Articles
Calculating CMMS ROI – Accurate? Maybe. Value? Always.
by Paul Lachance, Smartware Group
Is the software cost for CMMS worth it? Are you asked to justify the expense to purchase the software by your superior? These are age-old questions that never seem to go away. Calculating return on investment (ROI) for any CMMS technology purchase requires several important pieces of information – not all of which are easy to get. Still, even with the roughest estimate, CMMS technology will usually show positive ROI – usually strong ROI.
Organizations look to CMMS for a variety of reasons. “Saving money within the maintenance department” is one of the most common. To justify the expense of CMMS from a cost standpoint, you can validate with some simple formulas.
Data needed to calculate ROI:
Not all of this information is needed, but the more the better. In many cases, your accounting/finance department can help you get this information.
Equipment Data: Typically this would be dollars spent on equipment due to maintenance operations. This might include items such as refurbishments and replacement due to failure. These are expenses you might NOT have incurred if these issues could have been avoided. This is one of the main reasons for purchasing CMMS in the first place.
Inventory: When maintenance is performed on equipment, parts may be used. Sometimes this is routine (preventive), while other times it is unexpected (corrective). Keeping inventory without a system can be more expensive (not optimally ordering, poor leads times, stock goes stale, etc.). For this section, find out what the overall costs of your spare-parts/maintenance related inventory are.
Overtime: In many cases, overtime by your maintenance team can be attributed to unforeseen/unexpected work orders. If you can reduce the amount of overtime due to more proactive preventive maintenance and overall reduce corrective maintenance, this can have a positive impact in maintenance costs, not to mention the morale of the team.
Downtime: Obviously there is a direct impact on your profits if you incur too much downtime. For your organization, measuring downtime may be easy, or it may be impossible. When you have unforeseen equipment failures and are unable to produce or operate at optimal levels, there is a cost. If it is possible to determine what the cost of that downtime is, this is very helpful in calculating ROI.
Other: In many cases, if you ask your accounting department: “What was our overall maintenance expense last year?” They just might be able to give you this number. This can be valuable in calculating ROI. You can use this number in place of all of the above.
How to calculate ROI:
There are many ways to calculate CMMS ROI. They depend on your type of organization. For example, a manufacturer might use a “downtime-minimization” ROI model since they may more easily be able to calculate a downtime cost. A non-manufacturing organization may have to use more classic accounting information model based on overall maintenance expense.
ROI Method 1: Classic Maintenance Expense Model
If you have a good idea of what your maintenance expenses are (including any combination of equipment, inventory, downtime, overtime or overall), the formula is relatively easy.
(Overall Maintenance Costs Improvements – CMMS Cost ) / CMMS Cost = ROI
For example: If you had a total maintenance operations expense last year of $300,000 but then implemented a CMMS system (that cost you $5,000) and you had an overall reduction of maintenance expense by 15%, your ROI would be $45,000 or 800%! In this case you could show annual improvements of $45,000 on your maintenance expense.
(45,000 – 5,000) / 5,000 = 800%
This assumes that you can get a 15% improvement in your overall operations. This could be by reducing overtime, better inventory control, fewer equipment replacement/repairs, etc. These are all possible through a good CMMS implementation.
ROI Method 2: Reduction in Downtime Model
This model is more suited for manufacturers.
The key to this model is to calculate the average cost per hour when your equipment is “down”. For example – if you make a widget, and the machine that produces this widget goes down, you cannot make this widget. You are probably paying for a person to monitor this equipment – even though it is not running. You have the tech that has to work on that machine to fix it. Parts may be needed to correct the situation. You also have the lost production costs. If you can calculate a decent, estimated hourly cost associated to downtime, this model can work great.
• Estimated hourly cost of downtime
• Quantity of production equipment
• Average hours in operation per day
• Average current downtime percentage
• Cost of CMMS software
For example – you have 10 pieces of production equipment, each running 15 hours per day. Historically your equipment is down 5%. When down, it costs you $100 per hour (cost of the downtime per hour). For this example, the cost of the CMMS software is $5,000. With this data, if you can get your downtime from 5% down to 4.5% - a reduction of only 10% from current downtime levels, the ROI after 1 year is $22,375! That is profit over the cost of the software. If you could cut your downtime daily to 3.75% the cost savings would be $63,438 per year!
Conclusion: With good CMMS you can improve the operational efficiency of your equipment, reduce inventory costs, minimize overtime, reduce downtime and overall have a smoother running maintenance team. The operational benefits are great, but on top of all of this, when properly implemented, the software actually contributes greatly to improving your bottom-line.
If you want to learn more about how CMMS can improve your bottom line, better organize your staff and improve operations, contact us at 866-858-7800 ext.2.
