Payback method —Too simple and too expensive

According to the Society for Maintenance and Reliability Professionals (SMRP), 86% of the manufacturers surveyed do not use a life cycle cost model when designing new capital equipment projects. Indeed, the design and installation philosophy of many companies appears to be one of lowest installed cost and minimum adequate design (MAD).

07/01/2001


According to the Society for Maintenance and Reliability Professionals (SMRP), 86% of the manufacturers surveyed do not use a life cycle cost model when designing new capital equipment projects. Indeed, the design and installation philosophy of many companies appears to be one of lowest installed cost and minimum adequate design (MAD).

While minimum adequacy may be theoretically appropriate, the problem for many companies is that the basis for this idea is often poorly defined. It is driven by constrained capital budgets and demanding schedules, and ignores life cycle cost.

The point of this article is not to be overly critical of any particular analysis method, but to encourage balancing of all the appropriate issues, including consideration of life cycle cost principles.

Typical small capital project

Assume that the anticipated cost of a project is $1 million, and the annual estimated benefit that will result from improved production operations will be $333,000. Under this scenario, the payback period is 3 yr, which is considered the company maximum.

However, among other policies related to capital projects, the company recently implemented a project review process for all projects over $100,000, which requires a fairly thorough review of the job by the project engineer and appropriate senior level shop floor personnel (mechanics, electricians, operators, etc.).

These groups analyzed the job and made several recommendations:

  • Some material should be stainless steel for much longer life

  • Additional instrumentation is needed to better control the process

  • Spares are inadequate

  • Access and lay down space are inadequate as shown

  • The best (most reliable and easiest to maintain) pumps are something different than specified.