Of all the management disciplines that cost managers need to master to remain competitive in these lean times, we have observed that Equipment Asset Management is one of the weakest areas of operations. Yet, corporations depend on the millions of dollars of equipment that they utilize daily to be operationally effective at a moment’s notice.
As a point of reference, 98% of the clients we work with can’t even provide us with a complete list of their equipment maintenance contracts for the hundreds of preventive maintenance and service contracts they purchase annually. Nor can they tell us if routine and preventive maintenance is actually being performed under the contracts that they do have records on. From our experience, these routine and PM services aren’t being performed by all contractors, but our clients are paying for the service anyway!
I ask you, how can we value justify and continue to manage our equipment assets this way any longer? To turn around this embarrassing situation, the following procedures need to be instituted by cost managers:
1. All preventive maintenance contracts and service contracts of any kind MUST be centralized under the office of the director of supply chain management. This is the logical place to retain them since supply chain management should be the department that negotiates these contracts in the first place.
2. All contracts MUST be assigned a purchase order number prior to payment by the accounts payable department. All invoices that are submitted to accounts payable without a purchase order are to be sent to the supply chain department for investigation.
3. The supply chain department MUST send a questionnaire to all of the using department for all service contracts, three months prior to their renewal, asking users if they are happy with the contract and if the contractor has met the terms and conditions of the contract. Examples of questions would be: Have they provided the necessary PMs? Were they prompt in responding to service calls? Were parts available when required?
These three steps will resolve the challenge that all organizations face of not being able to generate a complete list of preventive maintenance contracts and service contracts on demand.
Preventive maintenance and service contacts have a way of multiplying exponentially in scope and in dollars if not managed and controlled effectively. We have recent proof of this with one of our clients who didn’t know that their facilities management contract was costing them twice what their contract terms and conditions suggested, because they (1) had lost their original contract written in 1997 and addendums written every year up to 2003, (2) approved all invoices submitted by their contractor every month, even though they were a higher cost than their contract price had spelled out, and (3) never calculated the true cost of this contract until we analyzed the total cost for them.
Therefore, contracts shouldn’t be treated like any other commodity purchase, but instead, due to their length (we frequently see service contracts with a term of five to eight years) and complexity, should be managed by one highly disciplined individual in every corporation. Preferably, these contracts need to be managed by a professional contract manager in large organizations and by a purchasing manager in small organizations.
There are many viable options available to corporations to manage their equipment’s preventive maintenance and service contracts (maintenance insurance, self-insurance, time and material, multi-vendor contracts, third-party service organizations, outsource and in-house programs). Yet most organizations only utilize one or two of these alternatives to manage their equipment assets as opposed to employing all of these solutions under a corporate-wide Equipment Asset Management Program that would embrace the concept of self-insurance as the primary method of delivering these services.
Based on the self-insurance philosophy, each piece of equipment that needs to be maintained would be evaluated based on its service history and other user’s actuarial experience. Then, one of the above service options would be selected as an appropriate fit for this equipment’s service requirements.
By following this decision path rather than selecting just one or two service alternatives for all of your equipment, you will find that your equipment maintenance costs will be dramatically reduced by 20% to 25%. Your service quality will also improve if you think outside the box.