Cost cutting is easy, but reliability ensures true long-term profitability.
Are You Taking or Making Profits?
The goal of any successful business strategy is to create long-term profitability. However, organizations must often decide between “taking profits” or “making profits” when considering their strategy. Taking profits includes short-term decisions that inflate profitability by cost cutting. Reluctant spending or halted spending establishes the illusion of increased profits—examples include delaying turnarounds and changing inventory levels. Making profits, on the other hand, has at its core a reliability focus. A reliability-focused strategy increases mechanical availability, overall proactivity in response to conflict, and promotes spending less for an equivalent amount of work. For example, a reliability focus depends exclusively on proactive as opposed to reactive work, which is less expensive long term. Solomon's International Study of Plant Reliability and Maintenance Effectiveness (RAM Study) shows a reliability focus can be 6 to 9 times less expensive than a cost focus [i]. The key difference between taking profits (cost-focused strategy) and making profits (reliability-focused strategy) is that a cost focus is not sustainable and not as profitable, and Solomon has 30 years’ worth of data to prove it. Solomon’s RAM Study shows that unreliable fourth quartile performers spend up to 4 times more on maintenance on an equivalent asset basis.
Reliability is a Profit Center
In general, many organizations view across-the-board cost cutting as the primary means to improve profitability. Over the course of the last 30 years, first quartile performers improved and achieved higher mechanical availability, while spending less overall on maintenance than peers, by using a proactive maintenance approach. The shift from a cost-cutting mindset to seeing reliability as a profit center parallels with reconfiguring reactive behavior to proactive behavior.
Unfortunately, a cost-focused strategy is more popular due to the instant gratification and the significantly reduced amount of effort, time, and money required. But in the long run, a reliability-focused strategy provides long-term validation in key decision making and results in sustainable profits due to the investments and the lasting work behind this strategy. Reliability also creates customer loyalty and employee satisfaction. For example, employees may take pride in a well-run organization where they experience less stress in day-to-day operations, created by a proactive environment that experiences fewer emergencies. When an organization is unreliable, not only does it spend more to get back to a normal state, it runs the risk of losing customers and employees who will seek reliability elsewhere.
The combination of unreliability and cost-cutting greatly reduces profitability. In today’s industry climate, organizations strive to differentiate themselves from their competitors. When discussing business strategy, it is worth noting that every aspect of business is considered a commodity, especially customer loyalty. “In almost every situation, if an organization does not reliably deliver product or service to its customer, the customer has the option to go someplace else,” Jeff Dudley, a senior consultant at Solomon, said.
Don’t Let Obstacles Derail Your Journey to a Reliability Focus
The transition from a cost-focused strategy to a reliability-focused strategy is not without its obstacles. The two most common concerns are the amount of effort required and the cost incurred. Organizations must view the money and work required for improved reliability as a strategic, long-term investment that will pay out. Cutting costs may remedy immediate conflicts, but the only successful long-term solution is a reliability-focused business strategy. In response to common pushback from impatient personnel related to the overzealous desire to increase profits or expedite culture change, Solomon reminds you to never lose sight of the long-term profitability goal. To accept a short-term approach is akin to accepting average performance, leaving money on the table, and remaining content with reactive behaviors in times of distress.
Solomon has 30 years of data to serve as evidence that when a reliability-focused strategy is implemented, the entire organization improves from top to bottom for years to come. This strategy will distinguish you from your competition, encourage brand loyalty, and promote both continuous growth and long-term profitability.
[i] Data sourced from International Study of Plant Reliability and Maintenance Effectiveness (RAM Study).
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