Effective Maintenance Management. V. Narayan
Good accounting practice mandates accuracy and, if for this purpose it takes more time, it is a price worth paying. Accounting systems fulfill their role, which is to calculate profits, and determine tax liabilities accurately. However, they take time, making day-to-day management difficult. Overhead accounting systems get around this problem by using a system of allocation of costs. These systems are cheaper and easier to administer.However, any allocation is only valid at the time it is made, and not for all time. The bases of allocation or underlying assumption schange over time, so errors are unavoidable. This distorts the cost picture and incorrect cost allocations are not easy to find or correct.
Subsidies, duty drawbacks, tax rebates, and other incentives introduce other distortions. The effect of these adjustments is to reduce the visible capital and revenue expenditures, making an otherwise inefficient industry viable. From an overall economic and political perspective, this may be acceptable or even desirable. It can help distribute business activity more evenly and relieve overcrowding and strain on public services. However, it can distort the cost picture considerably and prevent the application of market forces.
We have to recognize these sources of errors in measuring costs. In this book we will use the concept of cost as we measure it currently, knowing that there can be some distortions.
1.2.1 Mechanization and productivity
When we carry out some part of the production or distribution process, we are adding value by creating something that people want.We have to measure this value first if we want to maximize it. Let us examine some of the relevant issues.
In the days before the steam engine, we used human or animal power to carry out work. The steam engine brought additional machine power, enabling one person to do the work that previously required several people. As a result each worker’s output rose dramatically. The value of a worker’s contribution, as measured by the number of items or widgets produced per hour, grew significantly. The wages and bonuses of the workers kept pace with these productivity gains.
1.2.2 Value added and its measurement
We use the cost of inputs as a measure of the value added, but this approach has some short comings. Consider ‘wages’ as one example of the inputs. We have to include the wages of the people who produced the widgets, and that of the truck driver who brought them to the shop. Next we include the wages of the attendant who stored them, the salesperson who sold them, and the store manager who supervised all this activity. Some of the inputs can be common to several products, adding further complexity. For example, the store manager’s contribution is common to all the products sold; it is not practical to measure the element of these costs chargeable to the widgets under consideration. We have to distribute the store manager’s wages equitably among the various products, but such a system is not readily available. This example illustrates the difficulty in identifying the contribution of wages to the cost. Similarly, it is difficult to apportion the cost of other inputs such as heating, lighting,or ventilation.
We can also consider ‘value’ from the point of view of the customers. First, observe the competition, and see what they are able to do. If they can produce comparable goods or services at a lower price than we can, customers will switch their loyalty. From their point of view, the value is what they are willing to pay. The question is: how much of their own work are they willing to barter for the work we put into making the widgets? Pure competition will drive producers to find ways to improve their efficiency, and drive prices downward. Thus, another way is to look at the share of the market we are able to corner.Using this approach, one could say that Company A, which commands a larger share of the market than Company B, adds more value. Some lawyers, doctors, and consultants command a high fee rate because the customer perceives their service to be of greater value.
Assigning a value to work is not a simple task of adding up prices or costs. We must recognize that there will be simplifications in any method used, and that we have to make some adjustments to compensate for them. Efficiency improvements justified on cost savings need careful checking—are the underlying assumptions and simplifications acceptable?
1.3 MANUFACTURING AND SERVICE INDUSTRIES
1.3.1 Conversion processes
We have defined manufacturing as the process of converting raw materials into useful products. Conversion processes can take various forms. For example, an automobile manufacturer uses mainly physical processes, while a pharmaceutical manufacturer primarily uses chemical or biological processes. Power generation companies that use fossil fuel use a chemical process of combustion and a physical process of conversion of mechanical energy into electrical energy. Manufacturers add value, using appropriate conversion processes.
1.3.2 Factors influencing the efficiency of industries
Since the invention of the steam engine, the productivity of human labor has increased steadily. Some of the efficiency gains are due to improvements in the production process itself. Inventions, discoveries, and philosophies have helped the process. For example, modern power generation plants use a combined-cycle process. They use gas turbines to drive alternators. The hot exhaust gases from the gas turbines help raise high-pressure steam that provides energy to steam turbines. These drive other alternators to generate additional electrical power. Thus, we can recover a large part of the waste heat, thereby reducing the consumption of fuel.
A very significant improvement in productivity has occurred in the last quarter of the twentieth century due to the widespread use of computers. With the use of computers, the required information is readily available, thereby improving the quality and timeliness of decisions.
1.3.3 Factors affecting demand
The demand for services has grown rapidly since World War II. Due to the rise in living standards of a growing population, the number of people who can afford services has grown dramatically. As a result of the larger demand and the effects of economies of scale, unit prices have kept falling. These effects, in turn, stimulate demand, accounting for rapid growth of the services sector. In the case of the manufacturing sector, however, better, longer lasting goods have reduced demand somewhat.
Demographic shifts have also taken place, and in many countries there is a large aging population. This has increased the demand for health care, creating a wide range of new service industries. Similarly, concern for the environment has led to the creation and rapid growth of the recycling industry.
Some of the characteristics of the manufacturing and service industries are very similar. This is true whether the process is one of production or distribution. We will consider a few examples to illustrate these similarities.
A machinist producing a part on an automatic lathe has to meet certain quality standards, such as dimensional accuracy and surface finish. During the machining operation, the tool tip will lose its sharpness. The machine itself will wear out slightly, and some of its internal components will go out of alignment. The result will be that each new part is slightly different in dimensions and finish from the previous one. The parts are acceptable as long as the dimensions and finish fall within a tolerance band. However, the part produced will eventually fall outside this band. At this point, the process has gone out of control, so we need corrective action. The machinist will have to replace the tool and reset the machine, to bring the process back in control. This is illustrated in Figure 1.1.
In a chemical process plant, we use control systems to adjust the flow, pressure, temperature, or level of the fluids. Consider a level-controller