The Importance of Including Maintenance When Calculating Cost of Goods Sold

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In a typical plant, Cost of Goods Sold (COGS) is a critical metric and reducing COGS is integral to higher profitability. Unfortunately, many managers view maintenance as another expense on the P&L statement. Unlike other expenses which are seen as “consumable” in nature (e.g., energy, materials, supplies), maintenance is an investment back into the assets. What many managers overlook is the fact that the performance of these assets will ultimately determine profitability (or lack thereof).

Recent trends have focused on Preventive and Predictive Maintenance, which is defined as the process of scheduling repairs based on a pre-determined time, or based on past experience, to avoid unplanned breakdowns. Replacing bearings every six months or replacing a part after a set number of operating hours are both examples of preventive maintenance.

Newer trends incorporate Reliability (or Condition) Based Maintenance techniques, where operating conditions guide repairs or parts replacement. For instance, a high-speed motor will have vibration sensors. When a certain condition is reached relative to vibration, repairs are made. Another aspect of these trends is to try and apply expenses to those tasks that are truly needed. Why replace a bearing at 6 months when maybe it will last a year? Monitoring conditions can guide the appropriate time to make the repair and help control the costs of maintenance and improve reliability.

The aforementioned techniques are designed to increase uptime. “Running” becomes the overarching concern. However, maximizing profit requires a deeper understanding of asset performance and the interaction between maintenance and performance. The mantra of maintenance should be, “It is not just good enough to run”.

The concept is to remove the stigma of maintenance’s perception of just being another burdensome cost on the P&L statement; rather, the entire maintenance effort is an investment back in the assets. These assets need to perform in an optimized manner. It is not good enough that the machine “runs;” the focus should be on how well it is running.

The maintenance process needs to feature evaluations of asset performance as part of the criteria for deciding when to make a repair, replace a part, or replace the asset. Asset performance impacts all of the other elements of COGS. So while many managers are focused on controlling maintenance overhead, many of the other costs are higher and the net impact is a higher overall COGS and lower profitability.

Following are a few examples to highlight the concepts.

Ammonia Refrigeration System

A typical ammonia refrigeration system will have evaporative condensers for converting vapor back to liquid as part of its cycle. If the condensers become compromised, or the spray nozzles are clogged, the condensers will still “run” and the system will still “run”. However, the discharge pressure on the compressors will rise. This will result in more electricity to be consumed both in actual Kilowatts as well as increased runtime to make up for reduced capacity. This will produce a larger electricity bill, which as a line item on the P&L means that the COGS just went up.

Therefore, decisions are made to “postpone” or “defer” spending in maintenance and the condensers do not get cleaned, or the spray balls are not checked, since people talk themselves into thinking that by not spending that money, they are helping the plant to control spending. In truth, the opposite is happening.

Packaging Machine Performance

Packaging machine performance is another area where focusing solely on “running” may result in increased costs. Many flexible packaging machines rely on myriad components to form and seal a package. Due to the high expense of these components, many plant managers make decisions to not replace lifting mechanisms, seal bars, or heaters.

The machine “runs”, but additional rework efforts due to poor seals slowly climbs. The plant takes the product and sends it back to be repackaged. On the surface it may appear that money was “saved” by not replacing the components, but for each package reworked, the cost of the material is lost, and it is one less package making it to market, despite having paid for the energy and labor.

As a result, more packaging material needs to be purchased, and maybe the production line is forced to run overtime to make up for the reduced output. Both of these factors increase the COGS and lead to lower profitability.

Product Yield

The last example regards yield. Wherever product and equipment intersect, there is a risk for loss of product due to poor performance. It could be a meat grinder with dull blades, a milk separator with worn components causing cream loss, or an unbalanced thermal process causing some product to be overcooked in order to achieve proper temperature across the batch for fully cooked products. All of these examples will result in product loss and, in most food plants, the raw material is the primary cost component. Maintenance expenses are reduced and everybody feels good that money was saved. However, the COGS for the plant is higher and everyone is scratching their heads wondering why profits are lower.

The upshot to all of this is that maintenance efforts need to be focused on maintaining optimized asset performance. That means metrics need to be in place that closely monitor this performance. As soon as there is an indication of an impact, or by having specific guidelines for machine tolerances, action is taken and that cost is offset by not allowing COGS to rise due to sub-optimized performance.

This is why the maintenance mantra should truly be, “Not just good enough to run”.

About The Author

Paul Kafer has a background in operations and engineering, with a focus on maximizing profits through thorough understanding of asset performance and its connection to maintenance activities. He also specializes in plant and process design to provide for lower costs of production. While he focuses on food manufacturing as a whole, he has specific expertise with dairy, meat, snack foods, and coffee.

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