Why Cutting Maintenance Costs Backfires

Ed Ballina: Hi, I’m Ed Ballina.

Alvaro Cuba: Hello guys, Alvaro Cuba here.

Ed Ballina: So hey, welcome to the third season of the Manufacturing Meetup podcast. We’re three in. This is a show where we kick back in our downtime and we talk about the realities of the shop floor and how to keep ahead of the barbarians. Because as we say, in manufacturing, the barbarians are always at the gate. But what a fancy hat you have there, amigo. This is very cool.

Alvaro Cuba: This is my safari hat. I use it twice in Africa and one in India. And sometimes these days I use it in Florida when I play golf. Very, very interesting. What about yours, beanie?

Ed Ballina: Very impressive. Mine is not quite as exciting. When I left Pennsylvania, it was very, very cold, so I had to keep myself warm with my hat. And when I got here to Raleigh, North Carolina, it was 82 degrees. This hat quickly went in my suitcase. I’m just sweating right now for our viewers. These are the sacrifices we make. So you could see my hat. So that’s my story about my hat. It does keep me warm.

Ed Ballina: So hey, let’s just jump right into this. No warm-up, right? We made our predictions last year and I had no idea that they were going to be executed in the first quarter of the year. Here all of them at once, and even more.

Alvaro Cuba: All of them. Yes, yeah. And even more, yes. We fall short in some of them.

Ed Ballina: We did not predict that we were going to land somebody on the moon this year, but that could still happen. The year is still young. So hey, all kidding aside, folks, we are facing some pretty challenging times, right? Not to say that the supply chain isn’t always dealing with chaos, but this is a little extra special. The current geopolitical climate really brings a lot of uncertainty, cost pressures.

Ed Ballina: Tariffs with the changes, labor gaps aren’t easing. There is so much going on right now. And if you just think about what’s happening in the Middle East and the impact that that has on not just oil and fuel pricing, because that one’s easy to understand, but it ripples throughout the whole economy. Pretty soon we’re going to start seeing fuel surcharges on everything you buy because diesel is up a buck. So lots going on and it all impacts your manufacturing operation.

Alvaro Cuba: Yeah, well, we’ll do the same we did with tariffs, no? We are not here to talk about politics. We are here to talk about what you guys in your shop floors can control. Energy cost is just the tip of the iceberg, no? Because the ripple effects that they bring into all the other points in the economy — it compounds with supply chain disruptions and it also compounds with how the consumer starts behaving different, which impacts your demand. But we are supply chain and what’s common about supply chain, no matter what, no matter what crisis, we are always there. Somehow we always deliver. So we are here to talk about some ideas that can help in this situation and how not only you can deal with it, but get out of it in a better shape than you are today. But before we jump right in, please first hit the subscribe button at the bottom of the page so you don’t miss the conversations. And with that, let’s get started.

Ed Ballina: Let’s get started because remember, in supply chain, the barbarians are always at the gate. They change dress and color, but they’re always at the gate. Let’s get them.

Alvaro Cuba: Okay, so let’s start with what’s happening and how it hits manufacturing. So quick framing: supply chain routes for oil and gas are difficult these days. The Strait of Hormuz, Venezuela’s oil, the Black Sea. And from one day to the other, you can see from 80 dollars a barrel to 120, it goes down. It depends on the news. The volatility is huge. And in the Augury Production Health Survey, this came as the number two biggest issue that you guys are experiencing. So when you combine that, it’s obvious.

Alvaro Cuba: Direct hit into your energy cost and your gas and your electricity. But it didn’t stop there. It goes to things like resins and feedstock and lubricants and transportation, things where oil and gas goes directly into it. But it continues, goes on and on because then you start having the disruptions. And then you have spare parts and raw impact and all of that starts disrupting because their producers cannot produce or their prices start going up and down. And then as we said in the introduction, this does not only impact the production side, it also impacts the demand side. So the consumers are starting to get worried. They start changing what they consume, what they buy, and that affects not only manufacturing, supply chain, procurement, the entire end-to-end supply chain. So it’s a compound effect. How you see it, Ed?

Ed Ballina: No, most definitely. As you look at this and you frame it with all the other concerns — or challenges, I should say — that we’ve been facing, there’s a lot to take in, right? We still have the whole tariff question, which is settling down, but it’s still somewhat volatile. Our labor gaps are still there.

Alvaro Cuba: Yeah, news continue. Yeah.

Ed Ballina: You’re trying to plan for all this. I almost see it as — I hate to say it — but it’s almost like COVID 2.0, right? Where now you are really taking chance on severely disrupting the supply chain. And from a consumer experience, sooner or later, you’re going to start seeing fuel surcharges on everything you buy. Because whether oil is involved in the creation of the product or not, America moves on wheels, folks. Those tractor trailers that deliver most of our goods are now paying $5.70 a gallon for diesel. That’s a buck more than they were not too long ago. It’s going to challenge our costs, our ability to provide the service levels. Yeah, the number is huge.

Alvaro Cuba: And that’s 30% up. So when you say a buck up is one thing, when you think 35%, oh wow, that is going to have ripple effects in your costs.

Ed Ballina: 35%, right. So energy purely on its own, and let’s call petroleum byproducts, they’re a huge part of our cost and our P&L. But what we’re here to tell you is this octopus has got a lot of tentacles. We were just looking at a couple. This has got wide, wide ramifications.

Alvaro Cuba: Yeah, a lot of tentacles. Guys, do you know how much a 30% impact on fuel or energy is going to impact your output costs, your input costs? No? You better go quick to your finance guy. And those are simulations because you will need that. We’ll talk later about how to sell these, but also how to motivate your people. Everyone has to be all hands together and it’s important that you manage these kind of numbers.

Ed Ballina: Absolutely. Your point, Alvaro, is a real good one. Find out what the impact of this is going to be on your business before somebody knocks on your door and says, you got to make up $4 million because we are just seeing our COGS blow through the roof. Have an answer and a point of view and a strategy because the call is coming. It’s not if, it’s when.

Alvaro Cuba: And what I was going to say, it is possible to deliver that, but not by cutting on energy prices. Once you understand where it hits and how you can react in those lines, you are going to be ready. So you’ll be ready.

Ed Ballina: Yeah. And in our typical fashion — and you might’ve figured out by now — we’re going to slap you over the head with the bad news first. We’re going to cry a little bit into our beverage, right? And then we’re going to shake it off. We’re going to go, okay, so what do you do about it? Because if you come to me with nothing but problems and no solutions, the door to my office won’t be open too often for you. So we want to come to you and say, hey, Captain Obvious here, we have a problem, right? We’re Captain Obvious. We’re telling you, you have a problem, but also what are some things that you can do to take control.

Alvaro Cuba: But we are supply chain. So we do these three phases, no? The crying and then the washing the face and then the reaction. And I’m sure our listeners are like that. So what can we control?

Ed Ballina: It’s action focused. So what is it that we can control? And we have some ideas, right? Unfortunately, when things like this happen, the very first knee-jerk reaction is to start cutting costs. Cut discretionary. And again, I don’t want to go down the rant of maintenance costs are not discretionary. But that is the first knee-jerk reaction. You may be asked to cut money out of R&M, cut money out of overtime, cut costs. But what happens if in that attempt to cut costs, you delay a rebuild on a piece of equipment, and four months from now, when you are in even more dire straits, your piece of machine fails, and now you’re down for a week and a half or two.

Ed Ballina: You think the customer is going to care that you did it to cut costs? They’re going to see that you failed to deliver. So what is the real lever here? Energy efficiency begins with machine health because it’s the gift that keeps on giving. If you can have a line improve its efficiency from 50 to 60 — 10 points — that is a big number. It can really throw off huge savings in energy. And by the way, if you do that, you’re probably also going to be able to reduce your waste, right? And even if you just focus on energy by itself, there is a bunch of stuff that you can do, like chase down your leaks of compressed air. We spend so much money on electricity for compressed air that you’d be surprised how much an energy audit could save you. I’ve seen plants save $20, $30,000 a year. Look at where you have motors running hot, drives underperforming. These are all opportunities for you to directly hit the energy portion. And by the way, it’ll also help you drive efficiency, which will drive benefits in the other buckets. So, Alvaro, you have ideas there as well.

Alvaro Cuba: Yeah, well, more than anything, reinforce what you just said. The biggest lever these days we call machine health. But Deming in the 50s, TPM, everything that you go after — you cover the basis: strategy, organization, and training. The very first pillar you always go after.

Alvaro Cuba: In those times, it was called AMPM — autonomous maintenance, procurement, preventive maintenance. And that is a reason. Look at the Japanese. The reason is if you don’t have your machines up and running and they are going down and down because the failures go on and on, then not only you have waste, but also reprocess. It stops every time. Your people go into a firefighting mode. The mechanics go crazy trying to fix something. The operators are trying to help and it’s really a chaos. And then nobody has time to do the improvement part.

Alvaro Cuba: Machine health in the modern days has evolved, thanks God. In Ed’s time, my time, even in COVID five years ago, we were still on preventive maintenance. How to move from reactive to preventive, but how much preventive can prevent? 50%?

Ed Ballina: Yeah, right.

Alvaro Cuba: Nowadays, we are lucky that in the last five years the technology has jumped significantly. And now we have machine health with the sensors and AI and all the predictive health. Just one number: 99% efficiency when you do predictive maintenance well.

Ed Ballina: Absolutely.

Alvaro Cuba: And then you free a lot of your mechanics. You make the life of your operators super easy. And then they can really focus on what matters. In this case, you want to be as efficient as possible. If you want to save in energy, you don’t want to stop the line. You don’t want to produce waste or reprocess. You need to be flexible to cover the peaks and valleys of the demand, and you need quality to fight in the market. So all these come with this. That’s what I was reinforcing what Ed said. That’s a real lever that you can use. And I would recommend that’s the first to go and do something about it. And the good news is it’s going to put you in a better situation when we are off of this crisis.

Ed Ballina: Right. You’re building capability at the same time. Yeah, no, makes perfect sense. I’d like to leave you with — look, we realize that sometimes when we give you some advice, we know it’s not easy, right? And sometimes it takes time. These things take time.

Alvaro Cuba: At the same time that you are saving energy, yeah.

Ed Ballina: Real easy, execute today, and I can guarantee you’re going to get benefit. First, I talked a little bit about compressed air systems, right? One of the biggest hidden costs of energy are air leaks. And air leaks also degrade — you not only use more energy, but you also degrade the quality of your compressed air. You can go out and buy a handheld ultrasonic meter. They’re probably less than $10,000. I’ve seen some as low as $5,000, but some really good ones with screens are around that $7,000 to $10,000 range, where you can literally just walk around your facility following the compressed air lines and this thing will actually tell you exactly where it’s leaking. It’ll show you on video where the leak is coming from. No longer do we have the old ones that look like a bullhorn. This thing is visual. I’ve seen it work. It’s amazing. You can literally save $50 grand a year in your compressed air system by cutting down your leaks. And by the way, if you cut down your leaks, you may be able to reduce the pressure of your compressed air system. Today, you’re running at 110 because by the time you get it to the last use, you’ve leaked so much that you’re down to 75. Maybe you can run it at 80 because you don’t have leaks anymore. Anyway, that’s one.

Ed Ballina: Second: quick hit. Buy yourself an infrared thermography camera. I know I bring this up all the time because I am partial to it. But my god, they’re so cheap. For $5,000 you can buy yourself a really good FLIR camera. And if you haven’t used those before, shock yourself. Have somebody with the proper protective gear open up your power panels and just point the camera at it. You may be frightened at what you find and what is waiting in the weeds to eat your lunch.

Ed Ballina: So those are two real quick ones. But getting back to the point that Alvaro was making about focusing on machine health: when you shut down a piece of equipment, you are obviously stopping production, but you’re not stopping the usage of energy. In many places on some of these lines, you’ll see that the filler continues to run in slow speed because we’re getting ready, the conveyors don’t shut down because we don’t have it interlocked. So every time you shut down, you have all these phantom stealth losses that you don’t think about, but they cost you real money. So you can do the compressed air stuff and the infrared stuff to give you some quick wins, but the real money comes in machine health and in efficiency. And to support Alvaro’s point, preventive maintenance only truly affects about 15% of failures because only 15% of failures are time-based. The other 85% of the failure modes don’t vary with time. And that’s what PMs are all about.

Alvaro Cuba: They just occur, yeah, when you are not monitoring your equipment properly, which is impossible without the sensors and the new technology. But as Ed says, this is not about cuts, guys. And we talked about this before. You are going to be asked to save money. You are not going to be asked to cut. That’s the normal instinctive way to go. The answer is efficiency, because efficiency goes a long way, no? It’s not only cutting in something that you will need later. Efficiency goes not only in your machine, it goes in your production, it goes in your people, no? Raising your MTBF — mean time between failure — from minutes or an hour to three, four, five hours, it gives you production, quality, safety. It gives you all of the above plus the flexibility to react to demand. So look for those efficiency points. Ed was pointing to some and put your entire people to think about how we run more efficient, how the line never stops, how we produce with zero quality defects or zero waste. That’s the kind of approach that I experience, Ed experience, and we recommend you follow.

Ed Ballina: Look, we get it, it’s not easy, okay? Because when somebody is asking you to cut, they’re asking you to cut now. And in some of these situations, you may be asking for money with a big return later on. Work your plan, because you’re going to cut or you’re going to cut. I like Alvaro’s way he spins this, right? You got to innovate or you got to innovate. So you choose, be the master of your own destiny.

Alvaro Cuba: Yes. How we sell it — you just mentioned one important thing: they are going to ask to cut. How you present the other part, how you sell it.

Ed Ballina: Yeah, that is a challenge, right? The CFO or the plant director or the vice president of manufacturing is going to want to see the dollars. But if you can sell — and I’ll apologize for this ahead of time. I am a beg for forgiveness versus ask for permission kind of guy, okay? It is risky. But if you think you can pull it off, right? How many of you, if you’re a plant director, can’t go out and buy a $5,000 thermography machine without asking anybody. Come on, you’re running a $20 million a year enterprise. You can find a way to spend five grand on something like that. And then when you show — or even rent it — when you show leadership, hey, look, you asked me for half a million dollars of cuts. I’m not cutting. Here’s how I’m going to get it for you. Look at the pictures that I just took.

Ed Ballina: This was a failure that was going to happen. Or these are leaks that we were going to see. If you invest, I will get you the return. Never give them what they asked for, by the way. That’s another trick. If they ask you for five, commit to like 350, you may have that 150 in your back pocket, but you know, you got to have shoes. Anyway, if you can show them the proof of the pudding, how’s the CFO going to argue with you if he’s seeing a picture of an electrical circuit where the third leg was glowing cherry red and you were going to blow up the machine if you didn’t shut it down? You wouldn’t have found that without the infrared equipment. Pictures sell. So that’s an idea.

Alvaro Cuba: Yeah. And a couple quick ones. One is machine health and starting to get your machines better. One, you don’t need to ask for investment. It works as SaaS. So you don’t need to put the money upfront.

Alvaro Cuba: You buy the service as a software, they put it in your lines and it takes two, three months. So it’s not that you are needing a year to get the money back. In two, three months, you are getting these signals that allow you to go and do the predictive maintenance, the time of your mechanics will go down, your operators will feel better, then you can involve them to continue to find a better way. So it’s not difficult, and it’s fast. And the other idea is you need to think a little bit more holistically. The CFO or the senior management, they kind of get it, but don’t get it. Reliability, maintenance, and those kinds of things. What they get is global efficiency because it translates directly into the bottom line. They want to hear ROI. If you give a good ROI and you can get these days in three months, 8x, 6x ROIs with the new technology that is out there — there is no CFO that is going to say no, if they hear 6X, 8X, no? And then you translate for them and tell them, hey, this is not only going to improve…

Ed Ballina: They’re going to say, where do I sign?

Alvaro Cuba: The manufacturing plant. And Ed was alluding to that. It’s going to be manufacturing, it’s going to build capability, as Ed was saying, and third, it’s going to impact the other pieces of the business. It’s going to allow you to sell more. It’s going to allow you to have more capacity in the line so you can change and do faster changeovers, which helps on putting different products on the shelf. It’s going to help you reduce cash because if your lines go better, you need less inventory, no? And those are music to the CFO’s ears. So those are some ideas you can go on.

Ed Ballina: That’s inventory. You know, I was chuckling because I remember one time going into my SVP GM and we had some sort of an equipment failure in the middle of sales and I’m not explaining to him, hey, well, the bearing and the this and that, and he just looked at me and goes, hey, just get the hamsters to go faster. That’s it. His eyes glazed over when I started talking about the specific gravity of bubble gum. And he was like, just tell the hamsters to go faster, okay. Any product. He was great. And with this, he could do it.

Alvaro Cuba: And with this, you can do it. So go for it, guys. Hope you found some of these ideas helpful.

Ed Ballina: And to your point, Alvaro, you need to understand what is the data that you’re going to bring, right? And what is the language they’re speaking in? Because if you’re a plant manager, sometimes your P&L is all cost, right? And you want to reduce costs here, but here’s what I’m going to do. But when you start talking about supply chain costs, you start talking about transportation. Hey, I’m not going to have to insource that product because now I’m producing it myself. You start talking about customer delight. I’m going to reduce your out of stocks because my line is running more efficiently than it ever did. When you’re talking to a sales GM, they want to hear how are you going to get me the product that I need when I need it and at the right price. Yes, I’m interested in cost, but I live and die by sales, so do not ever out of stock me, okay? End of story.

Ed Ballina: Efficiency and cost, yeah, I like it, but first you’re going to get me my product. You got to know what room you’re in. So hopefully we gave you some ideas as to what you can do here. Uncertainty for us in supply chain is not new. I saw a headline the other day that said…

Alvaro Cuba: Yes. And uncertainty is the only certainty in supply chain. Yes, perfect. Yeah.

Ed Ballina: Yes, yes, yes. That is masterful because the quote I read was “Uncertainty is the new certainty” and Alvaro and I looked back and said, how boring, that’s how we live our lives. So yes, sir.

Alvaro Cuba: 30-something years.

Alvaro Cuba: So friends, this is another episode and we are so glad to be here with you in our third season, first episode. So thank you so much for your support and thank you so much for joining the Manufacturing Meetup. If you enjoy the episode, please like us if you are watching on YouTube and give us a review if you are listening on iTunes. And more important, share the podcast with your friends and allow them also to get a little bit of these neat bits that can help you in your plant. Thank you.

Ed Ballina: So if you want to keep the conversation going, you can email us at mmu@augury.com. We’ll also have links in the show notes of this episode and also related episodes.

Alvaro Cuba: See you guys.

Ed Ballina: Bye bye.