Three Ways to Evaluate Life-Cycle Costs

By Andrew Gager  
OTHER PARTS OF THIS ARTICLEPt. 1: New Technologies Require Life-Cycle-Cost AnalysisPt. 2: This Page

A manager's job is to make the most appropriate financial decision on the best available technology by determining its payback using a simplified LCCA tool. The box below shows the basic formula for calculating life-cycle costs. Managers can evaluate life-cycle costs in three ways:

  • Cost comparison is the present value for different alternatives. This comparison is based on net-present-value and looks at costs throughout the life of each alternative.
  • Cost-effectiveness looks at each alternative choice on a cost-reduction basis, payback period, or per-use rate.
  • Cost/Benefit looks at each alternative choice, its initial costs and the potential benefit to the organization, such as downtime reduction, maintenance utilization, and proactive maintenance hours versus reactive maintenance hours.

Before investing in the latest, greatest technology, managers must clearly understand the ultimate goal in buying it. Do not let a salesperson sell the department a Lexus when all it needs is a Ford. A legitimate alternative might be to outsource the technology. Instead of laying out thousands of dollars for a technology, consider outsourcing or using it on a trial basis before investing.

Too many organizations believe if they invest in new technology, the moon, stars, compressors, chillers, and weeds all will align. In reality, what matters are the systems in place and the strategies to properly support the systems. If managers do not clearly define these strategies, all technology will do is speed up their mistakes.

Andrew Gager, CMRP, CPIM, is director of consulting services with Marshall Institute, an asset management consulting and training company that helps companies improve the maintenance contribution to organizational performance. Gager has more than 25 years of experience, ranging from warehousing operations to plant management.

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Calculating Life-ycle Cost Chart

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  posted on 6/30/2011   Article Use Policy

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