Life-Cycle Costing: Why So Difficult?
EP Editorial Staff | September 13, 2016
By Dr. Klaus M. Blache, Univ. of Tennessee, Reliability & Maintainability Center
Life-cycle cost (LCC) represents the total cost of ownership over the complete life of an asset. Calculating LCC, a relatively simple exercise, can lead to better asset-management decisions. This approach has been referred to as cradle-to-grave or inception-to-disposal costing.
Using the stages in the accompanying chart as a guide, vendors/suppliers should be following detailed specifications from purchasing departments to ensure R&M (reliability and maintenance) requirements are met. This graphic is based on the Society of Automotive Engineers (SAE) 1993 & 1999 (document M-110 and 110.2), Reliability and Maintainability Guideline for Manufacturing Machinery and Equipment. (It’s noteworthy that both trades and engineers helped develop this guideline.)
Today there are many computerized LCC models. The concept is simple. Wouldn’t you be willing to pay 10% to 15% more in the initial purchase of machinery and equipment (M&E) if you could save substantially more over the life of those assets?
Overall, operational and maintenance (O&M) costs make up 50% to 80% of total life-cycle costs. By the time the M&E is constructed, however, 95% or more of that cost has already been determined. So, it’s either pay a little more up front or pay much more throughout an asset’s life. The good news is that incorporating “design for maintainability” principles in M&E purchasing decisions can generate substantial O&M cost savings. That means specifications should reflect design-in considerations such as accessibility, modularity, and easy assembly and disassembly. For example, ask:
- Has the need for accessibility with special tools been considered?
- To reach a frequently failing component, would items that haven’t failed need to be removed?
- Would some long-life parts be disposed of with disposable parts?
The objective of LCC is to select the most cost-effective approach, so that the lowest long-term cost of ownership is achieved. Unfortunately, ongoing pressure to save money drives short-term thinking. This was a challenge 30 years ago, and still is today.
At a recent Univ. of Tennessee Reliability and Maintainability Center (RMC) meeting in Knoxville, attendees from 50 member companies were polled on LCC matters. Questions and responses included:
Do you have an equation/formula that you use to calculate ROI [return on investment] when making Life-Cycle Asset Management decisions?
- 76% responded “No.”
How well does your life-cycle process work?
- Not at all or don’t have one (56%)
- Not too well (29%)
- Adequate (10%
- Very good (5%)
- Excellent (0%)
How much are design and purchasing (specifications) for R&M needed in buying new equipment?
- Should always be used (66%)
- Should be used most of the time (30%)
- Somewhat needed (4%)
- Don’t need them (0%)
How much are design and purchasing (specifications) for R&M used in buying new equipment?
- Somewhat use them (64%)
- Don’t use them (18%)
- Regularly use them (9%)
- Always use them (9%)
These responses indicate a continuing purchasing/manufacturing disconnect. As long as purchasing departments focus mainly on reducing initial costs, this won’t change. Purchasing typically reports to the top of the organization alongside manufacturing, so the battle continues.
What’s needed is a machinery & equipment reliability metric tied to a purchasing department’s performance, not just its cost-saving abilities. After all, LCC decision making is a rich opportunity for organizations. That is if they have the discipline to implement long-term success strategies. MT
Based in Knoxville, Klaus M. Blache is director of the Reliability & Maintainability Center at the Univ. of Tennessee, and a research professor in the College of Engineering. Contact him at email@example.com.