One of the toughest parts about establishing a total cost of ownership (TCO) for a piece of machinery is balancing the known, upfront costs with the variable future unknowns, such as overall equipment effectiveness. Our TCO model provides a framework for getting it done.
Big capital expenditures induce more than their fair share of organizational angst. But it must be done: Winning companies always invest in equipment, technology and talent.
The struggle centers on balancing the proposed upfront investment with the future impact of the equipment. How will the new machine allow you to tap into new markets? What efficiency improvements will it have? Will the machine be scalable?
We’ll share some thoughts on how to consider these questions in a model that’s specific to the converting industry. We’ll break it down into three main factors.
Factor 1 – Upfront investment
We start at the obvious place — the price tag. Converting machinery will have an obvious sticker price, but that will include a number of additional elements that must be calculated, including annual maintenance and training. You’ll also want to project out energy consumption costs.
- Purchase Price
- Energy Consumption
Your finances team will need to factor in offsetting factors, such as:
- Section 179 deductions
(Section 179 deductions are allowed by the US tax code for large equipment purchases. These deductions and depreciations may fluctuate.)
The time period for this investment can be stretched out over a number of years, especially if training or maintenance isn’t required on an annual basis. Also, understanding your tax deductions and depreciation benefits will help you understand the actual upfront investment.
Factor 2 – Overall Equipment Effectiveness
Factor 1 usually inspires a fair amount of anxiety, but Factor 2 is where the fun begins. It integrates potential growth and organizational efficiency that can result from the new equipment.
Listed below are a number of benefits that can be attributed to new machinery. If you foresee these benefits applying to your organization, fill in the potential impact in terms of dollars this benefit could have.
Factor 3 – The BIG Intangible you must consider
We’ve provided a framework for some quantitative upfront investment and OEE measurements. But we have to also consider one critical intangible factor:
When you improve the reliability and performance of your machinery, you become more confident in the throughput you’ll produce, day in and day out.
The goal is to reduce variances from part to part. The less subject you are to manual processes, the greater your accuracy and repeatability. You reduce scrap, improve efficiency, and serve the customer better.
Overall, you’re creating a culture of excellence.
While it’s hard to connect an actual number to that ideal, you’re well aware of its value. Consider it, as well as the other quantitative factors we mentioned here as you calculate your Total Cost of Ownership.