How to calculate the life cycle cost of equipment & the benefits of requesting new equipment to avoid costly unscheduled downtime
Life cycle cost (LCC) is an extremely useful analytical tool to help minimise waste and optimise energy efficiency, especially when incorporated into a fully-customised computerised maintenance management system (CMMS).
Background: life cycle cost calculation
The US military devised the concept of life cycle cost (LCC). It was so logical and accountable, it was adopted by other government departments and eventually adopted by big business. The U.S. Department of Energy definition of LCC,
“the sum of all direct, indirect, recurring, nonrecurring, and other related costs incurred in the planning, design, development, procurement, production, operations and maintenance, support, recapitalisation and final disposition of real property over its anticipated life span for every aspect of the program, regardless of funding source.”
Why you need to calculate the life cycle cost of equipment
As modern businesses have substantial operational plants and large pieces of equipment, it’s imperative to manage all your assets correctly in terms of productivity and safety.
Life cycle management is an important part of the tendering process. It helps determine how to get the best value from a new piece of equipment.
For example, your experience tells you a new widget would make the factory more productive. However, senior management won’t sign off on the request.
You instinctively know retaining and maintaining the old equipment is not worth the expense, but you need concise information and facts to present to them. A detailed life cycle cost analysis will be able to show management the benefits of the upgrade. This will enable management to make decisions with confidence, with all the figures clearly visible.
Benefits of a life cycle cost analysis
When pitching to management, you will be able to provide detailed pros and cons of upgrading compared with the costs of retaining, based on the life cycle cost analysis of:
- Age
- Condition
- Frequency of breakdowns, and
- Cost of breakdowns
If the production line is breaking down, you’ll be able to explain to management why.
You can confidently outline recommended solutions, present projected costs and show long-term return on investment – management will see the value in your recommendations.
A life cycle cost analysis will help you make sound buying decisions, and avoid making mistakes twice.
3 life cycle cost considerations
When calculating equipment life cycle costs, there are three areas that need to be analysed.
- Past scheduled work
- Reactive maintenance costs
- 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 covers:
- Cost of parts
- Labour
- Consumables, and
- Downtime
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 the 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.
Downtime is even more important in terms of reactive maintenance; because it is unplanned, it has an even more significant 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 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 in 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 maintenance managers keep putting it off.
A proven CMMS such as the one offered by MCGlobal Solutions 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 the proposed new equipment will bring.
For more information and advice about calculating Life Cycle Costs of equipment, please contact our friendly and highly-experienced team at MCGlobal Solutions, simply click here to contact us.
