And how does TCO affect Australian manufacturers?
The Australian manufacturing industry exists in a highly competitive business climate. This challenges companies to find creative ways of lowering their costs without compromising the goal of producing high-quality products. And all the while, they must maintain the required regulatory and compliance standards.
So it’s more important than ever to deliver a sustainable competitive advantage by investing in core business competencies and optimising management of non-core activities.
One such non-core activity is the life-cycle management of your capital assets and equipment that support your business operations. This is done by optimising their total cost of ownership, or TCO.
Direct and indirect costs
TCO is a concept used to represent all costs — direct and indirect — associated with owning capital assets. It goes through the entire life of the equipment, beginning with acquiring the asset, to maximising its operation, maintaining its performance, and then determining when to properly dispose of it.
Direct costs are usually those planned within a budget, where purchase orders are generated and invoices paid. That makes these costs easier to identify and track than indirect costs.
Indirect costs are typically hidden, and not included in a budget, thereby making them more difficult to measure and quantify. Often they are not factored into the equipment’s TCO. And even if these costs are factored in at the start of a project, very rarely are they monitored over the life of that purchased equipment to ensure it meets original expectations. For example, purchasing a labelling machine is a direct cost, as is the cost of service, but if it is a return-to-base warranty, shipping costs are usually indirect — as is the downtime caused by the labeller being out of action .
Direct TCO costs points to consider
- consumables over the period
- routine maintenance
- service contracts
- corrective maintenance
- spare parts
- installation costs
Indirect TCO costs points to consider
- downtime if the equipment breaks down
- shipping if the servicing is return-to-base
- downtime due to routine maintenance tasks
- operator training
- financing costs if it is a lease/ rental
- cost of disposal
- training time
Be proactive with TCO costs
Organisations can increase equipment performance and improve workforce productivity by understanding the life-cycle costs associated with equipment ownership. They can also save money and improve their bottom line. Implementing effective, proactive strategies and tactics to optimise costs over the equipment’s four-phase life cycle — acquisition, operation, maintenance and disposition — will also be of benefit.
Some of the strategies companies can evaluate to minimise their TCO and maximise the ROI on equipment are:
- evaluate the equipment’s reliability versus the capital cost vs. cost of downtime
- regularly inspect and maintain the machine, with fixed-price service contracts
- invest in proper operator training
- evaluate the mean time between failure, response times and same-day fix rates
- look at capital cost versus ongoing running costs (a low capital cost, but high running cost, is a hidden TCO)
Managers should also ask themselves:
- Have the operators received proper training?
- How many different suppliers (manufacturers and service providers) am I managing?
- Am I buying and standardising on the best equipment available?
- Am I leveraging my purchasing power and volume?
- Have I compared the ownership of equipment from one manufacturer to another to know if I’m getting the best value for money?
- Are my operators trained on how to use all of the equipment?
- Do I know if it’s going to cost more to service a particular equipment than if I was to buy new equipment?
If the answer to some of the questions above is “no”, then you have hidden costs. These can be eliminated by rationalising your asset base and reducing the number of suppliers with whom you do business. These activities will not only maximise your purchasing power and increase your operator performance, but also reduce some of the management and administrative burden talked about above.
Each factor and each business decision made in each one of the equipment life-cycle phases has an impact on the other factors. Companies who are successful in looking at TCO holistically will improve their profitability and sustain a competitive advantage over their competition.
Read more about how preventive maintenance can lower your TCO; see also how important total productive maintenance is to Australian manufacturers; while this blog sets the difference between preventive maintenance vs breakdown repair (it may be a surprise to know that the true cost of a machine breakdown has been estimated as between 4 to 15 times the maintenance costs —don’t get caught out: choose a local provider, with 24-hour support).
And see how upgrading your product ID and inspection equipment before it breaks down can also lower TCO.
Read Matt’s article “Business intelligence: code for success”, written for Food & Beverage Industry News that covers TCO and more. You can find it here, along with other articles from our Thought Leaders.