Trying to compare apples to apples on costs

With complex equipment and systems, the real cost extends beyond the purchase price. How do you evaluate those?

06/17/2011


Dear Control Engineering: In the process of evaluating a control system upgrade, one of the bidders is suggesting we look at TCO. What’s that about?

When purchasing anything much more complicated than a cup of coffee, an informed purchaser needs to think about anticipated costs of owning something that go beyond the original purchase price. For example, when you consider buying a car, you need to quantify factors related to gas mileage and maintenance over the vehicle’s life. While one car may be cheaper than another, you might end up giving the savings back at the gas pump or in higher maintenance costs.

The same is true for more complex pieces of industrial equipment. A common example is an electric motor. Manufacturers stress that the cost of electricity to run the motor over its life is many times greater than the purchase price. So the manufacturer of a more expensive but more efficient motor may make the point that while the purchase price is indeed higher, you will actually save money over the long term because you will spend less on electricity. This method of evaluating all the costs associated with an asset over its entire working life is called TCO (total cost of ownership). Another term that is similar, if not the same, is lifecycle costing.

This methodology has been growing in popularity with companies that sell such equipment as they seek to differentiate products and services from competing suppliers. Like the motor manufacturer, your prospective supplier companies will try and identify all the costs connected with a given asset to make you recognize what the real cost will be in the long term. This effort to contextualize the purchase price helps you as the purchaser make a more informed decision. While this is certainly a useful exercise, it will probably not give you a 100% accurate picture of competing options. Different suppliers may calculate costs differently, and these may not match with your own internal attempts to do the same. It is an imperfect process, but far better than taking a wild guess. It is a good idea to compare and contrast the various offers in light of your own experiences. Your prospective vendors may help you develop a better picture of the true costs over time than you might have done alone. The process may also help you get a more direct and accurate comparison of competing offers, allowing a more rational purchase decision based on reliable data.

Honeywell has produced a more extensive discussion of the process that you can download.

Peter Welander, pwelander@cfemedia.com



No comments
The Top Plant program honors outstanding manufacturing facilities in North America. View the 2015 Top Plant.
The Product of the Year program recognizes products newly released in the manufacturing industries.
The Engineering Leaders Under 40 program identifies and gives recognition to young engineers who...
Hannover Messe 2016: Taking hold of the future - Partner Country status spotlights U.S. manufacturing; Honoring manufacturing excellence: The 2015 Product of the Year Winners
Inside IIoT: How technology, strategy can improve your operation; Dry media or web scrubber?; Six steps to design a PM program
World-class manufacturing: A recipe for success: Finding the right mix for a salad dressing line; 2015 Salary Survey: Manufacturing slump dims enthusiasm
Getting to the bottom of subsea repairs: Older pipelines need more attention, and operators need a repair strategy; OTC preview; Offshore production difficult - and crucial
Digital oilfields: Integrated HMI/SCADA systems enable smarter data acquisition; Real-world impact of simulation; Electric actuator technology prospers in production fields
Special report: U.S. natural gas; LNG transport technologies evolve to meet market demand; Understanding new methane regulations; Predictive maintenance for gas pipeline compressors
Warehouse winter comfort: The HTHV solution; Cooling with natural gas; Plastics industry booming
Managing automation upgrades, retrofits; Making technical, business sense; Ensuring network cyber security
Designing generator systems; Using online commissioning tools; Selective coordination best practices

Annual Salary Survey

Before the calendar turned, 2016 already had the makings of a pivotal year for manufacturing, and for the world.

There were the big events for the year, including the United States as Partner Country at Hannover Messe in April and the 2016 International Manufacturing Technology Show in Chicago in September. There's also the matter of the U.S. presidential elections in November, which promise to shape policy in manufacturing for years to come.

But the year started with global economic turmoil, as a slowdown in Chinese manufacturing triggered a worldwide stock hiccup that sent values plummeting. The continued plunge in world oil prices has resulted in a slowdown in exploration and, by extension, the manufacture of exploration equipment.

Read more: 2015 Salary Survey

Maintenance and reliability tips and best practices from the maintenance and reliability coaches at Allied Reliability Group.
The One Voice for Manufacturing blog reports on federal public policy issues impacting the manufacturing sector. One Voice is a joint effort by the National Tooling and Machining...
The Society for Maintenance and Reliability Professionals an organization devoted...
Join this ongoing discussion of machine guarding topics, including solutions assessments, regulatory compliance, gap analysis...
IMS Research, recently acquired by IHS Inc., is a leading independent supplier of market research and consultancy to the global electronics industry.
Maintenance is not optional in manufacturing. It’s a profit center, driving productivity and uptime while reducing overall repair costs.
The Lachance on CMMS blog is about current maintenance topics. Blogger Paul Lachance is president and chief technology officer for Smartware Group.
This article collection contains several articles on the vital role that compressed air plays in manufacturing plants.
This article collection contains several articles on the Industrial Internet of Things (IIoT) and how it is transforming manufacturing.
click me