Measuring Replacement Asset Value (RAV) is a telling performance indicator of the return-on-investment from maintaining the physical and production assets used in an operation
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I read your article that compares maintenance costs to RAV and am inquiring to see what is your definition of ‘maintenance cost’ when measuring replacement asset value? Are you strictly referring to labor costs, or is this the cost of labor, services and capital equipment purchases to repair, replace or upgrade an existing machine?
Dear Tom,
In the example, ‘maintenance costs’ meant the direct and overhead maintenance costs – labor, parts, subcontract services and allocated overheads (i.e. supervision, management, associated infrastructure, etc. proportioned to direct labor hours) – incurred during the ‘normal’ operation of the car (i.e. the car is driven by a well-trained, responsible driver at the wheel). If you have a store/warehouse for maintenance parts then you add the proportionate cost of keeping and running the store to support the maintenance effort as part of the total cost of maintenance.
The example in the measuring replacement asset value (RAV) article is for a regular mid-size family car. The values listed in the table are the final market costs paid for preventive maintenance and breakdowns assuming no car crash occurs (i.e. you are allowing for the costs you would expect under ‘normal’ operating conditions). Those costs are the full costs of parts and labor after all direct costs and internal allocations for indirect costs were made by the various companies involved along the supply chain. I do not know if they also amortized capital expense in those costs.
I recommend that you keep the capital cost effects separate to operating maintenance costs when measuring replacement asset value. You can include them in as a separate KPI if that is important, but you should measure only the effect of maintenance when maintenance is done, and that is during the operation phase of the life cycle.
When you think about it, Percentage of Replacement Asset Value means just what it implies – the maintenance expenditure spent (i.e. the maintenance costs of operating the asset) as a proportion of asset replacement value (i.e. capital purchase cost if you had to replace the asset today). You actually want to separate capital cost from operating maintenance costs and compare them side-by-side as individual values. If operating maintenance costs are high the RAV will be poor and you start to wonder if your company has brought themselves an unreliable ‘dog-of-a-plant’, or if you have some very bad practices and processes ingrained into your business.
Maintenance Cost as a Percentage of RAV of (say) 20 percent tells you that for the money you spend on maintenance each year you could buy new replacement capital assets every five years. If the same plant could get its RAV down to 5 percent then it would take twenty years of maintenance cost to pay for replacement assets. As RAV reduces you are making more effective use of the asset and getting more value from your original capital expenditure.
This is not to be confused with when to replace a production asset. You do not wait to replace assets only when they are unreliable; you replace them when the alternate asset you want to purchase will make more money for your business than keeping the current asset in service. Unreliability of an asset is one reason your operating costs are high and it then becomes attractive to buy new, replacement assets; but a technological innovation that lets you make lower cost production is also a good reason to replace an existing asset with the latest alternative.
Percentage of Asset Replacement Value is an indicator of the payback or return-on-investment from your capital assets. A common reason RAV is poor is because the plant is unreliable. If that is the case then you need to understand the causes of that unreliability very well and act quickly to properly address them. Otherwise your only alternative is to buy new replacement assets to make you competitive again before you go out of business from being too expensive or too slow.
I hope the above is useful in addressing your question on RAV (Replacement Asset Value).
My best regards to you,
Mike Sondalini
P.S. If you have questions on life cycle asset management, equipment maintenance strategy, defect elimination and failure prevention, or plant maintenance and reliability, please feel free to contact me by email.