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TECHNICAL


In this article, Reesink Turfcare’s Service Manager Lee Rowbotham says that total cost of ownership (TCO) is a vital part of the decision-making process when looking to invest in a new machinery fleet, but certainly never before has the concept had such weight


W


hilst forecasts, budgets and plans for 2020 have been thrown a huge curveball due to COVID-19, it doesn’t mean all plans for the year


have to be shelved or put on hold. What it does mean, however, is that now more than ever, if you’re going to invest, make sure you invest wisely. It’s undoubtedly true that you get what you pay for, but turfcare professionals are now learning that there’s actually a lot more that you get if you pay attention to the devil in the detail or, in some cases, the angel in the detail.


With economic uncertainty as it is, it’s never been more important to make sure you consider more than just the purchase price. The equipment purchase price (net purchase or financed value) is important, but often no more than 35 percent as a cost component of the equipment’s operating life. It’s equally important to look for value, with features that enhance performance (productivity), reliability (downtime) and durability (longevity for residual value), such as a high quality transmission, strong cutting frame and components and large capacity cooling systems. These can impact other significant cost components over time. Total cost of ownership provides a data driven perspective for determining the total economic value of an investment, in this case machinery. It includes the total cost of acquisition and operating costs, as well as costs related to replacement or upgrades at the end of the life cycle. Lacking TCO information means that the decision to replace a large asset such as a £40,000 wide area reel mower can become more subjective than data guided. If the TCO is calculated at an appropriate level of detail, the information can guide informed decisions in procurement, maintenance, labour savings and energy management. When all management use the same cost data, they can cooperate in making better decisions that improve company performance and return on investment. When it comes to machinery, the TCO of any physical asset should reflect investigation of three key segments:


• Acquisition cost [typically 30-35 percent]


• Depreciation [typically viewed as future residual value]


• Operating costs (fuel, maintenance,


repairs and labour) [typically 55-60 percent]


Without this information, any organisation will be inclined to focus on short-term cost rather than the overall investment over the equipment’s expected ‘life cycle’.


Acquisition


Acquisition cost includes the first cost or purchase price of an asset. Our data needs to include the cost of borrowing money to acquire equipment or lost interest from making a cash investment. An operating lease, for example, will reduce finance costs/interest paid by virtue of an agreed residual value being factored in, compared to another finance product. Equally, annual finance repayments are more interest efficient than monthly.


Inflation will impact most of the operating component costs, however, contract hire (leasing with an inbuilt service contract) is a tool that can remove or significantly impact inflationary pressures on maintenance costs, effectively fixing them for the same term as the borrowing for the equipment.


Depreciation


Depreciation is a big factor affecting the end of use value of your machines and the total cost to own them over time. No one would want to invest money and decide to sell or change after a few years and find they owe more money than the machine is worth. Understanding the rate of depreciation is important, but no more so than understanding a good residual value is worth its weight in gold within the component costs of TCO. Getting a ‘return’ for your equipment significantly impacts the total cost of ownership. New technology can sometimes adversely affect the residual values of older models, as can the discontinuation of a specific model. It can be affected by OEM reputation, model reputation and the popularity of units in the field, together with long-term availability of parts and service.


An operating lease can be a useful tool to lock in the residual value and remove the risk element, but conditions of return will apply. The fundamentals are, look after the equipment, maintain it, look after its visual condition, and do not keep so long as to rack up excessive use (hours) which will affect its residual much as mileage does in a car.


PC June/July 2020 137


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