Lcc

MaintenanceCircleTeam

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maintenance

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June 18th 2007

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NEWSLETTER FOR MAINTENANCE COMMUNITY Word for the day: LCC

One of the most important factors influencing the purchase of machines, equipments and even supporting items for an organization is price. It is an accepted practice to source multiple suppliers and compare their quotations – prices – before purchasing. In Indian sub-continent, it is a well known fact that Maruti cars are economical to maintain than American counterparts. One of the most important parameter which for long has been considered by Japanese, now practiced all over the world is Life Cycle Cost or LCC. It is an indication of cost involved in keeping equipment operational throughout its life. LCC helps in deciding to purchase equipment not only based on the initial investment, but on cost involved throughout its life. To make the illustration simple, let us consider an example. A company is in the process of purchasing a 50 HP Screw Air compressor and has procured quotations from two sources, A & B. Now let us calculate the LCC for them and conclude which is more economical. We are aware that compressor’s consumables, maintenance and other activities are decided on number of hours it has run. Let us take 8000 hours as operational hours in a year and calculate the LCC. Following table shown schedule of various replacements and consumable for compressors A & B. Compressor

A (Rs.450000)

B (Rs.500000)

250 Hours >Change air filter – 1 – Rs.300 >Change Oil filter – 1 – Rs.750

500 Hours >Top up 1 liter Screw Oil – Rs.100 per liter

1000 Hours

>Change air filter – 1 – Rs.1000 >Change oil filter – 1 – Rs.1000

2000 Hours >Change Screw Oil (19 liters) – Rs.1900 > Change 1 Air-oil separator – Rs.2500 >Top up 1 liter Screw Oil – Rs.500 per liter

4000 Hours >Replace bearings on the screw assembly – 1 set – Rs.5000

8000 Hours

>Change 1 air oil separator – Rs. 8000 >Change Screw Oil (19 liters) – Rs.9500

Compressor A: (8000/250) = 32 air filters = Rs.300 x 32 = Rs.9600 (8000/250) = 32oil filters = Rs.750 x 32 = Rs.24000 (8000/500) = 16 liters of screw oil = Rs.100 x 16 = Rs.1600 (8000/2000) = 19 x 4 = 76 liters of screw oil = Rs.100 x 76 = Rs.7600 (8000/2000) = 4 Air oil separators = Rs.2500 x 4 = Rs.10000 (8000/4000) = 2 set of screw bearings = Rs.5000 x 2 = Rs.10000 TOTAL CONSUMABLE COST = (a) + (b) + (c) + (d) + (e) + (f) = Rs.62800

(a) (b) (c) (d) (e) (f)

Compressor B: (8000/1000) = 8 air filters = Rs.1000 x 8 = Rs.8000 (8000/1000) = 8 oil filters = Rs.1000 x 8 = Rs.8000 (8000/2000) = 4 liters of screw oil = Rs.500 x 4 = Rs.2000 (8000/8000) = 1 Air oil separator = Rs.8000 (8000/8000) = 1 x 19 = 19 liters of screw oil = Rs.500 x 19 = Rs.9500 TOTAL CONSUMABLE COST = (a) + (b) + (c) + (d) + (e) + (f) = Rs.35500

(a) (b) (c) (d) (f)

If you like to improvise this article or contribute or comment please mail us at: [email protected] This document contains information for reference only. We assume no responsibility for its implication.

MaintenanceCircleTeam

Page 2

June 18th 2007

From above calculations, it is evident that even though initial cost of Compressor B is more than A, its life cycle cost – LCC – is less than A, which makes it economical to run for long hours. When comparing long-term economic effectiveness in this manner, we must consider the time value of money. Cost conversions based on factors such as calculated interest must also be measured, using tools of engineering methods. There are three methods of comparison available: (I) All financial earnings and expenses are converted into current values, referred to as the present value method (II) The final value method is applied at the end of the period of comparison (III) The annual value method is used to estimate annual expenses. We will explain the usefulness and limitations of each method in future articles. It is essential to understand that LCC should not only be considered for high value or capital equipments, but can also be used for low cost daily items. For instance, if low cost tools are used for maintenance of equipments, it either breaks or does not have proper dimensions to suit the purpose. Even consumables like engine oil, hydraulic oil when bought on cost factor alone, without checking specifications increases the LCC of its applied equipments. Poor quality engine oil for instance deteriorates the life of engine to some extent. LCC has been a long accepted practice used by US department of defense and Japan Industries in procuring items and equipments. For instance, in military equipment – which may never be used unless there is a war – the cost of maintenance will be multiple times of its initial investment. Apart from procuring only “commercial” quotations, it is important that organizations obtain detailed breakup of all the costs involved over a certain period, say one or two years. If LCC is ignored and purchase is made only on basis of “initial” price alone, the benefit reflected will only be instant and in the long run, it may be offset by maintenance cost or consequent breakdowns. As an interesting note, in some of the companies in American, people are also hired based on LCC. Organizations will calculate the salary for a potential employee and compare it with the “projected” savings he / she can bring to them.

If you like to improvise this article or contribute or comment please mail us at: [email protected] This document contains information for reference only. We assume no responsibility for its implication.