Procurement Considerations for Life Cycle Costing Acquisitions

Written by Tracy Ong Yeak Ching, DPSM

by Tracy Ong Yeak Ching, DPSM

Life Cycle Costing Acquisition is a process that acquires item or equipment from another organisation in legal and ethical manner that based on life cycle costing (LCC) i.e. whole cycle of item or equipment of its desired service life. This aspect is worth consideration as it is highly overlooked by stakeholders that may greatly impact on bottom-line.

Life cycle
Content created by Tracy Ong Yeak Ching(2020) and Image taken from https://medium.com/@kenhensley/icebergs-and-spiritual-growth-1a92a490483e

Computing Life Cycle Cost

By using life cycle costing technique, procurement can identify and quantify all costs, the entire cycle is associated with a project or installation over a given period.  This includes material acquisition costs, installation and commissioning costs, operating and maintenance costs, repair costs, service costs, lost production costs during downtime, replacement material or equipment costs and disposal of material or equipment costs. While air compressors equipped with IE3 efficiency class motor may have a higher purchase price as compared to normal class motor, they tend to have lower cycle costs due to less frequency of maintenance activity is required and even no maintenance is required for the first few years that helps to increase cost saving. In light of less maintenance is required and therefore contributing more saving on service costs as well.  In short, less maintenance of equipment, will reduce wear and tear on parts. With continuous production output, relatively increase productivity and will generate higher revenue.

LCC
Life Cycle Cost
A comparison table of LCC for air compressor is as appended below.
Life Cycle Cost Summary
Diagram created by Ong Yeak Ching Tracy (2020)
Sustiable procurement
Image taken from: https://sipmm.edu.sg/crucial-factors-for-sustainable-procurement

Factors for Life Cycle Cost Analysis

  • Material Acquisition Costs

It is usually just a small part of total cost of life cycle.  Even though the cost is cheaper for normal class motor, the overall price is much more expensive compared to the efficiency class motor. 

  • Installation and Commissioning Costs

It will vary depending on the type and model of item or equipment being selected and it may include electrical configuration and foundation requirements, among other costs including commissioning costs

  • Maintenance Costs

It can be vary enormously.  To keep the item or equipment in tip top condition, it is required to follow the required maintenance schedules.  Therefore, with different recommendation services interval by manufacturers and component lifetimes that can have a huge impact on cost incurred over its lifetime eventually.

  • Service Costs

Basically, certain equipment need to have its oil changed e.g. air compressor, filter cleaned and filter replaced when is required.  The service interval of air compressor is very much depending of utilization level or level of activity carried out of its lifetime. 

  • Repair Costs

Labour and transportation charges can vary greatly if the purchase item or equipment to be repaired by overseas expertise due to flight charges, accommodation and traveling time.

  • Energy Costs

Latest technology model of equipment or component e.g. compressor can contribute to energy efficiency which could potentially save more than an average of 15% as compared to normal version of the model.  For example, the low rotation speed of the air end and 1:1 direct coupling between the good performance of compressor and the electric motor can ensure energy saving in long run.

  • Lost Production during Downtime

This is one of the major challenges to the manufacturing line when downtime happens as the impact can be significant and outrageous losses will be incurred. If the downtime situation is not managed properly, it may lead to further complexity and result to poor financial performance and affects an organisation’s reputation and sustainability. In addition, lack of engineering skills will prolong the downtime period and cause the productivity to plummet.

  • Replacement Costs

When equipment is out of order, every process flow from your production to your bottom line is disrupted.  Operations Team has to figure out quick and effective solutions in order to reduce downtime incurred.  In light of larger investment for replacement equipment, decisive decisions has to be made whether to repair or replace the malfunction equipment to not affect the production schedule as to fulfil customer’s requirement. 

  • Disposal Costs

Last but not least, most organisations only consider this factor when the charges increases gradually due to stringent rules and regulations that are exercised by relevant authorities obliged by organisations and such measures are usually very costly.

life-cycle-cost-analysis-overcome
Image taken from: https://www.assetworks.com/fleet-life-cycle-cost-analysis-overcome

Challenges for Life Cycle Cost Analysis

The life cycle cost analysis tool helps organisations to measure their long term sustainability as well as improve their bottom line.  It can be an effective cost-saving tool for parties that are involved.  On top of that, it can reveal the most sensible option for procurement to make optimal decision to purchase the right item or equipment to meet company’s goal.

For accuracy of data collection, cost profile is one of the multiple factors for procurement consideration in LCC acquisition implementation.  Organisations may face problems to convince respective stakeholders to execute their job mindfully due to lack of accountability, recognition and teamwork rapport among themselves.  This can be improved by executing effective processes in an organization.  Without effective processes and transparency of general goals, individual stakeholders might contribute differently and carry out their roles inadequately and affect the outcome of results.  Not only that, it may trigger doubtful impartiality throughout the process and suspected individual integrity. When inflated costs is involved. It will contribute to consistent increases in price levels. This would make the situation worst if procurement does not come out of the solution effectively which will affect return on investment (ROI).

supplier-managed-inventory
Image taken from https://sipmm.edu.sg/cost-reduction-strategy-through-supplier-managed-inventory

Competency and Communication

Organisations need to ensure that their stakeholders are competent in what they are doing. This can be done by scheduling a mandatory workshop to boost competency. For new product, life cycle is more cost efficient if early involvement with suppliers that helps to bring in supplier’s expertise. It can help to secure cost reduction, enhance innovation and better participant in research.  Therefore, stakeholders has to delegate certain level of accountability for them to execute their job mindfully and achieve cost reduction goals in a shortest time frame.

Advertisements
Supply Chain Ads

Maintaining close communication with supplier is an important channel to keep you and your suppliers on the same page more robustly.  This will help stakeholders to manage their processes effectively for compiling LCC data that shared by suppliers for analysis purpose. Have a transparency general goals with suppliers, must always ensure the crafted contract are clearly define the responsibility and terms and conditions as to eliminate any dispute arise as well as meeting target KPI. For any aspect of business, strategies are required for best structured relationship with your suppliers by treating them fairly and respectfully and you will be getting the same treatment in return for them to share the reliable information for LCC investigation.

Conclusion

Procurement professionals have to spend corporate fund wisely and mindfully. They must purchase the right materials, in the right quantities, at the right time, right price, and from the right sources as to meet company goals without any disruption.  Therefore, by implementing the LCC approach, procurement professionals are able to identify and quantify the accurate total cost of life cycle before concluding the right purchases and ultimately helps improve uptime, minimise unplanned failures so that organizations are running well towards continuous improvements and profitability of every company’s projects.


References

Angelene Chin Pei Sze, DPSM. (2020). “Crucial Factors for Sustainable Procurement”. Retrieved from SIPMM: https://sipmm.edu.sg/crucial-factors-for-sustainable-procurement, accessed 15/09/2020.

Assetworks. (2020). “Common Challenges with Life-Cycle Cost Analysis”. Retrieved from https://www.assetworks.com/fleet-life-cycle-cost-analysis-overcome, accessed on 12/09/2020.

Julie Kwek Choo Lie, ADLSM. (2020). “Key Focus Areas for Supply Chain Integration”. Retrieved from SIPMM: https://sipmm.edu.sg/key-focus-areas-supply-chain-integration, accessed 15/09/2020.

Ken Hensley. (2019). “Icebergs & Spiritual Growth”.  Retrieved from https://medium.com/@kenhensley/icebergs-and-spiritual-growth-1a92a490483e, accessed on 20/09/2020.

Lai Sok Yen, DPSM. (2019). “Costs Reduction Strategy through Supplier-Managed Inventory”.  Retrieved from SIPMM: https://sipmm.edu.sg/cost-reduction-strategy-through-supplier-managed-inventory, accessed on 20/09/2020.

Nurazyyati Jaffar, ADPSM. (2018). “Key Strategies to Build an Effective Supplier Relationship Management”. Retrieved from SIPMM: https://sipmm.edu.sg/key-strategies-build-effective-supplier-relationship-management, accessed on 16/09/2020.

SSINA. (2020). “Life Cycle Costing”. Retrieved from https://www.ssina.com/value-propositions/life-cycle-costing, accessed on 12/09/2020.

About the Author: Ong Yeak Ching Tracy has several years of experience in the field of procurement, specifically in the automotive industry. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Tracy completed Diploma in Procurement and Supply Management (DPSM) on September 2020 at SIPMM Institute.

Top