How Total Cost of Ownership data can help you make an informed equipment procurement decisions

posted by Sunil Newatia on August 3rd, 2021

Buying excavators, backhoe loaders, road equipment and attachments and keeping them operational can be costly. Usually, the largest capital expense for a project is the equipment. Procurement managers are supposed to study the initial investment, operation cost and calculate a return on investment. However, concept of Total Cost of Ownership is still alien to the Indian context.

Understanding the total cost of ownership (TCO) for each equipment or asset class is essential to making sound, data-driven procurement decisions that will positively impact your bottom line. These decisions include what brand to purchase,  purchase new or used, operational costs over the life of the equipment and when to dispose of the asset to get a maximum ROI and when to rent instead of purchase.

Construction companies across the globe have started employing Total Lifecycle Cost estimation OR Total cost of ownership (TCO) evaluations to measure operational performance and efficiency. Reducing TCO over the lifetime of machinery’ enables them to extract the best possible value from the asset, yet the impact of lubrication on TCO is highly underestimated. To stay competitive, construction companies are now looking to innovative programs to increase productivity, efficiency and performance applying Total cost of ownership (TCO) evaluations.
Typical break up of TCO

A construction company spends appx 15–17% in the acquisition of the asset and 55–60% in fuel over the total life of the equipment. A fuel efficient equipment can thus have a significant impact on overall operating costs. Even a 2 litre / hour saving can bring down the overall impact of fuel cost to less than 50%!! 

Maintenance cost, which involves lube and filter changes, costs only 5% during the entire life cycle of the equipment but most of the procurement 
Some companies may assume that owning makes more business sense than renting, but in many cases, those assumptions could be mistaken. Computation of  TCO can enable you to see, whether renting is the right decision. TCO can show how much money can be saved by avoiding the capital expenditure on an equipment purchase as well as the costs of maintenance, transportation and storage. Money saved from the capex budget can be invested elsewhere in the business.

Understanding TCO is the first step in reducing it. But TCO isn’t always an easy number to calculate, as it includes maintenance and operation costs. Since those costs vary with use and operating environment, they can be different for each company, area of operation and the quality of manpower.
Typical data sheet of TCO

Cloud-based fleet management software, used together with equipment telematics, is essential to having the right data. Most modern fleet management solutions allow a company to view costs associated with owning, operating and maintaining a specific asset. However, smaller companies cannot afford such solutions and would need to put in place a system for collection and collation of jobsite data.

To calculate TCO, begin by adding up:
·       The purchase price, including taxes
·       The cost of insurance and extended warranties
·       The cost of transporting the equipment from jobsite to jobsite
·       Maintenance and repair costs, including parts, supplies and labor
·       Fuel and oil costs
·       Storage costs
·       Interest on financing
·       Depreciation

For continuing expenses such as insurance, maintenance and fuel, you need to estimate how many years one plans to own the asset, then multiply the projected annual cost by that number.

Salvage / Residual value expected from the sale of the unit at the end of its lifecycle need to be subtracted to arrive at the TCO. To annualize the TCO, you need to divide the TCO amount by the number of years your company plans to own the equipment.
Of course, annual TCO is not constant. The expense of depreciation slows over time, while maintenance and repair costs change with usage hours and operating conditions and increase as a machine ages. For determining maintenance costs, a preventive maintenance plan, administered through fleet management software, is critical. 

To make a buy vs. rent comparison, look at the annualized TCO compared to the cost of renting the same unit for the number of days or weeks per year the equipment is used. 

Total cost of ownership isn’t just a number, it’s an important piece of data that can help you find more value. TCO can help your company achieve annual budget goals and lower fleet costs by making smarter decisions around what equipment to buy, when to sell assets and when to rent.

Call #SuretechInfra 1800 120 7873 ​ 
#DrDigger #AttachmentSpecialists​ since 1990. 

Transforming the way you use your machines


Subscribe to Dr. Digger's Prescriptions

We'll send you an email every time a new post is published. We'll never spam you or sell your email address to third parties. Check out our privacy policy for details.