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Beware of Phantom Savings

Written by Joel Levitt

Did you ever read or watch an ad that talked about the huge savings from this new program or that new gadget? Did you ever wonder if those claims were 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 the accounting profession confuses the two types of savings. There are real cost savings, and there are phantom savings. Real cost savings flow through the accounting system and appear on the books. Phantom savings appear on reports and can never be tracked to the accounting books. Perhaps they could be called cost avoidances, but they are not cost savings. There is a diff erence.

Here are some examples of real savings, even though not all real savings appear on maintenance budgets: reductions in payroll (personnel); non-replacement of personnel because they are not needed; reduction of overtime; reduction to billing from contractors and vendors; reduction of materials used; reduction of on-shelf inventory; reduced expenditures for tools and equipment; reduced equipment on rental bills; reduction to regulatory fines; closing a satellite garage and reduction of overhead; reduction of billed energy usage; reduced number of total units due to increased uptime; and reduced operator personnel needed.

Phantom Savings

Now here are some examples of phantom savings, things that sound good but just cannot be documented: reduction of labor without realizing any savings; small reductions to energy usage; small reduction unit usage; and reduced compressor usage due to leaks being fixed, unless you can prove electricity savings.

For example, 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. 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? is is a phantom saving.

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, i.e., translated into real savings. If we could decrease overtime, then the savings would be realized. If the PM used a $25 belt each month and we dropped the usage from 12 times a year to four times a year, we could show real savings of $200.

We act as if the real and the phantom savings are the same. That is a trap that people trying to sell you new systems and gadgets use. They are not the same and should be presented separately. “Hard numbers” people (bean counters) 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 may be. 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.

Also, phantom savings could very well be worse than merely no savings showing up on the books. Consider the impact of a major effort toward eff ective shop scheduling. Conservative estimates show productivity could improve by 20 percent. Now most places don’t implement planning and scheduling and then lay off 20 percent of their people. Most places have excessive identifi ed 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 amount of 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). Improving productivity might adversely impact the maintenance materials budget.

There are usually additional jobs that didn’t make it to backlog originally because no one had confi dence that they would ever get done (particularly infrastructure jobs). Eventually when the backlog is reduced to a manageable level, the whole plant will run better. Fewer corrective jobs will break down waiting for maintenance to get there.

Keep your eyes peeled for all types of savings. Real savings are like gold, while phantom savings are like copper—useful, but not quite the same.

Joel Levitt is a leading trainer of maintenance professionals. Since 1980, he has been the president of Springfield Resources, a management consulting firm. He is a frequent speaker at maintenance and engineering conferences and has written 10 popular maintenance management texts. Joel Levitt can be reached at JDL@Maintrainer.com.

Published in Police Fleet Manager, May/Jun 2011

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