The growing importance of overhead costs in investment decisions has changed the way total cost is viewed.
Several other costs, not only the acquisition cost, are taken into account in the decisions.
This trend is reinforced by rising costs for energy consumption and spare parts. Therefore, some industries have started to deal with life cycle models as part of strategic cost management.
What are life cycle costs
Life Cycle Costing is the sum of all expenses incurred from the acquisition to the decommissioning and disposal of the machine or equipment.
It is a technique used to ensure that the lifetime cost of an asset is as low as possible.
It generates important warning information in case of high maintenance costs or high operational expenses.
Owners, managers, and employees in general need to make decisions about the acquisition and ongoing use of their assets, including the need for spare parts and a suitable location for their installation.
The initial capital cost of acquiring an asset is usually objectively defined and is a key factor influencing the choice of asset, considering the alternatives for selection.
However, it is only a part of the costs over the life cycle of an asset.
That being said, this process of identifying and documenting all the costs involved over the life of an asset is necessary.
The total cost of ownership of an asset is often much higher than the initial investment cost and can vary between different solutions presented for the same operational need.
Consideration of lifetime costs provides a solid basis for decision making.
From this information, it is possible:
- To assess requirements for future resource needs;
- Evaluate the acquisition costs of potential investment alternatives;
- Decide on the best supplier for the chosen asset;
- Accounting for resources used in the past and present;
- Improve the design of the production system (by changing the need for labor and energy over the life cycle);
- Optimize operational and maintenance support;
- Assess when assets reach the end of their economic life and whether a modernization is required.
The life cycle cost methodology
The life cycle has several stages, detailed in a previous article that can be accessed here and illustrated below.
The life of an asset can be determined by its ability to deliver products or services in the expected quality.
This means that assets can become obsolete before they reach the disposal stage, because they do not meet the expected performance in terms of quality.
Regulatory changes, economic infeasibility due to technological or end-customer changes, can also be reasons for obsolescence.
Methodology Goals
Life cycle cost analysis can be performed during any of its stages. It can provide information for decisions related to planning, purchasing, installation, operation, maintenance, renovation, and disposal of assets.
The goals of life cycle costing are:
- Identify the attributes that most influence life cycle cost, for effective management;
- Define the cash flow required for the project;
- Minimize the total cost of the acquisition and the infrastructure where the asset will be installed;
- Support management decision making during any phase of the asset life cycle.
The process of identifying the life cycle cost of an asset can be as simple as a table of expected annual costs or it can be a complex model that addresses potential scenarios based on future costs.
The scope and complexity of the analysis should reflect the complexity of the assets under analysis, the ability to predict future costs, and their importance to the organization’s decision.
More availability for your assets
The Solution has proven adherence in various types of industries to help manage assets from installation to end-of-life.
It is a technology that incorporates the main values of Industry 4.0, helping to better manage the life cycle of industrial assets.
Contact us and learn more.