“What the heck is total cost of ownership of a rubber machinery?”. If this question has popped up in your heads after reading Prof. Dr.-Ing Andreas Limper’s interview, you are not alone.
Neither is this concept new.
Dr. Limper explains, in his interview, that the inability of a customer to see the ‘holistic perspective’ and evaluate machinery on ‘ownership cost’ basis is frustrating. This is because, most buyers select a rubber machinery on the ‘initial cost’.
“So what?” you may ask me.
And at this stage of our conversation, if I add that your ‘initial cost’ (basis which you made the strategic capital purchase) represents not more than 13-15% of your ownership cost!
Well, do I have your attention now?
Let me explain.
Simply put, the Total Cost of Ownership (TCO) is the total cost of your rubber machinery over the whole of its life. You can also complexly word it as ‘sum total of your purchase, ownership and post-ownership costs of your rubber machinery in a quantitative and qualitative manner’. (jargons?)
This means in your TCO calculations, all your obvious and hidden costs of ownership across the full life cycle of the rubber machinery has to be considered. There is often room for judgement and sometimes different opinions, in deciding what is the appropriate lifespan for you to analyse.
This is because some of your costs will be one-off, others will be recurring – so you need to know how many years you intend to use this machinery. For example, you could consider Depreciable Life (i.e the number of years in which the machinery is depreciated) or Economic Life (i.e the number of years in which the machinery returns more value to you than it costs to own, operate, and maintain) or Service Life (i.e. the number of years the machinery will actually be in service).
In some cases there may be some residual value in the machinery or parts. However, you will also have costs associated with its disposal.
Here’s a typical compilation of all costs associated with the purchase of your rubber machinery.
Purchasing Costs (includes but not limited to)
- Market Research including business directory purchase
- Consulting or specialist advice for machinery assessment and its appropriateness for your use
- Supplier identification costs like administration costs, telephone calls to discuss, travel, accommodation costs for factory visit and negotiations, etc.
- Purchase Price of the Machinery & its required accessories
- Delivery Costs (freight) and insurance
- Installation, erection and commissioning costs
- Trial run and Training
- Licences for software and automation
- Insurance costs
Operating Costs (includes but not limited to)
- Consumables, ‘Wear & Tear’ Components
- Regular Maintenance or Servicing (Self or Outsourced)
- Spare Parts
- Energy/Electricity Consumption Costs
- Breakdowns & Repair Costs
- Extended Warranties
- Operator Costs
- Cost of replacement service during a breakdown such as hiring (another) machinery or outsourcing the work.
- Licence renewal/ software upgradation costs
- Insurance renewal costs
Disposal Costs (includes but not limited to)
- Decommissioning costs, involving technical specialists.
- Transportation of the machinery away from the Plant
- Disposal Fees of machinery and/or its parts as per your country laws
- Data migration costs from existing control instrumentation and records
- Other related cost of change of machinery after its life
- Site clean-up costs
Resale Value: You should remember to add back any money received on the resale of your rubber machinery and its accessories.
Your formula for calculating the TCO thus becomes
TCO = Purchase Price + Regular Recurring Costs + Irregular One-off Costs + Disposal Costs – Income Generated – Revenue on Disposal/Resale Value.
Do you get the ‘drift’ now?
Do you agree with me that your decision to buy a rubber machinery only on the basis of initial purchase price could be a flawed strategy and need a rethink (…..if you are doing this, like the majority of other rubber machinery buyers!!).
Having outlined these thoughts, let me also caution you that the success of your evaluation depends on the type of the machinery you buy.
For example, you would not want to get into the same evaluation techniques when you buy a relatively simplistic (or one-off) machinery like bale cutter or sheet feeder as compared to a project investment of a mixing line or rubber mixing room.
Do let me know!
Summing up, the Total Cost of Ownership (TCO) is the total cost of your rubber machinery over the whole of its life and, I think, should be the most important criterion when you invest in projects and/or strategic capital purchases.
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