Worth the Cost? Calculating Return on Investment for CMMS

by Paul Lachance — Is the software cost for Computerized Maintenance Management Systems (CMMS) worth it? Are you asked to justify the expense to purchase the software by your superior? These are questions that seem to have been asked since the CMMS gained popularity, and they never seem go away. For most facilities supervisors and managers, the value of a CMMS seems obvious. As even Wikipedia notes, CMMS software packages are “designed to maintain a computer database of information about an organization’s maintenance operations” that is “is intended to help maintenance workers do their jobs more effectively.”

As obvious as it might seem to users of a CMMS that these systems can save a tremendous amount of time and money for your facility, it may not be as obvious to the financial executives at your organization. So you’re going to need to provide your organization’s management with hard dollars and cents numbers to justify the expense — i.e. return on investment (ROI). Calculating ROI for any CMMS technology purchase requires several important pieces of information — not all of which are easy to obtain. Still, even with the roughest estimate, CMMS technology will usually show positive ROI — often strong ROI — making them a valuable tool for any facility.

Organizations look to CMMS for a variety of reasons. “Saving money within the maintenance department” is 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

Here is some of the data needed to accurately calculate ROI for any CMMS system. Not all of this information is always needed, but it is more practical to collect it all at once and then decide the exact information you need. In many cases, your accounting & finance department can help you collect 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. This is one of the main reasons for purchasing CMMS in the first place.

INVENTORY: When maintenance is performed on equipment, spare parts must be readily available. Keeping inventory of those spare parts without a CMMS can end up costing your organization more than the cost of the CMMS itself, since it can lead to over- or under-ordering, poor lead times, stock going stale, andoften the most costly of alldisruption of the business enterprise due to facility systems breakdown. For this section, find out what the overall costs of your spare-parts and maintenance-related inventory are.

OVERTIME: In many cases, overtime by your maintenance team can be attributed to unexpected work orders. If you can reduce excessive overtime through preventive and routine maintenance, this can have a positive impact in maintenance costs and 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 a valuable in calculating ROI, since in many cases you can use this number in place of the other data described 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 a 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 percent, your ROI would be $45,000 or 800 percent. In this case you could show annual improvements of $45,000 on your maintenance expense. (45,000 5,000) / 5,000 = 800 percent.

This assumes that you can get a 15 percent 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 (see text box) can work great.

For example — you have 10 pieces of production equipment, each running 15 hours per day. Historically your equipment is down 5 percent. When the equipment is 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. Using this data, if you can reduce downtime from 5 percent down to 4.5 percent — a reduction of only 10 percent from current downtime levels — the ROI after one year is $22,375. That is profit over the cost of the software. If you could cut your downtime daily to 3.75 percent, the cost savings would be $63,438 per year.

It stands to reason that with a good CMMS you can improve the operational efficiency of your equipment, reduce inventory costs, minimize overtime, reduce downtime and have a more effi cient and effective maintenance team. The operational benefits of a CMMS are great, but, in addition, a properly-implemented CMMS can contribute greatly to your bottom-line — often saving tens of thousands of dollars in repairs and downtime costs over and above the cost of the system itself. FEJ

CMMS expert Paul Lachance founded the Smartware Group,

along with Dave Peelstrom. For more information visit:

www.bigfootcmms.com

The journal is published six times a year by AFE, which also conducts the Certified Plant Engineer and Certified Plant Maintenance Manager credential programs and Facilities America conference.