Equipment Financing

The Perils of Plant Equipment Neglect

Unchecked, small plant equipment woes, like a fissure in a chemical vessel or a wobble in a compressor fixture, can grow into serious business prob...
Jeffrey A. BurchillMarch 2, 2016

A roll of paper towels accidentally left in the belly of a turbine after routine maintenance. That was all it took to destroy a million-dollar piece of equipment at one of our customer’s power-generation facilities. Although a turbine is a beast of a machine, it’s precision equipment. The blades are vulnerable, and when they started to turn, the paper towels won.

Jeffrey Burchill

Jeffrey A. Burchill

Why would an incident like this be your problem as a CFO? Well, equipment cost aside, the incident disrupted service and angered consumers long enough to affect the utility’s revenue, loyalty, and brand. If shareholder value and competitive advantage are your bailiwick, so is mitigating the risk of failure of big equipment in your company.

And that’s a major responsibility. As a CFO, you may have hundreds of facilities under your purview that are critical to your revenue stream. On top of that you have dozens of partners you rely on for goods and services every day. What are their equipment practices like? What financial and reputation risks are you taking on via the big machinery in their plants?

Oversights like the paper towel incident happen more than you might think. Sometimes it’s a screwdriver. Sometimes it’s a stray nut or bolt. Sometimes it’s a sliver of metal shorn from aging equipment that’s overdue for service. Even if the machinery is insured, your revenue stream isn’t likely to be.

Frankly, I worry when I scan the Duke University/CFO Global Business Outlook survey, covered in CFO in December. It predicts overall weak business spending in 2016. While that might be a yellow flag for the economy, it’s a red flag for business continuity.

As the survey suggests, restrained capital investment often means an effective aging of assets: “Sparse spending on new assets will lead to an aging of the stock of assets in place. Fifty-four percent of U.S. firms say their assets are aging at a “moderate” or faster rate.” (The italics are mine.) Opinion_Bug7

Older generators, boilers, and other big machines invite disruptions and the business problems you fear most. Even when it doesn’t fail catastrophically, aging, and neglected equipment can erode efficiency. According to the Duke/CFO survey, 40 percent of the companies reporting that they have aging assets, said the aging assets “reduce their overall productivity.”

Don’t Neglect Maintenance

If companies are cutting back on equipment replacement, it’s no great leap to assume they’re trimming maintenance and inspection, too. That means that small problems such as a fissure in a chemical vessel or a wobble in a compressor fixture can grow unchecked into bigger, more expensive problems. And that’s not just a facility manager’s problem, but a business problem.

Nonetheless, maintenance budgets are often one of the first things to go. You don’t see an immediate return with maintenance and, in most cases, forgoing maintenance doesn’t trigger an immediate failure. The procrastination of maintenance is the “storage” of issues for which you’ll eventually need to pay the piper.

Like a car you don’t service, your boiler probably won’t break down in the short term. In the longer term, however, the motor oil degrades, pistons wear, rattles are ignored, and the likelihood of breakdown increases. The eventual bill, including replacing the blown engine, is inevitably higher than the cost of preventive maintenance. Then you could be spending more in attempting to repair the damaged reputation of your company.

Even if you commit to preventive maintenance, you’ll face some tough calls. Consider machines that you own from a recent corporate acquisition. Your facility manager may not know their age, how many cycles they’ve had since their last service, or their whether their usage patterns are steady or intermittent.

Another good example is the power industry. Many larger power generating stations are now operating in cycling (on/off/on/off) or peaking (up and down fluctuation) modes compared to their originally intended baseline (constant) mode. How does your company assess the additional wear and tear, if there’s any at all?

Yet another twist: If you’re using equipment age as your yardstick, how do you deal with a 30-year-old piece of equipment that’s had half of its original parts replaced in the past five years? How old is it, really?

The Human Factor

Compounding the risk of aging and neglected equipment is the challenge of finding qualified people to operate it. Finance chiefs consider luring and keeping qualified employees as one of their top three business concerns, according to the Duke/CFO survey.

That certainly jibes with my experience. Although we work with many skilled equipment operators, we’re definitely seeing an erosion of skills in the industry. Too often, you have an aging plant with inexperienced people looking after it. It’s part of the larger skills crisis. Throw in reduced maintenance budgets, especially during sluggish economies, and the risks increase further.

The rule of thumb we use is that two-thirds of our fire and equipment-related losses have a human error somewhere in the causal mix. In a recent webinar, a turbine manufacturer said 40 percent of failures are a direct result of operator error. So, like it or not, equipment operators are pulling the levers of your brand.

The Promise of Technology

Some companies are looking at big data to solve these challenges. Digital monitoring systems might be used to compile data that will drive maintenance decisions and optimize plants. Instead of the traditional calendar, a data-driven algorithm might be able to tell you what maintenance needs to be done and when. Such automation has great potential for the industry. Yet, as is so often the case, the hype is currently outstripping the reality.

Any monitoring system will still leave operators with tough decisions. Let’s say a piece of equipment is earning your company $100,000 in profit per day. The computer alerts you to a 20% chance of failure within the next month. Do you shut everything down for three days to look under the hood? That will cost you $300,000. Not an easy call. But one that you, as a CFO, might want to keep an eye on.

Jeffrey A. Burchill is CFO of FM Global, the commercial and industrial property insurer.