Condition-Based Maintenance under Performance-Based Contracting
Introduction
Many manufacturing industries incorporate MRO services (Maintenance, Repair, and Overhaul) to meet the demands of their target market. To achieve this, these firms utilized material based contracts (MBC) and performance-based contracts (PBC). Many clients seeking after-sale services prefer short term business contracts and this coerced manufacturing and commercial companies to improve the services offered leading to an increase in demand for service-based contracts. The developing global economy led to changes in these organizations and the stellar after-sale services offered followed the investigation of performance-based contracts, performance-based logic (PBL) to determine the most effective model and policy for MRO service providers. To ensure manufacturing and commercial companies have the tools to be more service-based, this paper conducts investigations to examine the impact of performance-based contracts on MRO service providers through comparing two benchmark models (cost-minimization and availability-maximization) with the new model (profit-centric approach) to ensure organizations meet the increasing global demands of after-sale services.
Problem Statement
MRO services have become crucial for many modern industries. The increasing global demands from clientele have led to the transition from material based contracts to performance-based contracts. The transition led to the need for the development of a new cost optimization model that is based on the performance-based contracting approach. To develop this new cost optimization model, there were stochastic degradation investigations done to determine the most effective approach using two models: cost-minimization and availability maximization. MRO services are traditionally performed under the MBC guidelines but increasing market demands have led to the search of a new model whereby efficient and modern MRO services can be offered based on PBC.
Methodology
Performance-based contracts incorporated the pricing methodology power-by-the-hour. This contracting strategy meant that MRO service providers were paid on an hourly basis. However, this depended on the systems functioning properly since field operations relied on them. This pricing methodology ensured that MRO service providers improved the reliability and availability of their products. A condition-based maintenance policy was implemented for field service purposes. Under this contracting strategy, service providers were compensated based on the reliability of the products during field operations. Many MRO providers preferred this strategy since it had a fixed payment rate in case machinery experienced mechanical problems. Good compensation also meant that there needed to be standby maintenance and repair personnel. The purpose of the methodologies adopted is the investigation of the impacts of the PBC approach during on and off-field operations. Through the contracting strategy, MRO service providers gained insight on the best policy to adopt under PBC to improve field operations.
Performance-based logistics (PBL) is considered one of the critical elements of success for MRO service providers and this paper examined its existing background. To achieve the desired results, there were surveys conducted to determine PBL effectiveness. MRO service providers purposed to improve their performance outcomes through investing in reliable programs offered under PBL contracts. Also, there was an investigation of two different types of contracts: material and time contracts through the use of a proprietary data set technique. MRO service providers investigated the most effective contracting approach that ensured that there is the provision of stellar after-sales services through a standby professional customer care team.
To determine the new cost optimization model, there was the investigation of cost-minimization and availability maximization. The two benchmark models were utilized for comparison purposes to determine the most effective approach to deliver MRO services. The two traditional models: cost-minimization and availability-maximization were compared to the new profit-centric approach. The purpose of the comparison was to determine which models led to the effective delivery of MRO services based on PBC. All equipment for instance aircraft wings requires repair leading to the question: Do the repair and maintenance restore the equipment to pristine condition or it will constantly require regular maintenance? As such, the models helped compare the probability of MRO service delivery in line with the PBC approach. In the paper, there is the investigation of optimal policies influencing costs and profits under the PBC and profit-centric approach. Through such methodologies, they led to a critical analysis of which services lead to profits.
Results
The success of MRO service providers depended on product reliability under the contracts. Following an empirical investigation of the time and material contracts, results showed that product reliability was higher by 25-40 percent under the performance-based contract. There was a stronger MRO team that ensured improved performance outcomes during field operations. Policies and models were investigated to determine the most effective based on performance-based logic (PBL). Results showed that each policy and model incur different costs based on reliability, durability, and availability. As such, organizations need to invest in policies that minimize operational costs and provide a strong framework for their optimal performance. Results also showed that the profit-centric approach improved the efficiency of MRO service providers. Through the profit-centric approach, organizations can track their inventory, especially during field operations. The approach led to cost minimization increasing motivation of MRO service providers to maximize profits. Such incentives increased product reliability and efficiency of MRO providers.
Results showed that the global economy continues to be more serviced-based leading to the increase in demand for support and maintenance services from MROs. As such, after-sale services are now perilous to the success of manufacturing and commercial companies. Additionally, the products offered must be reliable, durable, and available. Further investigations revealed that due to the increasing demand, manufacturing firms currently make products with long life cycles to guarantee durability and reliability. Subsequently, this results in the growth of MRO services influenced by performance-based contracts. However, product maintenance was required despite the contract signed by the MRO service providers. Results also showed that investing in flexible fees proved more beneficial than investing in fixed fees. During field operations, equipment may fail and flexible fees mandate MRO service providers to repair while fixed fees mean losses for the client. All in all, the performance of equipment is the main concern for customers due to the increasing global demands.
Results showed that policies under the availability-maximization approach proved to be closer to the profit-centric approach. Therefore, MROs can invest in both the profit-centric approach and the availability-maximization approach. Under the availability-maximization approach, there were minimized operational costs. The minimized costs increased the incentives of MRO service providers and motivated them to improve their performance outcomes. Results showed that the cost-minimization approach does not motivate MRO service providers. The model mainly utilizes the flexible fee (pay-per-hour) contract implicating that the reward is based on the performance. Additionally, the pay per hour contract ensures that MRO service providers do not maximize profits. There are no periodic inspections of the equipment under the cost-minimization approach and this leads to high maintenance fees and policies.
Conclusion
The performance-based contracting approach was incorporated in this research to help organizations seeking MRO to improve the quality of services offered. As evidenced above, the impact of PBC depended on the profit-centric approach, which was the model preferred to support MRO. Results showed that MRO service providers are motivated more by incorporating the profit-centric approach. Through the profit-centric approach, organizations can maintain and track their inventory as well as their field operations. The optimal policies implemented under this model minimized costs mainly through cost data analysis. High procurement and holding costs were also eliminated by utilizing the profit-centric approach. All in all, the profit-centric approach increased customers for MRO service providers and led to more profits for clients.