Approving Maintenance expenditures

 

A fundamental management principle is that any function that is a part of a business process should add value, and this includes the function of approving expenditures.

Of course, all major capital expenditures receive appropriate approvals, and if you are reading this in the US you may also be required to have a system of approvals to satisfy SOX legislation (which I’ve heard described as an attempt to legislate morality, in case that’s possible).

However, the process for approving routine maintenance expenditures varies widely, is often not very logical and can easily have negative value.

Approval processes are a reflection of a corporation’s culture. If the corporate philosophy is based on trust, the business processes may allow managers at all levels to make significant commitments without further authorization and these managers are held accountable for the results they achieve. At the other end of the scale, where there is a low level of trust, perhaps as a result of high staff turnover or other factors, each and every transaction may require one or several levels of approval.

There are three kinds of transactions that cost money when routine maintenance work is done, and they are:

– Commitments to purchase materials or services from outside the company.

– Commitments to use materials or supplies from Stores.

– Commitments to use maintenance manpower.

Looking at the approval processes for these in more detail:

 

Outside purchases

It is the most common practice to approve outside purchases, with the level of management having approval authority being dependent on the cost of the purchase. Outside purchases include the purchase of “zero-stock” items which are included in the materials catalogue but are not stocked, and which require a maintenance system that will treat the purchase of these items the same as other direct purchases for approval purposes (see The ‘zero-stock’ catalogue and its power).

The information captured on a direct purchase requisition that is charged to a work order should make it possible for the maintenance computer system to direct approvals to the right person or people. This information includes the equipment number, which identifies the department where the equipment is located, so that the supervisor or manager responsible will receive the request.

For some types of direct purchases, special approval may be required. For example, electrical materials may be directed to the electrical supervisor by an appropriate work order field, or for requisitions for computer hardware or software, the approval routing may be first to the manager of the department and then to the IT manager to ensure conformity to standards.

For parts, tools and supplies, the approval routing must include technical experts as well as those with financial authority. More on this below.

 

Use of Stores materials

In many organizations, Maintenance employees may withdraw materials from Stores with no approval, even if the item has a high value. In some cases, where individual work orders are approved, Stores material may be issued against approved work orders without further approval while other non-work order issues must be approved. In some cases, items worth more than a defined amount require approval prior to withdrawal.

There is, of course, no cost incurred until any stocked item is replenished (athough items may be expensed on issue, when they then become a direct and reportable cost to the operation), and it is a common practice that these replenishment transactions, usually initiated by a Buyer based on an automated stock replenishment report, require no approvals.

 

Labour commitments

The normal process for approving the use of Maintenance labour is through the approval of work orders. However, because there is a significant cost in tracking Maintenance labour costs against work orders, very commonly labour will be charged to a departmental Maintenance labour cost code. Arguments for and against tracking work order labour costs can be made (see Why bother to measure Maintenance costs).

A recommended minimum level of approval for work orders is for area Maintenance and Operations supervisors to review all work orders when they are originated to ensure that they are of sufficient priority to proceed and are in line with department objectives. Whether further approval is required is a matter of preference, and this may depend on the corporation’s accounting practices. For example, in some publicly-funded organizations, special account codes must be used to differentiate between maintenance and redesign, and someone with authority needs to ensure that these codes are correctly applied.

 

Approval processes must add value

I once observed an approval “chain” requiring 13 signatures to allow a new item to be added to Stores inventory. At no step in the approval process did the “approvers” consider anything other than the cost, with the result that many unnecessary items were held in the Stores. For this specific type of approval, the most important consideration is a logical evaluation of the need to stock the item in question, taking into account its probable failure development time, the expected lead time, the reliability of the PM programme and the Economic Order Quantity (see “What parts should be in your Maintenance Stores and why?“).

Business processes should show each step in any approval chain, and define the purpose of each step. For example, the first step for purchasing materials may be a Maintenance Supervisor or Planner (approving to confirm the material is required for a specific work order), then (perhaps) a Maintenance Engineer (approving for conformity to plant standards) then, for large expenditures, a more senior manager or managers.

 

What are the alternatives?

In organizations facing financial difficulties, its not uncommon to find very onerous approval processes, sometimes to the extent that a site manager must approve every single purchase. The results of such a process include:

– operating losses caused by the delay in purchasing essential parts.

– “work arounds” to by-pass the approval process – I have even seen parts charged to personal credit cards. The desire of conscientious Maintenance people to keep the plant running should not be underestimated.

– purchasing two items when only one is needed so that a spare will be available when needed and without delay.

– “rubber-stamping” of purchase requests by the manager, who is already overloaded in a typical troubled organization.

– increased costs of parts and transport because approval delays result in emergency deliveries.

Рequipment may be left disassembled for long periods while component parts are approved, risking loss and damage. These delays also cause a loss of job continuity which can increase costs and reduce work quality.

– Maintenance people being assigned to low-priority and perhaps unnecessary work using stocked materials because materials for the high-priority work they should be doing have been delayed.

– and, of course, frustration all around.

The alternative to very restrictive approval processes is well-structured and disciplined reporting. In one operation where the Plant Manager’s approval for all purchases had been the practice, all Maintenance Supervisors and Planners were given the authority to purchase items up to $7,500. At the same time, a report on all purchase commitments for the last 24 hours was distributed to the managers who attended a daily afternoon production meeting, and all items listed were reviewed at the meeting. Where items that should not have been purchased were noted, the supervisor responsible was advised and reminded of the standard. The results of this change included a greater acceptance of spending responsibility by the supervisors and a significant reduction in overall costs.

 

Rejecting transactions and transferring authority

A good maintenance computer system will have the functionality to handle both of these important tasks.

If a commitment request is rejected at any step in the approval chain, the originator and the people who have already approved the transaction should all be advised of the rejection and the reason.

If a person occupying a position with approval authority expects to be absent, it should be very easy for his/her approvals to be transferred to the relief person. It should also be easy for the system administrator to make the appropriate approval transfer in the event of unexpected absence or when any “approver” forgets this important transfer.

 

A last word on technical approvals

Be aware of the “bicycle syndrome”. This is where a request for a “Hybrid synthesizer servo module P/N 23GH5446” is approved without question, because the approver is responsible only for the cost and does not understand the request. On the other hand, the same approver on receiving a request for a bicycle for plant transport will return it with recommendations for large tires, carrying racks, lights, etc, because “everyone is an expert on bicycles”.

Ensuring that approval chains include technical approval avoids the bicycle syndrome.

 

Usually, a good balance of a reasonable commitment authority for key Maintenance people and a disciplined reporting process, which by definition means that reports are reviewed and followed up, will result in minimum delays and a close adherence to accounting and plant standards.

 

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Don Armstrong, P. Eng

President

Veleda Services Ltd

250-655-8267 (Pacific Time)

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