If you’ve been following our blog lately, you’ve likely seen our Lubrication Cost-Saving Series as part of our new joint venture with Precision Lubrication Services, Inc. So far, in Part 1, we evaluated the costs and challenges of having an unrefined lubrication program, and in Part 2 we explained how to establish an optimized lubricant management plan. In this final Part 3 of our 3-part blog series, we’ll calculate and break down the actual cost-savings companies can experience by having a refined lubrication management program in place.
When it comes to calculating exactly how much money these programs save your company, the return on investment (ROI) of implementing an LMP is easily benchmarked, measured, and analyzed if you know what to look for. The results of these calculations can be very persuasive when trying to obtain buy-in approval from senior management, and in providing information that Plant Managers can use to set benchmarks and analyze and adjust their LMP as time goes on. To help your company realize the savings of implementing a refined LMP, here’s a breakdown of how to calculate the ROI of an LMP.
Targeting Savings Opportunities
If you remember from Part 1 of the blog series, typical lubricant budgets only account for 1-3% of the total operating budget, despite having the potential to significantly increase maintenance costs in the event of a lubrication error. Under-developed lubrication practices are known to cause unnecessary machine parts consumption, elevated overtime, and lost productivity – all of which can be prevented with the proper proactive maintenance program. If you can fix these problem areas in your production and implement an optimized LMP, you’ll create cost-savings opportunities from the reduced spending on maintenance and overtime labor costs. Looking at the Before and After graphs below, for example, you can see how a PLSI Lubricant Management Plan can help you create documentable savings:
Calculating Return on InvestmentIn 1966, the British Government commissioned H. Peter Jost to conduct a study on the effects of the lubrication optimization in industrial applications. Known as the Jost Report, this was the world’s first comprehensive study of how friction, lubrication, and wear directly and indirectly affected a country’s Gross National Product. In his research, Jost discovered significant cost-savings opportunities after implementing improved lubrication management practices and comparing the before and after expense figures on the company’s spreadsheet. He found that savings accrued through an optimized LMP could be as high as 20% in some areas – in what many considered a conservative rating scheme. Here is what he found:
20% savings from new lube buys
20% savings on reduced maintenance and repair costs
7.5% savings from less energy use due to friction control
5% savings on new machine purchases
1% savings from higher utilization ratios and improved machine efficiency
0.13% savings on labor due to fewer repairs
These findings opened the door for more comprehensive lubrication research, and since these findings in 1966, manufacturers around the world have been looking for different ways to improve their lubrication practices and realize these cost-savings. In fact, one of the most popular ways to calculate ROI today is by calculating the net present value of your lubrication investments.
Net Present Value
Net present value (NPV) can be defined as the sum of the present values of your incoming and outgoing cash flows over a period of time. It takes into consideration the cost of your current investments, and compares it to the present value of the future cash receipts after being discounted by a specific rate of return. This is very useful for capital budgeting, because it allows you to determine the value of an investment over the course of its life. Looking at the spreadsheet from one our recent customer proposals below, for example, you can see just how to calculate NPV:
The program we proposed had a selected value allocation of $297,660/year with the first year only being one-third of the value and the second year being two-thirds. We estimated the cost of the program to be $46,439 the first year, with recurring costs of $30,372 and $19,283 in years 2 and 3 respectively. You can calculate the net cash flow by taking the annual project improvements and subtracting the total costs from them. From there, using the discount rate of 10%, you multiply the net cash flow by the discount rate to give you the discounted net cash flow. Once you’ve calculated the discounted net cash flow for your projections, you can add up the sum of those values to give you your NPV, which we calculated at $773,437 for this customer! In other words, for just over $96,000 in total costs, our customer could save nearly $800,000 with an optimized LMP. And while these savings will vary from company to company, there’s no denying the impact that a refined lubricant management plan can have on your bottom line.
For companies that want real, documentable cost-savings with their lubrication program, PLSI and U.S. Lubricants can provide a potential savings forecast by analyzing your current program and calculating the net present value of the suggested improvements. In our years of experience, we’ve seen numerous companies save hundreds of thousands of dollars just by optimizing that small 1-3% sliver of their budget, and we can certainly help yours. To see firsthand just how much U.S. Lubricants and PLSI can help your company save with a refined LMP, contact Tony Springer at TSpringer@uslube.com or by phone at (800) 490-4900 ext. 8823.