Use life-cycle costing to rake in best value
As consumers, all of us have had to make similar decisions – whether we’re conscious of our thought processes or not. Maybe you’ve had to decide between buying a piece of furniture made of solid oak or one made with plywood and veneer. Or maybe you’ve had to decide between gas versus charcoal when buying that patio grill. Regardless of the item being purchased, there are specific costs associated with each of these decisions that inevitably will affect the overall ownership cost of that particular item.
Purchasing is a lot more complicated in the public sector, where procurement professionals face the daunting task of meeting the complex needs of their constituents with limited resources. Because of these budget constraints, purchases often are dictated by lowest price. However, past lessons learned have taught us that purchasing the lowest-priced product or service often does not reflect the best value.
Overcoming the low-price method of purchasing can be very difficult when an agency is facing a multitude of budgetary pressures. It’s very easy to look short-term when the well is almost dry. Unfortunately, history often shows us that the well never really fills up and that better procurement practices need to be considered.
All agencies should consider incorporating life-cycle costing methodology into their procurement process. This method of purchasing takes into consideration everything associated with the cost of ownership of a particular item.
In my current position as a governmental support consultant for a heavy equipment manufacturer, my responsibilities include gathering competitive owning and operating costs for heavy equipment. I’ve learned that whether you’re purchasing a garden rake or bulldozer, the ultimate goal is the same: getting the most out of each dollar spent. Obviously there is a lot more to consider when buying a bulldozer. Still, if you let that basic principle guide your buying decisions, you’ll find that in most cases, initial price is not the best gauge when determining the best value.
The factors that I consider when trying to establish the life-cycle cost for heavy equipment are scheduled maintenance costs, expected repair costs, fuel consumption and residual values. Take fuel consumption as an example. With the price of 1 gallon of gas exceeding $4 in some parts of the country, choosing a machine that consumes 1 gallon per hour less than another machine over a five-year, 5,000-hour life cycle would equate to a $20,000 cost savings in the ownership of the particular piece of equipment. If the initial purchase price for the more fuel-efficient machine were $5,000 higher than the less efficient one, the agency would realize a savings of $15,000 over the established useful life of that machine.
Imagine now that you incorporated into your calculations the scheduled maintenance costs, repair costs and the residual value of the machine over the same time period. Maybe you take it a step further and include productivity, operator efficiency, serviceability, dealer capability and even fleet standardization into the equation. Finally, imagine applying these criteria across your entire fleet. Before you know it, the well doesn’t seem so dry.
Among the benefits of life-cycle costing, it: promotes vendor accountability; provides your agency with higher-quality products; and enables you to budget with a much higher level of certainty. The bottom line is that you attain peace of mind knowing that you’ve spent your agency’s money wisely and have made the best choice at the lowest total cost.
Just in case you were wondering, the rake still works great!
About the author
Jason Walker is a governmental support consultant for Peoria, Ill.-based Caterpillar Inc. Contact him at Walker_Jason_C@cat.com.