August 9, 2016

The Economics Behind CARE

Top 5 Costs of Oil Analysis & Why You Should Hire Reliability Experts

All asset-intensive industries are constantly are under pressure to decrease their operating costs while maintaining or increasing asset performance. Often, this is achieved through either direct reduction in operating costs such as non-essential services, parts and labour or improvements in operational efficiency through condition monitoring technologies such as oil analysis. While direct cost reduction is fast and relatively easy to achieve, leveraging condition intelligence is not so clear-cut, as it involves a gradual process that is highly dependent on sustained level of focus, efficient and aligned internal processes. However, most importantly is an adequate level of expertise both internal (staff) and external (fluid analysis service provider).

In order to get the management’s “buy in”, the benefits behind investment in condition monitoring must outweigh their ongoing costs and provide tangible improvements such as increased equipment availability, MTBF (Mean Time Between Failures) or ROI (Return on Investment). There are typically two approaches to achieving this goal: developing and maintaining in house capability of the maintenance and reliability team or partnering with an external reliability experts capable of managing the oil analysis program. Whatever the chosen strategy might be, the economics behind each approach should be evaluated from the perspective of the following five costs.

1. Acquiring and Maintaining Core Competency

A company should assess their internal resources and capabilities to adequately manage and sustain a fluid analysis program. Given the constant interruptions related to availability of manpower as well as time and costs associated with developing internal expertise, management can spend significant amount of resources on this area while accomplishing very little. At the end of the day, your company’s core competency may be drilling, construction, mining, processing, manufacturing or product refining and despite your best efforts, this is likely where the available resources will be allocated. Instead of bogging down your team with trying to figure out oil analysis reports, it is often cheaper to outsource this activity to experts that can help you. Below an example of relative cost associated with dedicating and maintaining internal expertise as a function of minimum required time:

Efficiency Gain:
(10% of reliability specialist’s time) x ($100,000 salary) = $10,000/year

2. Knowledge Retention

Employee turnover can be very costly for a company. Sudden departure or job reassignment of key staff member can have devastating effects on maintenance and reliability program effectiveness and sustainability. According to the Society of Human Resource Management, it costs up to 150% of a mid-level employee’s salary to replace. In the case of reliability specialists, that can easily be over $100,000. At a 15.1%[1] risk of employee turnover the cost per employee can be calculated as follows:

Risk of Employee Turnover[1]:
(15.1% per year) x (150% of reliability specialist) x ($100,000 salary) =
$22,650/year

3. Process Improvement

Depending on the size of the maintenance department, its structure and availability of manpower, many sites can have inefficient processes for managing their oil analysis program. This includes inconsistencies in processes related to sample collection, shipping, result diagnostics and response to the actionable results.

Our experience shows that the maintenance staff can spend from two to four work days per week on managing an oil analysis program. In the example below, we will use three work days or 60% of one employee’s time, which can be easily reduced to less than one day per week:

Additional Cost of Poor Work Flows:
(40% newly allocated time for other tasks) x ($100,000 salary) =
$40,000/year

4. Diagnostics

Inability to properly diagnose and respond to the analysis results can also be very costly. Industry studies show a minimum ROI for oil analysis averages about 2.5:1, where a well-developed in-house program can offer returns as high as 5:1, based on equipment failures and performance of unnecessary maintenance activities.

As a third party provider of reliability services support, our experience shows that the median benefit of Fluid Life CARE program customers is approximately 10:1 which is much higher as the industry average. At 200 samples per month and approximately $60,000 per year in cost of oil analysis the variance in diagnostic ability and the financial impact can be calculated as follows:

Cost of Missed Equipment Failures or Unnecessary Troubleshooting:
5 x $60,000 = $300,000/year

5. Lost Opportunities (Reliability Projects & Best Practices)

Dedicating scarce resources to the day-to-day management of the oil analysis program leaves little room to expand its scope into related projects such as:

  • Optimization of Oil Drain Intervals
  • Optimization of Contamination Control Practices
  • Warranty Management
  • Condition Based Component Change Outs
  • Optimization of Lubricant Storage & Handling Best Practices

Given the size of opportunity at hand, engaging in each of these projects can result in saving your company hundreds of thousands of dollars while not putting your equipment at risk.

Depending on the number of assets the potential additional benefits of oil drain interval (ODI) extension as well as component life extension due to increased lubricant cleanliness can be conservatively estimated at $50,000 per year of lost opportunity costs.

Bringing It All Together

As a provider of Reliability Services (CARE), Fluid Life recognizes the importance of building internal capabilities of the company as means of achieving their corporate objectives of maintenance excellence at reduced cost. However, in many cases, it is done without any regard for the costs involved or a company’s long term ability to sustain their efforts in this area. Below is a direct comparison of outsourcing versus managing your oil analysis program internally by the staff of three reliability professionals (combination of engineers, planners and support staff) with an average sample volume of 200 samples per month.

Table 1. Annual Cost Analysis of In House Program Management vs Fluid Life CARE Service

AreaIn House Annual CostFL CARE Service
Core Competency-$30,000Included2
Knowledge Retention-$67,959Included2
Process Improvement-$120,000Included2
Diagnostics-$300,000Included2
Projects1-$50,000Included2,3
 -$567,959On Average 10th of the Annual In House Costs

1Number of Projects and their potential value will depend on the priorities and availability of resources. For the purpose of this example, we have used $50,000 that was explained in point 5.
2CARE service is billed monthly as a flat fee on top the cost of analysis. The rate is contingent upon the number of assets, sample volume and scope of projects involved.
3CARE service fee typically includes one project outside of the scope of the CARE service. All expenses related to project execution outside of the scope of care are billed to customer at cost.

Table 2. Economics of In House Program Management vs Fluid Life CARE Service

Above analysis merely reinforces the fallacy of the ‘acquire versus develop’ dilemma, whereby not having a sound understanding of all underlying costs can lead to false assumptions. Not only is CARE capable of providing superior returns, it is also a far cheaper alternative to support your onsite reliability program.

For more information on CARE or to have your onsite oil analysis program assessed please contact us directly at 1-877-962-2400.


[1] 15.1% in 2013 – http://www.halogensoftware.com/blog/does-your-organization-have-healthy-employee-turnover