Published January 7, 2019
Capital equipment can be defined as equipment used for the manufacture of another set of products or components and depending on your industry can be valued anywhere between $5,000 to $2,000,000.
The purchase of capital equipment, is quite often an excellent indicator of the performance of our economy – often declining during signs of a recession and growing during recovery from one.
In the ever-changing global economy and marketplace, capital equipment purchasing can be a daunting task for any engineer, procurement manager, or business owner. In many industries, the sheer number of equipment suppliers, with varying levels of features, benefits, quality, performance, and aftermarket support is difficult enough.
Complex and Involved Decision:
The decision to pursue new equipment or machinery is generally made based on the need to replace aging equipment, develop new lines of business, or improve efficiency in cost and space used on the manufacturing floor. With a fluid economy, manufacturers also look for payback on their investment within two years or less.
Complex and detailed analysis must be done, to fully understand the impact on your business, and make the decision on what equipment to source. This is generally a long-term process as capital purchases always involve:
- Large investment
- Technical complexity – understanding how one vendors equipment is better than the others
- Commercial complexity – cost beyond equipment cost / features (warranty, installation, spare part costs)
- Multiple internal decision makers – CEO, Production Manager, Maintenance Manager, Purchasing Manager, may all be stakeholders both resident at the factory level or corporate level.
With these factors involved, the engineer or manager being tasked with reviewing the case for purchase of new capital equipment, needs to take a disciplined approach understanding the upfront investment of the equipment and installation costs, and weighing them against the cost and benefits that result.
Payback / Return on Investment – Consider it All! –
It is not uncommon that in pursuing new equipment for replacement of existing machinery, short sightedness can prevail. Many people commonly investigate only the obvious cost factors – reductions in direct labor, energy cost savings, and raw material reduction, while other cost saving factors and benefits are overlooked.
It is important to review all factors that will either save cost OR generate income – stakeholders will be looking for it. Consider this list when doing so:
- Direct Labor – Operation – many manufacturing operations are done manually, and can be automated, or perhaps with aged equipment involve multiple people, which can be streamlined.
- Maintenance / Downtime Labor – with older equipment specifically, unscheduled downtime is never fun. Often, with such equipment, repairs, upgrades, and addressing issues comes at a price beyond lost production – it’s called overtime.
- Energy Costs – newer, often called “State-Of-The Art” equipment, can often operate more efficiently, using less electrical power or compressed air, with improved designs compared to old equipment.
- Raw Material – current technology may offer the benefit of reduced raw material cost. For example, a higher performing UV curing system versus a less efficient system may allow you to use a less costly coating or less coating all together.
- Scrap Reduction – can a properly operating system, not prone to failures of your current equipment, prevent you from producing scrap product or reduce it dramatically?
- Floor Space Reduction – as with everything when technology develops – things get smaller. Will the new equipment be more compact and take less valuable shop floor space?
- Training Reduction – many updated technology / machines provide user friendly operator interfaces, software, or in some cases apps, that can reduce your long-term training costs for operators when turnover occurs on your plant floor.
- Productivity / Line Speed – if you are buying capital equipment, you are planning to increase line speed – not maintain it or go slower. Understand the value of additional capacity created by your purchase.
- Lead Time / Changeover Improvements – new equipment design and efficiencies can improve the versatility of your operation and grow your customer base. Perhaps you shield away from short run jobs due to changeover time, which new equipment may solve.
- Tax Incentive / Deduction – Section 179 – as most look for short payback period, it is always nice to write off a significant amount of the investment. Investigate the tax benefit of what you are purchasing. Check out this calculator online: https://www.section179.org/section_179_calculator/
- Market Share – does the piece of equipment you need to source offer you a competitive advantage over your competition, or allow you to diversify your product offering? For example, does a tighter tolerance system allow you to pursue aerospace markets you would have perhaps avoided?
- Product Quality – does a newer machine, capable of improving part quality open new markets or change / improve upstream / downstream operations?
There are also a few intangibles that can be hard to measure the cost impact of. Nonetheless – they may be the deciding factor in gaining approval from your decisions makers to proceed or not proceed with purchase of the equipment. These include:
- Safety Improvements – is current operation a safety concern? Can be hard to calculate cost savings unless someone is injured – then it’s easy!
- Environmental – new equipment can be environmentally friendly or green (harmful emissions, dust generator, etc.).
- Serviceability – ancient capital equipment and part availability can be frustrating (tired of scouring eBay or Craigslist for spare parts!). There is a cost associated with this with sourcing time and paying excessive prices for short supply parts. New equipment should not have this problem.
- Sustainability – probably the most important factor – does your equipment being purchased require knowledge of one individual to run it, or can anyone be trained to operate it. Also, does the supplier offer a sustainable supply of spare parts and service for the long haul.
- Improvements in Workplace Moral – we all know a happy employee, is generally a productive employee. An operator or maintenance person tending to an aged, failing system prone to issues, may be unproductive, or outright leave.
In the end, it’s a simple dollars and cents decision to determine what is best for your business in the long run and the financial benefits of investing in new capital equipment compared to the continuing with the existing production process which can be costing your company excessive financial losses.
Purchasing capital equipment requires a substantial amount of research and analysis which can often extend the procurement process. Don’t get frustrated. Taking the time up front to consider all of the points above will help ensure that you can reap the rewards of your hard work.
Written by: Steve Donohue