Financial Impact and Analysis of Equipment Inventories (Part 1) - FMLink (2024)

by Robert A. Keady Jr. CEM, CSDM, FMP — Today, it is not uncommon for Facility Management (FM) and Owner Organizations (hereinafter referred to as organizations) to have an incomplete concept of equipment inventories: their importance, use and how to maintain them. Even among the best, facility managers often differ about what comprises an equipment inventory and how to create, develop, establish and maintain one.

This article series focuses on the following:

• Advantages and savings of both component- level and complete inventories versus preventive maintenance (PM) inventories.
• The benefits of using industry standards rather than a self-generated system.
• Analysis of system-based versus objectbased equipment identification.
• How to maintain an inventory.

Why are equipment inventories critical? The bottom line: They are the basic requirement for every aspect of facility management. Equipment inventories affect facility safety, as well as how the facility is operated, maintained and forecasted. They also have a direct impact on facility costs. If the equipment inventory is not accurate, the facility and the organization will not be as effective. Figure 1 (page 12) illustrates the complex relationship between equipment inventories and finances, and how finances are directly or indirectly affected.

Instead of fixing a common problem in the industry of incomplete, inaccurate and self-generated equipment inventories, organizations will compensate by spending millions of dollars and thousands of manhours. With increased global competition where the focus is on waste reduction and increased spending oversight, organizations can no longer afford to consistently waste time, manpower, and funds.

Inventory Types and Management

Before continuing on, it is important to define some terms and concepts related to equipment inventories. When analyzing equipment inventories, it is important to understand the differences between the types of inventories and how they are identified and maintained.

The four main types of inventories are as follows:

• Partial Inventory a facility equipment list that is not tied directly to any specific standard, maintenance schedule or controlled process. Partial inventories can be similar to paper or digital equipment lists given to a facility after construction. Some common problems related to partial inventories are; the equipment listed may not be the equipment actually installed, the equipment counts may be inaccurate, and it may omit important pieces of information, such as equipment attributes or physical locations.
• Preventive Maintenance (PM) Inventory an inventory of all the equipment within a facility that requires preventive maintenance. Non-preventive maintenance equipment is not included in this inventory.
• Component-Level Inventory an inventory that includes PM and Non-PM equipment down to the component, or product, level. A component-level inventory normally consists of equipment that conveys with the facility during transfer of ownership or is tracked, serviced, repaired or maintained by the organization. Componentlevel inventories are as in-depth as possible for an existing building without actually performing destructive testing to determine what is behind the walls or underground. This type of inventory does not normally include disposable inventories such as supplies. For example: A component-level inventory would contain lighting fixtures but not contain light bulbs, electrical outlets, or mounting hardware.
• Complete (Master) Inventory an inventory that includes all equipment within the building envelope and site boundaries. Complete inventories capture the equipment that a component-level inventory is not able to capture. Complete inventories are normally obtainable only after new construction. They are found in organizations like nuclear power plants, oil rigs, manufacturing companies, and ships, and reflect the understanding within these organizations that equipment inventories are important to the success of overall operations.

Equipment can be identified in various ways within an inventory. The various equipment identifications can be broken down to the way the identification system itself was developed and the method in which the equipment is then identified within that system. Identification systems are developed as follows:

• Self-generated identification systems are self-made proprietary systems developed specifically for an organization(s).
• Industry-standards-based identification systems use universal industry standards and codes as the identification system. The methods in which equipment is identified within a system are as follows:
• System-based design is when the equipment within the identification system is identified based on the relationship it has with the building element or component system it is associated with. For example, a system-based approach would include both a Condensate Return System Pump and a Condensate Supply System Pump.
• Object-based design is when the equipment is identified based on its design or function. An object-based approach to classifying the above system would instead be based off the different designs of pumps (centrifugal or positive reciprocating) and not the systems they are used in. The object “pump” would then be linked to a system object such as the “Condensate Return” or “Condensate Supply” within the database. This design uses the combination of objects to identify the relationship between components and systems.

Inventories are maintained in different formats and through many different processes. Inventories are either maintained in a paper or digital format that may or may not be updated. The key difference is whether or not an organization has a formal process to maintain inventories and if they actively support and use that process.

The following sections will provide an analysis into the different types of inventories, systems versus object-based design and the proper methods to maintain an inventory. Comparison of Inventory Types While it would seem obvious that a complete inventory would be the most beneficial to an organization, the reality is that most organizations do not understand the impact equipment inventories have on their business. This is not an uncommon reality in an environment where most facility managers are under the impression that a preventive maintenance inventory is more than sufficient to properly budget, operate and maintain a facility.

The idea that “inventory is a maintenance function” fosters this false impression. Because of these impressions, the majority of Chief Financial Officers (CFO) and Chief Executive Officers (CEO) are not provided the proper information to develop accurate budgets and make critical decisions related to their facilities. It is important to understand that accurate equipment inventories affect many different aspects of building management, including management of energy, projects, operations, maintenance, and customer service, and, therefore, they affect the overall finances of an organization. For example, if an inventory is not accurate, an organization does not have the ability to reduce peak load during curtailment periods (Figure1), which increases the utility bill and, therefore, increases costs. Another example: If an accurate equipment inventory is not maintained, the number of man-hours needed to maintain and operate the facility cannot be easily calculated. Therefore, personnel must be sent to the facility every time a project, contract, audit, or assessment of the facility is performed to capture the equipment inventory in order to accurately calculate man-hours. This method can easily create inaccurate costs in contracts, audits and projects, which, in turn, create contract modifications that increase the waste of manpower and staffing, and negatively impact the budget. This simple example of wasted manpower shows that accurate equipment inventories are important to all property management fields such as the contract officer, portfolio manager, human resource manager, and financial manager, not just the FM.

A preventive maintenance inventory is important for identifying equipment that requires maintenance to ensure it is operating properly and efficiently in order to prolong its life. Preventive maintenance inventories are important to properly schedule and define labor resources, but for a more accurate measure of cost and resources needed for the operation of a facility, it is crucial to know the average costs of repairs, service calls and resources for emergency planning, regulation compliance, energy management, renovations, projects, and safety compliance. The following examples will explore the limitations of preventive maintenance inventories [Refer to Appendix 1, Equipment Inventory Summary of Cost Benefits on www.AFE.org]: Repair/Service Call Data With only a preventive maintenance inventory, the organization can capture repair and service calls, but they are unable to tie those costs to non-preventive maintenance equipment. For a medium or large organization to budget for these costs, develop business decisions, identify overpayments, or troubleshoot their facility, it would have to manually sort any available existing data. This task is manpower-intensive and an expensive cost that could be avoided. For example, imagine a scenario in which an 8-inch isolation valve on a chiller does not require regular maintenance and, therefore, is not in the inventory. Its operation would be verified when the maintenance on the chiller is performed. The valve is repaired or replaced three times within a two-year period. Because the valve is not in inventory, a repair or service call cannot be written on the component and tracked and, therefore, valuable data is lost. Moreover, the services cannot be referred to in the future and no one can answer the following questions: Was the organization charged multiple times for a repair not performed? Is there a problem with the type or placement of the valve causing its failure? Were the subsequent repairs under warranty?

Emergency Response An inventory that does not include the component-level equipment, as in a preventive maintenance inventory, reduces the readiness of an organization to respond to emergencies. For example, a facility experiences a chilled water line break on the 4th floor. The length of time it takes to find the isolation valve for the leak increases significantly since the information is not readily available. The 1-inch isolation ball valve, which had no required maintenance, was actually located within an adjacent room. The main valve to the facility had to be closed, causing the entire facility to be shut down. All four floors under the break had to be renovated. The ability and speed of recovering from this event a fire, an explosion, or some other emergency depends upon the capability of determining all systems and components affected by the event. Once the affected components are determined, their impact on the operations of the facility and the speed at which the FM can bypass or isolate those affected systems to permit continued operations is critical to event mitigation.

The emergency response includes the ability to identify replacement components, the ability to accurately scope the work to repair teams or contractors, and the ability to accurately estimate the project costs for management. A facility with only a preventive maintenance inventory cannot respond as fast or as effectively.

Regulatory Compliance The organization increases its exposure to violating regulations that would be otherwise captured with a component-level inventory. The Environmental Protection Agency requires the continued monitoring of all underground storage tanks. Facilities that no longer use their tanks, and have not for some years, might not properly keep the component in their preventative maintenance inventory. This action could lead to fines and oversight by outside regulators. Organizations have released large amounts of oil into the environment simply due to equipment not being maintained.

The equipment was not in the inventory and on the preventive maintenance schedule as it should have been. The clean up and resultant fines alone would pay for an accurate and quality component-level inventory. Preventive maintenance inventories, because they focus just on equipment that has to be maintained, can easily miss the inventory of critical equipment.

Component-level and complete inventories identify all of the equipment within a facility and there is no decision of whether or not equipment is maintained or belongs in the inventory. Facility managers are responsible for ensuring the organization complies with numerous federal, state, and local codes and regulations. A component-level or complete inventory assists the facility manager in ensuring that all equipment is properly identified for regulatory compliance.

Energy Management Managers’ ability to predict, reduce, and plan the energy usage for a facility are based upon equipment inventories. For example, a large organization decides that it does not perform maintenance on motors under one horsepower or electric duct heaters. That is because these pieces of equipment are run-to-failure and have no actual maintenance, as the cost for maintenance would be more than the cost of replacement. Because of this decision, the equipment is not captured in the curtailment plan and the facility staff is limited in its ability to reduce peak load during high demand periods, increasing electrical costs. A component-level or complete inventory would have captured all of the equipment within the facility, allowing proper operational planning. The ability of the facility to reduce peak usage, plan energy conservation methods, and predict future energy usage is directly impacted by the type of inventory, which, in turn, affects the financial costs to an organization.

Manpower The exclusion of components from an inventory negatively affects any manpower resource that requires an accurate accounting of those assets. The lack of a complete, or component-level, inventory, impacts an organization’s ability to successfully perform essential tasks in an efficient manner (i.e., capture equipment information for buildinglife- cycle costs, energy or maintenance audits, projects, renovations, chargebacks, contracts). These tasks then become repetitive capital expenditures that could be avoided with a component-level or complete inventory.

Safety When repairs are performed on the ballast of a 277-volt fluorescent light fixture, the maintenance repairer is usually normally two things that occur: two personnel “flip breakers” [one at the ballast and one at the breaker panel(s)] cycle the breakers until they find the correct source of power; or one person replaces the ballast “live” without turning off the power.

Flipping breakers for all of the repairs over the course of a year is a significant outlay of manpower. The industry probably spends hundreds of thousands of man-hours just “flipping breakers.” The second action of working the component “live” exposes the organization to legal, safety, and regulatory ramifications. A component-level inventory that captures the electrical distribution system of a facility to include breakers could dramatically mitigate, if not eliminate, these costs. The Department of Energy’s Federal Energy Management Program writes in Operations & Maintenance, Energy Efficiency and Renewable Energy that: “Effective O&M (Operations and Maintenance) is one of the most cost-effective methods for ensuring reliability, safety, and energy efficiency. Inadequate maintenance of energy-using systems is a major cause of energy waste in both the Federal government and the private sector. Energy losses from steam, water and air leaks, un-insulated lines, maladjusted or inoperable controls, and other losses from poor maintenance are often considerable. Good maintenance practices can generate substantial energy savings and should be considered a resource. Moreover, improvements to facility maintenance programs can often be accomplished immediately and at a relatively low cost. “It has been estimated that O&M programs targeting energy efficiency can save 5% to 20% on energy bills without a significant capital investment. From small to large sites, these savings can represent thousands to hundreds-of-thousands of dollars each year, and many can be achieved with minimal cash outlays.” (View it online at www1.eere.energy.gov/ femp/operations_maintenance/.)

The foundation to an effective O&M strategy is a component-level inventory. Because of the amount of equipment captured, the facility management team is capable of identifying all components that affect energy usage, require maintenance, and assist in safe operations. Figure 2 (page 13) provides an estimated simple payback cost for a contractor to capture a component-level inventory. A component-level inventory has a positive payback to a corporation, organization, or facility. The above examples and analysis should demonstrate that a component-level or complete inventory is critical to the efficient operation of a facility and a significant improvement over that of a preventive maintenance inventory. The choice then is whether to capture a component-level or a complete inventory. This decision can easily be made based on whether the building is a new facility under construction or an existing facility. Once a building falls into an existing building status, it becomes cost prohibitive to open up the walls or dig up the landscape to do the work necessary to perform a complete inventory. In contrast, a componentlevel inventory can and should be performed on existing facilities and can be updated as renovations or projects are performed. Now that the type of inventory is decided upon, the way and manner in which the equipment is identified within the organization’s inventory system becomes very important.

Component Identification Systems

When the decision is made to capture a component-level or complete inventory, the organization must decide how to identify the components in a manner that is consistent and relevant. The two basic ways an equipment identification system is developed for an organization are self-generated based identification systems or industry-standardsbased identification systems.

Self-generated identification systems are usually proprietary systems developed specifically for an organization. As a result, such a system is normally inconsistent with any other organizational system in use in the industry. The system may not even be consistent with other systems in use within the same organization. This type of system requires frequent updates when new components come on the market or changes are made to the identification system. For example, the changes made to the system when one branch or region of the organization combines its identification system with another branch or region of the organization.

Self-generated systems require capital resources, including personnel, to keep the system up to date and properly implemented. Preventive maintenance documents are a common source used in the development of a self-generated inventory identification system. For example, a motor has preventive maintenance performed upon it as described in maintenance card MTR-01. The motor is therefore identified within the inventory system as MTR01-Sequential Number (001 for this example = MTR01-001). Now if the organization changes the maintenance card to a different nomenclature, all of the affected components within the organization have to be re-identified. If a second maintenance card exists due to different maintenance required for the same motor, for example MTR-02, the possibility of having both MTR01-001 and MTR02-001 within a database exists, even though it is only one piece of equipment. Self-generated systems are not consistent or compliant with standards or systems used by other industries or organizations. Because self-generated systems are not based on industry standards, it often creates a communication gap between the construction and the operations of facilities. Organizations that build, own, and operate facilities are consistently compensating for this gap in communications. When a new facility is brought online, the facility has to convert the industry standards used to organize the construction information to those used by the FM or owner.

The cost of the conversion is a reoccurring nonrefundable one. A million-square-foot facility, at a cost of $0.10/gross square foot [Figure 2, note (1)], equates to a $100,000 cost related to using a self-generated system. This is capital that could be used to improve the building’s performance. Self-generated systems also introduce training and human error costs to the organization. An illustration of the communication gap between construction and operations of facilities is provided in Figure 3 (page 14).

Industry-standards-based identification systems use industry standards and codes to implement a universal identification system for components to be inventoried. The use of industry standards to identify components helps to reduce or bridge the gap between construction, facility management, and owners. When a new facility is brought online, the component-level or complete data can be transferred directly into an organization’s database and is useable immediately at little or no cost.

This would be the same cost savings realized during renovations or projects requiring use of the standards. The use of industry standards also ensures that various departments and branches within the organization are using the same language. All data and metrics are consistent. The use of industry standards facilitates communication internally and with external corporations, organizations and facilities. State and federal agencies using the same industry standard would effectively reduce their communication gap, especially in emergency situations. As discussed above, using self-generated based identification systems is not efficient or effective for any organization. The best option is to use an object-based universally accepted industry standard. In order to properly evaluate which standards to use, it is important to understand the difference between a system and object-based design to identify the actual equipment within an identification system. System-based design is when the components within the identification system are identified based on the relationships they have with the building or component systems they are associated with. This type of approach to identify components is expensive and complicated to maintain. A centrifugal pump common to a lot of systems would have to be replicated in all of the different system categories.

When technology develops a new type of pump, that pump has to be populated in all of the relevant systems. System-based component identification systems are normally very large and, therefore, costly to maintain in manpower and computing data space. This approach is less flexible than an object-based approach. An organization does not go to a manufacturer to buy a Condensate Return Pump; rather, they buy a centrifugal pump and place it into the Condensate Return System. To be able to parse data and find all of the pumps within a facility or organization (Table 1, page 16), the query would have to include all of the different system identifications in the database, or the organization would have to perform text searches of the database. An object-based approach is simpler and more flexible in its use, and, therefore, more cost effective and efficient. Object-based design is when the equipment is identified based on its design or function. The object “Pump” would then be linked to a system object such as the “Condensate Return” or “Condensate Supply” within the database. This design uses the combination of objects to identify the relationship between component and systems. This allows the organization to parse the database by objects or combinations of objects based on the data needed (Table 2, page 16). Hence, they are able to quickly find all centrifugal pumps, all pumps, or all of the components related to the whole Condensate Return System.

A manager would have the capability of tabulating all of the voltages, amps, horsepower, efficiencies, etc., of all of the pumps within a facility or system. The data could be quickly parsed by system or product level. All of the components energy usage within a system could be accurately determined for chargeback or the development of a curtailment plan.

Part 2 of this series will appear next issue and cover relevant standards and inventory maintenance.

Additional Resources

• Construction Specifications Institute
• National Institute of Building SciencesTM
• buildingSMARTallianceTM
• CIFE VDC Use in 2007

Robert A. Keady Jr. CEM, CSDM, FMP, is energy manager and building management specialist for the U.S. General Services Administration. Keady also is Chairman of OmniClass Table 23, and developer and project manager of the IFACT [Inter- Agency Federal Asset Classification Team] project. He has more than 20 years’ experience in operations, maintenance, facilities management, energy management, training, emergency planning, and electronics in both the private and public sectors. Keady’s experience ranges from the United States Navy and commercial nuclear power utilities, to the commercial retail industry and Federal Government. He graduated summa cum laude from Barry University with a bachelors of science in Management Information Systems Network Engineering.

The AFE Newsletter is published monthly for the members of AFE which also offers certifications: Certified Plant Engineer-CPE; Certified Professional Maintenance Manager-CPMM; and Certified Professional Supervisor-CPS.