April - Library

AMMJ
Maintenance Enginering and Engineering Economics
Maintenance Engineering Deserves Better Financial Tools
ME mixes old fashion with modern financial tools. Old stuff includes ROI (Return on Investment), a
coefficient that express a measure of gain (return as profit or cash flow) as a percentage of sacrifice
(investment); all these variables are measured in more than one way, to complicate matters still further.
Also, simple payback rule that ignores the time value of money is no adequate solution. EE and
Corporate Finance can offer better resources. What?
There are proven discounted cash flow methods – NPV (Net Present Value), IRR (Internal Rate of
Return), LCC (Life Cycle Cost), B/C (Benefit Cost Ratio) and DPB (Discounted Payback) – not to mention
the more refined Real Options tools. All those require two (hard to get) inputs: the investment expected
cash flow and the corresponding discount rate (adjusted by the systematic risk of the investment). This
toolbox can certainly be upgraded to better satisfy the needs of any area of application. There is no
reason to use old stuff.
Even if sharp tools are used, EE is not able to properly formulate the problems ME faces and to supply
the required inputs. None is more qualified to generate cash flow projections than the Maintenance
Engineer. Acquiring skills in forecasting methods and accounting is recommended, nothing so difficult
as to impede engineers to do the job. My favourite example is cost. ME cost is traditionally gauged by
how much it spends, what is just a fraction of the whole “cost iceberg”. There are many other costs,
including hidden ones such as loss of business reputation due to the deliver of poor quality goods, the
final outcome of faulty maintenance activities. It seems that current cost models ignore the costs of not
doing maintenance work. A rigorous cost model is still lacking.
Discount rates come next. The use of “hurdle rates” to appraise capital expenditure projects with no
justification of its value is common and undesirable practice in many engineering applications. Even
textbook authors in Corporate Finance and EE fail in this respect. Is that a surprise? Not so much. To
adjust a discount rate to the project level of risk is no easy task. But there are means to do it, starting
from the basic financial theory of asset pricing under conditions of risk. The corporate wide cost of
capital may be a good guess to begin with, because ME spending is much related to preserving the
current business capacity.
Engineering Economics Needs Maintenance Engineering
EE needs more engineering. Gradually, EE was pushed out the more technical university departments, being
restricted to industrial (or production) engineering departments. These may provide a better living environment
for Engineering Economists, but it certainly limits the scope and reach of their work. Take a look at the bestsellers
textbooks: there is ever less engineering content in them. I do not want to disrespect anyone’s intellectual
production, but this a sad truth. If you are sceptical, please search inside any EE textbook for engineering subjects
like innovation, maintenance and retrofit; you will find nothing.
From my thirty six years of experience teaching to undergraduate and graduate students of Engineering at
Universidade Federal do Rio de Janeiro (UFRJ), I learned that it is easier to teach Economics to them rather than
to teach Technology to students of Economics or Business Administration.
My students – they alone deserve credit for this – never offered any major resistance to become learned in
Economics. Although it was not my intention, some of them became very good economists… To my greatest
satisfaction, most of them became better engineers. Where I found some opposition was in the academic staff.
To many of them, Economics is not a necessary intellectual competence of the engineer. In Brazil, to the best
of my knowledge, engineers tend to reach high management positions and, also, many times become very
successful entrepreneurs. In the beginning of their professional careers they look for opportunities to strengthen
their intellectual capital, such as the MBA programmes, a clear recognition of the missing ingredients in their
undergraduate preparation.
What ME can supply that EE needs? Much, but I will draw the attention to only two themes:
1. First and foremost, ME is indispensable to shed light on the matter of production capacity. Once a
production facility is started up, ME enters the game to preserve its capacity. How do ME activities relate
to capacity levels? I assume that Maintenance Engineers can answer this question in their own language.
What we (Engineering Economists) need is to get this answer in a language that we understand. We,
on both sides, must therefore strive to understand each other. The financial health of private and public
organisations alike will much benefit from this. And, of course, we will be doing a much better job.
2. ME is a service that can be supplied in many ways. Different strategies and technologies make a host
of investment (and current spending) alternatives, with varying implications for the availability of production
capacity. We must explore this territory together.
Vol 24 No 2