How to calculate the life cycle cost of equipment.
Gathering the information you need to decide if and when a new equipment purchase is a good decision.
It’s easy to calculate the life cycle cost of equipment; just use this simple formula from Norsok Standard…
…or if you’re not mathematically inclined, you can read about an even simpler way to do it in this article.
Background: Life Cycle Cost (LCC) Calculation
You might think that a manufacturing company was responsible for devising the concept of life cycle cost calculation. But no.
It was actually the US military who came up with the concept in the sixties to justify tender selection decisions for the Vietnam war.
LCC was so logical and accountable, it was adopted by other government departments and eventually adapted by big business.
The U.S. Department of Energy has a comprehensive life cycle cost definition. They call it:
“the sum of all direct, indirect, recurring, nonrecurring, and other related costs incurred in the planning, design, development, procurement, production, operations and maintenance, support, recapitalization, and final disposition of real property over its anticipated life span for every aspect of the program, regardless of funding source.”
Today we know life cycle cost as a highly useful analytical tool that can help you minimise waste and optimise energy efficiency… especially when incorporated into a fully customised computerised maintenance management system (CMMS).
Why you need to calculate the life cycle cost of equipment.
If you only had limited plant and equipment, life cycle cost wouldn’t be quite so critical.
However, as modern businesses have so much operational plant and so many pieces of equipment, it’s imperative to manage all your assets correctly in terms of productivity and safety.
Life cycle management is also an important part of the tendering process, as well as determining how to get the best value out of a new piece of equipment.
For example, your experience tells you that a new widget would make the factory more productive – however senior management won’t give you what you need.
You instinctively know that retaining and maintaining the old equipment is throwing good money after bad, but you need concise information – concrete facts – to present to them.
Armed with a detailed life cycle cost analysis, you would be able to show management the benefits of the upgrade.
When pitching to them, you’d be able to provide detailed pros and cons of upgrading compared with the costs of retaining, based on:
· Frequency of breakdowns, and
· Cost of breakdowns.
This will enable them to make good decisions with confidence, with all the figures clearly visible.
Furthermore, if you are copping flak because the production line is breaking down, you’ll be able to tell the MD exactly why.
You can confidently table your recommended solutions, and present projected costs.
And, with the right information, you can show them what they REALLY need to know, which is the long term ROI — so they can see the VALUE in your recommendation
Plus, a life cycle cost analysis will help you make sound buying decisions – and avoid making the same mistakes twice.
Three Life Cycle Cost Considerations
When calculating equipment life cycle costs, there are three areas that need to be analysed.
We’ll unpack them in detail below, but in overview, they are:
1. Past scheduled work
2. Reactive maintenance costs
3. Forward projections
Each data set gives you important insights, and takes the guesswork out of decision-making.
1. Past scheduled work.
This determines the criticality of an asset. Even if it is an inexpensive part that no one notices, if it stops everything else, it is critical.
The criticality of past scheduled work also covers:
· Cost of parts
· Consumables, and
2. Reactive Maintenance Life Cycle Costs
When you react to a breakdown, in addition to the cost of lost productivity (particularly if it is a critical piece of equipment), you also have to account for hard costs of parts, labour, and consumables.
It’s important to keep an up-to-date log of work orders/ work requests because if there is no system, there is no knowledge…and knowledge, as they say, is power.
Subjectivity just isn’t good enough.
Downtime is even more important in terms of reactive maintenance; because it is unplanned, it has an even bigger impact.
Obviously you cannot project ‘Murphy’s Law’ forward, but a failure analysis – such as reporting on two similar-but-different pieces of equipment can provide invaluable insights.
For example, a manufacturer will say that a piece of equipment has a two-year MTBF (Mean Time Between Failure) rate, but what is the ACTUAL rate in your particular environment looking backwards, as a result of your specific conditions (eg dusty, hot, humid, etc)?
Knowing this can make a tremendous difference to decision making, and take out much of the guesswork
3. Projecting Life Cycle Costs forward
It is difficult to project forward manually as it is very labour intensive – which is no doubt why so many maintenance managers keep putting it off.
A proven CMMS such as the one offered by MC Global lets you define maintenance schedules in the system and project annual maintenance years in advance.
In terms of reporting, it will give you a clear, concise summary and help you put forward a compelling business case – complete with any up-spec or superior performance figures that the proposed new equipment will bring.
For more information and advice about calculating Life Cycle Costs of equipment, please call +61 7 3303 0177 and speak to the friendly, helpful team at MC Global Solutions. Or simply click here to contact us.