Capital Equipment News August 2019

EDITOR'S COMMENT

TCO IN FOCUS

T hat the sticker price remains a major influencer of most buying decisions is no exaggeration. Understandably, in a difficult economy, capital isn’t always available, and procurement decisions are forcibly taken based on capital cost without necessarily factoring the ‘hidden’ lifecycle ownership costs. Total cost of ownership (TCO) is no new term, but do we really understand what it means? What does it mean for cash-strapped capital equipment owners who need to make wise decisions on capital equipment purchases? Are you looking at the bigger picture, not just the upfront cost? As you will see in two of our TCO features in this edition of Capital Equipment News , the ongoing costs after you have written the cheque for that piece of capital equipment are just as important, if not more important, as the purchase price. However, for certain assets acquisitions, purchase price and ownership cost can be very different. Acquiring certain assets brings purchase costs, but ownership can also lead to many other “hidden” costs during service life. TCO analysis attempts to uncover both the obvious costs and the hidden costs of ownership. TCO highlights the difference between purchase price and long-term cost. There is actually a general school of thought that owning the equipment could cost between five and eight times the purchase price, if not more. Today, instead of just focusing on purchase price, TCO analysis should be

largely supporting buying decisions for a wide range of assets in the capital equipment space. This should be a major consideration on items with significant maintenance and operating costs across ownership life. One area where TCO should be a principal factor in any buying decision is the high voltage (HV) motor sector. Efficiency is a big factor in achieving lower TCO in HV motors. The upfront capital cost of a motor should be no big factor. To give an idea, only 2% of the total lifecycle cost of an electric motor is attributable to the initial purchase price, and some 97% represents the energy costs used to power the machine. Therefore, the efficiency of the motor, its reliability and its correct sizing for the application, are all critical factors in achieving maximum efficiency and minimising the costs of operation. It is important that ownership life receives special attention in any capital equipment procurement decision. TCO analysis can play a central role in decision support, but also in budgeting and planning. The fact of the matter is that a TCO analysis tries to pick out all of the lifetime costs – obvious and hidden – that follow from a decision to own a piece of equipment. TCO lifespan should reflect the acquisition’s economic life, service life and depreciable life. It is advisable that every procurement decision entails an objective TCO analysis process with a systematic search plan that aims to uncover every cost impact caused by the acquisition.

Munesu Shoko – Editor

capnews@crown.co.za

@CapEquipNews

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