Economic feasibility analysis for insourcing hydraulic maintenance services using the Monte Carlo method

Torre, Nuno Miguel de Matos; Brandalise, Nilson; Bonamigo, Andrei

doi:10.1590/1806-9649-2023v30e1623

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ORIGINAL ARTICLE • Gest. Prod. 30 • 2023 • https://doi.org/10.1590/1806-9649-2023v30e1623 copy

Economic feasibility analysis for insourcing hydraulic maintenance services using the Monte Carlo method

Análise de viabilidade econômica para a primarização de serviços de manutenção hidráulica pelo método de Monte Carlo

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Maintenance plays an indispensable role in the productive sector of an organization. The increasing use of high-precision operations in the steel industry means that hydraulic systems demand greater attention. This study proposes an evaluation framework for analyzing the economic feasibility of insourcing hydraulic maintenance services, seeking to present tools for assisting managers in decision-making and optimizing maintenance strategies. This paper presents a cash flow study, where the Net Present Value (NPV), the Internal Rate of Return (IRR), and the Profitability Index (PI) are calculated. Subsequently, the Monte Carlo method is applied to perform a sensitivity analysis for viewing the probabilities and output results. The main contribution of this study is to enable the evaluation of the results considering the economic feasibility of insourcing or outsourcing maintenance contracts through the proposed framework. In this case, the economic viability of insourcing presents a cost reduction in maintenance services. This approach suggested an industrial case study, where the use of the Monte Carlo and cash flow methods are useful tools for decision-making, contributing to the optimization of resources among industrial managers.

Keywords:
Maintenance; Hydraulic systems; Insourcing; Monte Carlo

Types of research
Applications	Applied
Objectives	Exploratory and Descriptive
Inquiry Mode	Quantitative
Methods	Modeling and Simulation

Years	Production Losses	Penalties	Contract Penalties
1	R$ 3,844,650.00	1%	R$ 38,446.50
2	R$ 4,032,750.00	1%	R$ 40,327.50
3	R$ 3,211,950.00	1%	R$ 32,119.50
4	R$ 2,790,150.00	1%	R$ 27,901.50
5	R$ 2,550,750.00	1%	R$ 25,507.50
6	R$ 3,935,850.00	1%	R$ 39,358.50
7	R$ 2,482,350.00	1%	R$ 24,823.50

Years	Value
1	R$ 576,553.50
2	R$ 574,672.50
3	R$ 582,880.50
4	R$ 587,098.50
5	R$ 589,492.50
6	R$ 575,641.50
7	R$ 590,176.50

Initial investment
Description	Value
Office equipment
Microcomputer / Accessories and Network	R$ 18,000.00
Air conditioner devices.	R$ 4,400.00
Printer/Fax	R$ 600.00
Water dispenser / 20 L bottle	R$ 850.00
Cordless type phone	R$ 720.00
Office tables	R$ 5,391.36
Table chairs	R$ 2,695.68
Drawer	R$ 2,062.20
Tool rack	R$ 2,000.00
Subtotal	R$ 36,719.24
Tools and maintenance equipment
Flashlight	R$ 60.00
Hex key (Set)	R$ 198.00
Pliers	R$ 144.00
Socket wrench (Set)	R$ 450.00
Spanners	R$ 102.00
Screwdriver (Set)	R$ 372.00
O-ring pull kit	R$ 288.00
Accumulator pre-charge case	R$ 5,435.00
Pipe wrench	R$ 75.00
Digital caliper of 200 mm	R$ 327.00
Subtotal	R$ 7,451.00
Hydraulics certification	R$ 15,000.00
Total	R$ 59,170.24

Fixed annual costs
Uniforma	R$ 4,309.80
Individual protection equipment	R$ 6,391.20
Salaries	R$ 508,599.00
Total	R$ 519,300.00

Company resources outside its cash flow	Number of days
1. Accounts Receivable	60
2. Term Inventories	30
Subtotal Resources	90
Third-party resources in the company's cash flow	Number of days
3. Suppliers - average purchase period	30
Subtotal Third-party cash resources	30
Net Working Capital Requirement in days	90-30 = 60

Annual spend
Fixed annual cost	R$ 519,300.00
Annual variable cost	-
Total company cost	R$ 519,300.00
Total daily cost	R$ 1,422.74
Net Working Capital Requirement in days	60
Total – Minimum Cash	R$ 85.364,38

Years	1	2	3	4	5	6	7
Outsourced contract (R$)	576,553.5	574,672.5	582,880.5	587,098.5	589,492.5	575,641.5	590,176.5
Cost without depreciation (R$)	519,300.0	519,300.0	519,300.0	519,300.0	519,300.0	519,300.0	519,300.0
Gross Profit (R$)	57,253.5	55,372.5	63,580.5	67,798.5	70,192.5	56,341.5	70,876.5
Tools and maintenance equipment depreciation (R$)	957.99	862.19	775.97	698.37	628.53	565.68	509.11
Office equipment depreciation (R$)	4,983.33	4,734.16	4,497.45	4,272.58	4,058.95	3,856.00	3,663.20
Total Depreciation (R$)	5,941.31	5,596.35	5,273.42	4,970.95	4,687.48	4,421.68	4,172.31
Net operating profit (R$)	51,312.19	49,776.15	58,307.08	62,827.55	65,505.02	51,919.82	66,704.19
Income tax (34%)	17,446.14	16,923.89	19,824.41	21,361.37	22,271.71	17,652.74	22,679.42
Profit after income tax (R$)	33,866.04	32,852.26	38,482.67	41,466.18	43,233.31	34,267.08	44,024.76
Cash Flow (R$)	39,807.36	38,448.61	43,756.09	46,437.13	47,920.79	38,688.76	48,197.08
Attractiveness rate of 12.75%.
Discounted Cash Flow (R$)	35,305.86	30,244.58	30,527.33	28,734.21	26,299.12	18,831.53	20,806.78
Accumulated cash flow (R$)	-23,864.38	6,380.20	36,907.53	65,641.74	91,940.86	110,772.39	131,579.16

Years	1	2	3	4	5	6	7
Outsourced contract (R$)	576,533.5	593,122.5	620,334.0	644,125.61	666,680.42	673,595.06	709,518.66
Gross Profit (R$)	57,253.5	73,822.5	101,034.0	124,825.61	147,380.42	154,295.06	190,218.66
Profit after income tax (R$)	37,787.31	48,722.85	66,682.44	82,384.90	97,271.08	101,834.74	125,544.32
Cash Flow (R$)	37,787.31	48,722.85	66,682.44	82,384.90	97,271.08	101,834.74	125,544.32
Discounted Cash Flow (R$)	33,514.24	38,326.54	46,522.37	50,977.84	53,382.75	49,567.46	54,197.74
Accumulated cash flow (R$)	- 25,656.00	12,670.54	59,192.91	110,170.75	163,553.50	213,120.96	267,318.70

Criteria	Current	Proposal
Present Value (PV)	R$126,764.10	R$326,488.90
Net present value (NPV)	R$67,593.90	R$267,318.70
Internal rate of return (IRR)	48.8%	65.97%
Profitability Index (IL)	2.1424	5.5178

Parameters	Minimum	More likely	Maximum
Cost of Steel Ton (R$)	320.00	333.00	352.00
Annual Production (Tons)	1,900,000	2,410,793	2,546,82
Total Corrective Maintenance (Minutes)	1,308	3411	3,747
Hydraulic Corrective Maintenance (Minutes)	871	895	1,415
Contract Cost (R$/Year)	615,000.00	634,070.50	734,342.00

NPV Statistical Measures
Minimum	R$ 105,438.00
Maximum	R$ 499,754.00
Expected value	R$ 303,061.00
Median	R$ 302,331.00
Standard deviation	R$ 101,681.00
CV (Coefficient of variation)	0.34

Universidade Federal de São Carlos Departamento de Engenharia de Produção , Caixa Postal 676 , 13.565-905 São Carlos SP Brazil, Tel.: +55 16 3351 8471 - São Carlos - SP - Brazil
E-mail: gp@dep.ufscar.br

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[1] Source: Adapted from Kothari & Garg (2019)Kothari, C. R., & Garg, G. (2019). Research methodology methods and techniques (4th ed.). New Delhi: New Age International..