Equipment Executive Top 10 List

Execute the following strategies correctly, and you and your company should enjoy substantial success

Construction Equipment - September 1, 2006

Mike Vorster
Contributing Editor

We've covered a lot of ground since launching this column 36 months ago, so as our present to our readers, here's a top 10 list of things you need to do right.

We've covered these topics in previous articles, all available at the Equipment Executive section of ConstructionEquipment.com, so feel free to review the details online. And plan to attend our next Construction Equipment Institute on Jan. 16–19, 2007.

1. Buy right. It starts with having the right iron. You are making a long-term investment in assets, so take the selection decision seriously. Don't buy because the deal is too good to resist, and remember that dealer support is more important than low first cost.
   Equipment works hard and success depends on your ability to keep the machine producing completed construction on time and on budget. To do this, the machine must have the quality and capability needed to produce work all day, every day.
   You must also have the expertise needed to keep it up and running regardless of where it may be working. Every machine will break; the speed, efficiency and cost of returning it to service will determine the success of your selection decision.
2. Develop your operators. Operators are your first line of defense. No one is more important when it comes to determining the operating cost and productivity of your fleet, yet operators are frequently outside the equipment manager's sphere of influence. Even so, be committed to their training and development.
   Manufacturers continue to improve the reliability and capability of equipment, and more skill is being demanded of our operators. We cannot waste these efforts by constantly switching operators from machine to machine, having operators who are not fully trained, and unable to balance the need for productivity with the need to look after the machine.
   You will show that you care about your equipment and your operators if you emphasize operator development, give them a sense of ownership in the equipment they operate, and understand the value of their role in productivity and cost.
3. Maintain without compromise. Preventive maintenance is an investment rather than a cost, and systems that ensure that it is done to the required quality standards on time every time are not negotiable. The field technicians visit the machines regularly and must have the time, training and tools needed to inspect and report; they cannot just check, change, adjust and lubricate.
   Mechanical maintenance focuses on repair before failure and bridges the gap between preventive maintenance and repair. It keeps you in control of the timing and the extent of the work to be done and reduces cost without sacrificing reliability. An effective program depends on an ability to predict failure and use data rather than conservative guesses.
4. Manage costs by category. It is good to know that actual costs are exceeding budgeted costs, but it is unlikely that you will be able to take appropriate action unless you know which cost category is causing the problem. Therefore, divide both actual and budgeted costs into an appropriate number of categories to manage cost by category.
   Owning and operating costs must be counted together any time we consider the total cost of a machine, but we will do a better job if we measure actual versus budget for each category and manage them independently. Owning costs are mostly fixed, and the hourly rate is dependant on annual utilization. Operating costs are proportional to the number of hours worked, and the hourly rate depends on the age and application of the machine as well as the effectiveness of maintain, repair and rebuild decisions. Actionable cost information can only be provided if these two categories and their appropriate subcategories are budgeted and managed separately.
5. Know that repair costs will increase. Repair costs will increase as a machine ages, yet we budget and manage them as if they will remain constant. This causes two problems. First, young machines under-run their repair cost budget, and we falsely believe they are "making money." Second, older machines over-run their budget, and we falsely see this as a cause for concern rather than a predictable part of total lifecycle cost.
   Establishing repair budgets for each third of a machine's life improves budgeting and helps to identify machines that are exceeding budgeted repair costs.
6. Understand depreciation. Tax calculations are performed with only one objective in mind (to establish a basis for calculating tax due), and each step in the process is defined by tax codes. The only real measure for the actual depreciation experienced when putting a machine to work is provided by the used equipment market.
   If you want your depreciation estimates as close to "right" as possible, then you must base them on your knowledge of the market and not on numbers provided by the administrators who write and amend the tax codes.
7. Measure inputs and outputs. We are really good at measuring money, the prime input, but we struggle to measure outputs such as availability, uptime and reliability. We need to know whether increasing expenditure on repair and maintenance is producing the desired results, or whether we are simply throwing good money after bad.
   Measuring both inputs and outputs enables us to focus on the efficiency of our processes and often shows how wrong it is to buy low, pinch pennies, and focus on cost reduction without regard to uptime, reliability and productivity.
8. Buy what you burn. If a machine lasts 16,000 hours and you run eight of them for 2,000 hours a year, you will have to replace or rebuild hours equivalent to one new machine per year. It is not complicated, but it requires discipline and an acceptance of the fact that you must constantly invest in your fleet if you wish to maintain your productive capacity.
   Buying what you burn means that you are not living off your seed corn, that you are reinvesting the cash flows recovered through depreciation, and that you have a long-term strategy in place. A steady systematic fleet-investment program maintains fleet average age and solves many of the problems associated with out-of-balance repair costs and lumpy depreciation schedules.
9. Focus on functions. Equipment managers can become so focused on equipment that they lose sight of the fact that construction companies succeed by bidding competitively and producing safe, quality work. Equipment management is not "the business," and empires or corporate organizations that focus on internal scorekeeping and politics rather than the real business of making money won't survive.
   Focusing on and understanding six basic functions will build success. We need to 1) buy and sell equipment for the best price possible; 2) ensure that it is licensed, inspected and legal; 3) move it from job to job and have it in the right place at the right time; 4) keep it up and running through effective field maintenance; 5) run efficient repair facilities, shops and yards; and 6) manage the fleet to maximize its value as an corporate asset.
   Focusing on these six things, managing each and measuring outcomes, will ensure our success.
10. Play the game, add value. There are two approaches to defining the role of the equipment manager. The first sees equipment management as synonymous with "shop management" and considers the equipment manager's primary function to supply equipment as and when needed. Broad and important issues such as making sure that the fleet supports current operational plans go unattended. There is no overarching responsibility to manage the fleet as a corporate asset.
    
    The other approach defines equipment management as an executive function that provides expertise, integrates decisions, provides information, and looks after the fleet from cradle to grave. The equipment manager is a member of the executive team, is involved in strategic decision making, supports policy at all levels in the organization, and manages the fleet on a fully informed proactive basis.
    
    Which approach applies depends on the value you add to the company. Be constructive, be proactive, rejoice in your expertise, and constantly seek out new ways to play the game.

These 10 strategies will make you and your company better. We won't stop here, though. Our fourth year starts next month.