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The Management Challenge: In-House vs. Outsourced Maintenance
Published on Construction Equipment
The care and maintenance of each piece of heavy iron in a fleet directly affects
the balance sheet of all departments in the organization. Fleet management is
more and more about asset management, and whether equipment professionals
choose to build a team to keep maintenance operations in-house or turn
maintenance and repair tasks over to their dealers, they are still looking for an
ownership experience built on reasonable costs, maximum equipment uptime,
To meet the challenges of more complicated machines, new data-collection
technologies, new diagnostic tools, and ever-changing environmental and
economic rules, the “shop and yard” segment of Mike Vorster’s management
hexagon needs dedicated attention. Some organizations are putting
maintenance under secondary leadership; others are looking for outside
expertise. These changes are driving the features and benefits of equipment-
management business models.
Fleet executives can choose from three models. They can build an in-house equipment-management team, outsource repairs and maintenance needs to an OEM dealer or third-party, or create a hybrid form of the two business models.
The in-house team model gives the contractor total control over all costs; allows for custom-tailored service procedures for specialized, one-of-a kind equipment; and works for companies that can handle their own field repairs. The team approach is labor-intensive and requires a commitment to ongoing training to keep technicians and support personnel current with new technologies and regulations in the industry. Keeping equipment data collection in-house, whether collected by clipboard or telematics, gives the company unrestricted access and use of information that can be used with aftermarket management programs to assist in budgeting, equipment utilization, and life cycle forecasting.
Outsourcing to an OEM dealer such as Flagler Construction Equipment, a Volvo dealer in Orlando, Fla., provides fleets with OEM-trained technicians knowledgeable in the latest diagnostic and service procedures, which is an attractive benefit for customers purchasing the latest Tier 4-Interim engines currently coming on the market.
“Dealers can offer fixed-cost agreements that allow customers to plan standard equipment expenses,” says Howard McNeal, vice president of product support for Flagler. “Authorized dealer servicing helps to ensure work is done within warranty specifications and with OEM parts.” McNeal says his company’s contracts are flexible, and three-year lease/three-year maintenance contracts are common this year. Because of the economic uncertainty, contractors may opt out of their contact with Flagler after 12 months.
McNeal also points out that the dealer technician has an OEM checklist for each maintenance procedure and will note or adjust items that may be overlooked by an in-house mechanic.
The team approach
Barth Burgett, CEM, vice president equipment and support for Kokosing Construction Co., a regional highway/heavy and industrial contractor headquartered in Fredericktown, Ohio, manages 1,700 pieces of heavy equipment with the help of six regional field support supervisors. Burgett says keeping his equipment’s repair and maintenance in-house works because it gives him more control over the quality of each machine’s servicing.
“If you do it yourself, you’re going to just naturally take a look at other things on the vehicle that may need repair and fix those issues before they become problems,” Burgett says. He says that staying pro-active and keeping ahead of potential repairs allows him to keep his costs in line, which directly trends down to how much his department charges operations for each machine’s division-to-division rental. Kokosing project managers do have the option to rent equipment outside of Kokosing Construction, but Burgett says they usually find that the in-house rates are far superior to those charged by a rental house. “My responsibility is to provide the lowest cost to the operations department so that job can go out at a premium price.”
Burgett keeps paperwork simple to lessen confusion at all division levels. He prefers general work orders to line-item orders. For example, his parts planners support multiple mechanics who give the planners their parts requests. The parts planner is already versed in what parts a machine may require according to the type of project on which the equipment is being used and has prepared his inventory to handle the demand. This allows the mechanic to obtain the correct parts quickly and keeps the invoice numbers and paper trails to an orderly minimum. “You want your people doing what they are good at, not pushing paper,” Burgett says.
Burgett’s procedures are based on 20 years of experience, detailed and compiled in a folder he refers to as the bible. “We’ve taken everything we’ve learned over the past 20 years, such as how to write a purchase order to what we need to tell suppliers in order for us to set a machine up correctly, and put it into this folder,” he says.
An example of a procedure in Burgett’s folder is how Kokosing inventories every part of every model machine the company owns. Burgett has designed this supplementary database based on similar equipment-management models used in the military. Before Burgett even accepts delivery of a new piece of equipment, he requires his vendors to supply the machine’s manual, from which his department inventories the names and model numbers of each part on that piece of equipment. This database allows the service department to quickly identify and requisition the correct parts without paging through multiple manuals. His inventory database system is especially effective for frequently ordered parts such as tires, filters and batteries that, although staples in the shop, often have numerous model types and serial numbers that must match a given machine’s specifications.
“The supplementary database saves us a lot of time,” Burgett says, and has also proven very useful when looking for replacement items that are not usually thought of as repair parts, like when he needs to replace a machine’s seat.
When Kokosing acquires a previously owned piece of equipment, his department does the machine’s parts inventory list and adds those specs to the supplementary database. Burgett requires the same inventory listing from vendors supplying pre-assembled components. Compliance from the vendors is part of his company’s purchase contract, and vendors understand that Burgett will not release payment for an order until the inventory listing is completed.
The supplementary database provides Burgett with data that allows his department to work with operations to maximize equipment utilization and uptime. “We as a team look at project forecasts of equipment utilization,” he says. “With this information we are able to better allocate assets.” It also serves as a notice of potential operator or manufacturer errors if a part consistently comes up for reorder on a specific model machine or type of job.
Burgett’s team approach to equipment management meshes well with the financial side of the Kokosing house. When the construction slowdown began, Burgett was able to bring reliable data to the table detailing what each machine would require to keep it running efficiently and lengthen its life span—parts, labor and applications. His cost and asset forecasts leant support and guidance to Kokosing’s decision to keep purchasing to a minimum, without adversely affecting the quality of service his equipment division provided.
Burgett’s advice to contractors setting up an in-house team is to first know actual costs and where they are generated. Burgett uses a rental model where each piece of equipment is attached to a cost code for each project.
“Understand the cost of running your equipment and put those costs where they occur,” he says. “Generalizing costs will not allow you to accurately forecast future expenditures of labor and money.”
Managing expectations from all the company’s divisions is based on communication. “Everyone here understands that this division does more than maintain and repair equipment,” says Burgett. “We participate in each project’s weekly meetings and attend quarterly budget meetings. We have quarterly meetings with operations and support staff to discuss safety, maintenance and communications to make sure we are delivering a consistent message within the company.” When asked what would persuade him to outsource his equipment management, Burgett said, “They’d have to have better people than I do.”
Outsourced but hands-on
Greg Kittle, CEM, vice president of corporate purchasing at William Charles Construction in Rockford, Ill., advocates outsourcing but adds this caution: “I like outsourcing tasks, but I don’t believe in outsourcing management.
“Each contractor has unique equipment needs, and it is very difficult for a dealer to respond to those individual, specialized needs in totality,” Kittle says. “By managing and directing your long-term relationships with your preferred vendors, you are able to manage the value you are getting for what you are spending and communicate your equipment needs properly. Ultimately, the equipment manager is responsible for his profit and loss, and that is something you can’t outsource.”
Outsourcing makes better use of a contractor’s core competencies, Kittle says. “If your core competency is mass excavation or highway/heavy work, devoting large amounts of your resources to something you’re not particularly good at doesn’t make a lot of sense,” he says. “Add to that exponentially exploding changes in the industry and you’ll find there is no way to keep up.”
Kittle’s methodology has led to development of his preferred-vendor program that “creates structure around the relationships we already have,” he says. “The preferred-vendor program, along with our national-accounts program, formalizes the entire relationship between us and our suppliers, including who has liability, how we pay, what we expect.”
Ben Tucker in Metairie, La., reduced Barriere Construction’s in-house shop from 40 people to just one technician by utilizing his Total Reliability Process and outsourcing almost all of Barriere’s repair and maintenance to Louisiana Machinery, a Caterpillar dealer with a dozen locations throughout the state. Like Kittle, Tucker is hands-on and aggressively measures his dealer’s performance. Tucker has clearly spelled out his expectations in his master service agreement and holds the dealer accountable.
“We work with percentages and measure our Cat dealer’s weekly scheduled maintenance rate, their emergency rate, and their breakdown rate,” says Tucker. He says his emergency rate should be less than 5 percent of his man-hours.
Tucker closely analyzes the lifecycle of each Barriere machine, with an eye toward replacing a piece of equipment before it requires major repairs. The slow economy made Tucker re-evaluate his fleet, and he decided to extend the lifecycle of some equipment by 20 percent, going from a fleet average age of three years to four-and-a-half years. To accomplish this, he asked Louisiana Machinery to give him another technician. This increased his maintenance budget and brought his emergency rate up to 6 percent, but it saved $3.5 million on his new-equipment budget by extending the life of his fleet. “It’s a balancing game,” says Tucker.
Fleet value and fleet equity are other lifecycle factors for the William Charles equipment-management program. “We’ve developed asset class-based lifecycles,” says Kittle. “Each asset class has its cost and value profile. For example, an excavator acts differently than an articulated truck, which acts differently from a scraper. We have a different lifecycle strategy for each asset class and plan our servicing accordingly.”
Outsourcing to a dealer gives contractors the services of well-trained technicians without assuming the fixed internal costs of continuous training, parts inventories, and employment expenses. “This has helped put us in an advantageous position with our operations costs per hour, which have been staying flat or declining,” says Kittle.
“This is a cyclical business and having the ability to change fixed costs into variable costs is very important to our approach. Overhead is a contractor’s killer.”
Thad Pirtle, vice president/equipment manager for Traylor Brothers, Evansville, Ind., oversees a global fleet of 5,000 pieces of heavy equipment. Traylor Brothers has five yards serving its marine, tunnel and heavy construction divisions and is a good example of a contractor whose business benefits from the hybrid service/repair model using an in-house team for their specialty equipment and dealer support for their general equipment.
“Our business is a niche model because we do specialty work that we have to engineer our way in and out of, such as marine projects, blast tunnels, bridges, and mining structures,” says Pirtle. “We can’t just take an off-the-shelf crane for those jobs. Our specialty-equipment department works with our in-house engineers to build or modify equipment that will perform for each job.”
Traylor Brothers’ specialty-equipment department employs five expressly trained mechanics who retrofit and modify existing equipment because Pirtle says there are no dealers who can support the type of projects and equipment Traylor Brothers runs.
“We still rely heavily on dealers for maintenance and repair of our general construction equipment,” he says. “Even then, our project managers call our in-house people before they call a dealer because the in-house charges are usually a little less than what the dealer charges.”
Another reason Pirtle keeps many tasks in house is the rigorous adherence to safety and environmental regulations most government projects demand.
“We provide our customers, our other divisions, with the reliability factor, too,” he says. “We do a full-fledged audit every few years to get feedback on our service from our project-management people. We also do regular rental rate checks to see where we are in comparison to outside rentals. Our machines are less costly to maintain than renting equipment and are safer for our people. This is a business within the business.”
Pirtle says not many vendors have the distribution network his company requires. “I need to see their distribution footprint. Only three or so in the U.S. have well-integrated distribution networks that carry the broad lines of products we need in the widespread areas we cover.”
Pirtle says that contractors seeking to build an in-house team for their specialty equipment need to make a long-term commitment to training their people. “It takes six or seven years to train our people so they can work on their own.”
Equipment executives are being asked to bring more financial-management expertise to the organization without decreasing the effectiveness of the machine side of the business. Both team-based and outsourced equipment management approaches can help them manage those challenges. In doing so, equipment managers must maintain strong relationships with the other departments within the organization, as well as with outside vendors and distributors. “He needs to be capable of abstract thinking and communicate effectively with operations, service and financial,” Kittle says.
Second in a series, this installment of The Management Challenge investigates how fleets can best manage the “shop and yard” segment of the management hexagon.
By Georgia Krause, Contributing Editor
Fri, 2011-04-01 (All day)