Total Cost Of Ownership Delivers Best Analysis For Capital Packaging Equipment Purchasing

March 17, 2016

When it comes to purchasing new equipment for a packaging line, many companies first seek to minimize capital costs. Managers are motivated to get the best bang for the buck, and low price is easier to justify than the overall quality of an equipment solution. In fact, this “bargain” machinery may very quickly increase their company’s production costs.

Many U.S. companies are concerned with limiting capital costs in order to increase short-term profits. When reviewing machinery that is expected to have an expected lifespan of 15 to 20 years, corporate leadership often looks for payback within two years. By limiting machinery costs, they can conserve cash and boost short-term profits. But what happens over the long haul? High operating costs can make that pennywise packaging line look pound-foolish.

The cost of new packaging machinery can easily be hundreds of thousands — if not millions — of dollars. These machines can be high-value, high-risk investments, which typically involve a number of senior decision makers assessing a wide range of criteria before a purchase decision. For this reason, several global leaders in the packaging industry are using Total Cost of Ownership (TCO) as the primary justification for enhanced investment in equipment. Using TCO calculations, the senior decision makers can accurately capture the value of buying a higher-quality piece of equipment with a higher cost up front, demonstrating how the investment can allow for the most effective and efficient operation over the life of the machine.

Using TCO To Weigh Future Needs

Let’s also consider possible upgrades to new or existing equipment. These days, many packagers want maximum flexibility in their packaging lines. It’s not unusual to change products or package types a few times daily. While customers will keep costs down by limiting the bells and whistles, it is also important for the customer and the original equipment manufacturer (OEM) to take future needs into account. A conversation between the OEM and customer regarding overall machine flexibility will provide the customer with the future potential capabilities that may ultimately extend the useful life of the machine. A forward-thinking OEM will design flexibility for long-term package requirements from small to large package sizes, or will produce the machine with additional space for future add-ons. Depending on the customer application, the OEM will have a different range of flexibility capabilities.

Total cost of ownership is what it costs for end users to purchase, operate, maintain, and upgrade any piece of equipment used in their operations. This can include a variety of measurable factors, such as labor, productivity, quality, safety, production waste, maintenance, spare parts, and energy usage. When these elements are considered along with the original acquisition price, TCO can help decision makers determine which machine investments make the best financial sense.

OEMs Must Supply Capabilities Data

Most consumer packaged goods (CPG) companies have their operating costs down to a science. They know what their fixed costs will be, and they can predict quite well what their variable costs will be. To do this accurately with new equipment, these companies need the OEM to supply reliable information about the estimated operating characteristics of the equipment, such as the expected run rate and efficiency of the machine for their specific operation. Additionally, the OEM should provide accurate changeover, preventive maintenance, and cleaning schedules. After the relevant information is shared, the CPG companies should be able to calculate their expected capacity over a specified time, based on the equipment capabilities and preventive maintenance requirements.

It is important to factor in maintenance costs on an an- Total Cost Of Ownership Delivers Best Analysis For Capital Packaging Equipment Purchasing TCO can help decision makers determine which machine investments make the best financial sense. nual basis. Depending on how frequently preventive maintenance is performed, the annual cost of machine maintenance should be about 3 to 5 percent of the purchase price of the machine. Therefore, on a $1 million machine, the service and parts would total between $30,000 and $50,000 annually. A cheaper, lower-quality machine will typically have maintenance costs between 10 to 15 percent of the machine purchase price, and these annual numbers typically increase as time goes on. It’s not just the cost of doing maintenance, but it boils down to the equipment being in operation and its Overall Equipment Effectiveness (OEE). A lowerquality machine might have an OEE of 50 to 60 percent, while a world-class manufacturer should maintain an OEE above 85 percent.

Measuring Equipment Effectiveness

OEE is a key component in understanding the total cost of ownership. Measuring equipment effectiveness requires a percentage calculation of three factors: availability, performance, and quality. Using these metrics in different scenarios can help when making comparisons of potential equipment solutions:

  • Availability takes into account production downtime, and is calculated as Operating Time / Planned Production Time
  • Performance measures the actual output against the potential output over a specified time period, and is calculated as Total Pieces / Operating Time / Ideal Run Rate.
  • Quality takes into account Quality Loss, and is calculated as Good Pieces / Total Pieces.

To determine OEE, these percentage calculations (Availability x Performance x Quality) are multiplied to deliver the overall score. For a complete explanation of the calculations,click here.

An example of whereOEE can be significantly impacted by the initial machine investment is product or package changeovers. For example, investing in automatic dual retractable clean-in-place (CIP) fillers costs more up front, but it allows for continuous production and drastically increases the availability of the equipment. Multi-format machines with automatic changeovers from one package format to another also increase the availability of the equipment, saving from 15 minutes to a few hours each time a format is changed.

The Impact Of Production Waste

Limiting production waste is another major factor in determining Total Cost of Ownership. In some cases, an end user might have to overfill a pouch just to make sure it reaches the targeted fill weight. Say the stated net weight is 150 grams, but the CPG consistently must place 155 grams to ensure that weight on the underfilled packages. Over a year of production, that adds up to significant product waste. It’s money flying right out the door. A machine with more accurate filling capabilities justifies the additional capital costs of a higherquality system.

Likewise, if a machine produces a lot of scrap — such Total Cost Of Ownership Delivers Best Analysis For Capital Packaging Equipment Purchasing as dropped pouches or poor seals — that can easily result in 7 to 10 percent waste coming off the line. While initial ROI may look good in the first two years due to the low machine price, the cost of an inefficient operation will pile up and continue in perpetuity. A premium machine that is well maintained should keep the amount of wasted product below 1 percent.

Overcoming Internal Hurdles

Companies are becoming better at bringing operating costs under control. However, many are not effectively using TCO as a method to gain the best results. Production engineers increasingly understand the value of buying a high-quality piece of machinery, but may face internal hurdles in the buying process. For instance, a two-year return on investment is a common goal in the consumer packaged goods industry. If the return is 2.5 years, the buying team might not purchase the machine. This does not make sense when a company can purchase a machine that may last longer and provide operations with fewer headaches due to higher performance. One of the major challenges is trust. If the CPG companies are paying a premium, they must be able to trust that the OEM is going to deliver what the sales team is promising. In the end, it’s about a proven track record. The end user must believe that the OEM makes a good piece of equipment, and it will deliver the value laid out in the Total Cost of Ownership calculations.

Many considerations go into determining the Total Cost of Ownership. To help CPG companies and OEMs, the OpX Leadership Network was founded by PMMI. This group of more than 100 CPG companies and 30 OEM suppliers has developed a set of TCO guidelines and a checklist that can be used in commercial transactions. It includes all major costs for acquisition, operations and disposal/ refurbishment. A playbook describing the results can be downloaded at capital-equipment-total-cost-ownership/download/ total-cost-ownership-playbook.

For further examples of how Total Cost of Ownership can contribute to better decisions on capital equipment purchases, see John Henry’s article on distinguishing between price and costs at Food Online.

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