Management: Beware the Phantom

Did you ever read an article in a magazine that talked about the huge savings from this new program or that new gadget? Did you ever wonder, like I do, if those claims are real? Whenever I would track down the claims I would always hear some likely story. What I wanted was a report showing the fleet’s finances before the change and a report showing the ‘after’ picture. The difference between the two is the savings. I could never get that.

It turns out that almost everyone outside accounting confuse two types of savings. There are real cost savings and there are phantom savings. Real cost savings flow to the accounting system and appear on the books. Phantom savings appear on reports and never can be tracked to the accounting books.

Here are some examples of real savings (not all real savings appear on the maintenance budget):

  • Reductions in payroll (personnel)
  • Non-replacement of personnel because we don’t need them
  • Reduction to overtime
  • Reduction to billing from contractors and vendors
  • Reductions to material used
  • Reductions to inventory on shelf
  • Reduced expenditures for tools and equipment
  • Reduced equipment rental bills
  • Reduced demurrage (rental of tanks, rail cars, ships)
  • Reduction to regulatory fines
  • Closing a satellite garage and reduction of overhead
  • Reduction of energy usage (large enough to be read)
  • Reduced raw material usage
  • Reduced number of units due to increased uptime
  • Reduced operator personnel needed

And here are some examples of phantom savings:

  • Reduction of labor without realizing any savings
  • Small reductions to energy usage
  • Small reduction unit usage
  • Reduced compressor usage due to leaks being fixed (unless you can prove electricity savings)

Let’s consider a PM on a special unit that takes three hours a month and does not use materials. After looking at the data we decide the PM is too frequent and we reduce the frequency from monthly to quarterly. And let’s agree there was no increase in breakdowns or adverse events. Calculations show we “saved” 24 hours a year. Where did the savings go? We say that the time is now available for other valuable maintenance activity—which is true—but where did it go? Classic phantom savings.

If we could cut out use of a repair vendor three days a year as a result of this PM frequency improvement, then the phantom savings would be realized (translated into real savings). If we could decrease overtime then the savings would be realized. Or, if the PM used a $25 belt each month and we dropped the usage from 12 to four a year we could show real savings of $200.

We act as if the real and phantom savings are the same. That is a trap used by people trying to sell you new systems and gadgets. They are not the same and should be presented separately. Hard numbers people (our friendly accountants) are extremely suspicious of phantom savings. Their experience shows that in the real world we rarely realize those savings. Phantom savings are nice to have but not as nice as money in the bank.

This is not to say that phantom savings are not important, because they are. Phantom savings can really be used for important work. It’s just that the Return on Investment will show up as a result of the work we actually do and not from the savings activity itself. It’s also a guide or a pointer to real savings.

The situation of phantom savings could very well be worse than just no savings showing up on the books. Consider the impact of a major effort toward effective shop scheduling. Conservative estimates show productivity could improve by 20 percent. Now, most places don’t implement planning and scheduling and then layoff 20 percent of their people. Most places have excessive identified work (hopefully in backlog) and use the gain in productivity to accelerate the speed with which they work their way through the backlogged jobs.

Each job takes a shorter time (on the time clock). Materials and tools are available when the job starts. More jobs run smoothly. Without a layoff or reduction to overtime there are no savings in maintenance costs. To makes matters worse, those additional jobs will consume materials. The uptick in material usage will be real (not phantom). In the end, improving productivity might adversely impact the maintenance materials budget.

Usually there are additional jobs added that didn’t make it to backlog originally, because no one had confidence that the job would ever get done (particularly infrastructure jobs, it seems). Eventually, when the backlog is reduced to a manageable level the whole plant will run better. Fewer corrective jobs will breakdown waiting for maintenance to get there.

Keep your eyes peeled for all types of savings, but remember: real savings are like gold while phantom savings are like silver or copper (useful but not quite the same).