A Philosophy of Equipment
Costing.
February 2014.
C.E.M.P. Central Inc.
Construction Equipment Management Program
Mike Vorster.
CEMPCENTRAL, Inc.
[email protected] www.cempcentral.com
© CEMPCentral Inc.
1
A Philosophy of Equipment Costing
February 2014
Mike Vorster.
CEMPCENTRAL, Inc.
[email protected]
www.cempcentral.com
© CEMPCentral Inc.
A Philosophy of Equipment Costing
2
Yes, I do have a philosophy.
And…
It is very simple.
Mike Vorster.
CEMPCENTRAL, Inc.
[email protected]
www.cempcentral.com
© CEMPCentral Inc. 2014.
1
© CEMPCentral Inc.
3
A Philosophy of Equipment Costing
1. Owning and operating costs have different DNA.
Manage each with the skill it deserves.
2. With cost, actions speak louder than budgets.
Produce actionable cost information
3. Age management is critical.
Know your sweet spot, manage it
4. It is not as complicated as it looks.
Understand the bumper stickers
5. A picture is worth a million numbers.
Develop them, use them
© CEMPCentral Inc.
4
A Philosophy of Equipment Costing
A lot of it is in here
Mike Vorster.
CEMPCENTRAL, Inc.
[email protected]
www.cempcentral.com
© CEMPCentral Inc. 2014.
2
© CEMPCentral Inc.
5
A Philosophy of Equipment Costing
1. Owning and operating costs have different DNA.
Manage each with the skill it deserves.
© CEMPCentral Inc.
1. O&O costs have different DNA
OWNING COSTS
The cost of bringing a
machine into your fleet
and keeping it there.
6
OPERATING COSTS
The cost of turning the
key and putting it to
work.
They have different DNA
© CEMPCentral Inc. 2014.
3
© CEMPCentral Inc.
1. O&O costs have different DNA
OWNING COSTS
Buy - Borrow – Lease
Sell
License, Insurance
Tax
7
OPERATING COSTS
Fuel
Wear parts, tires, tracks
Maintenance
Repair parts and labor
They have different DNA
© CEMPCentral Inc.
1. O&O costs have different DNA
OWNING COSTS
Come in BIG chunks at
the beginning, the end,
annually or monthly.
Fixed when you ink the
deal.
© CEMPCentral Inc. 2014.
8
OPERATING COSTS
Come constantly or at
random intervals for
repairs and rebuilds.
Depend on age,
application or operation.
4
© CEMPCentral Inc.
1. O&O costs have different DNA
OWNING COSTS
Have to do with finance
and cost of capital.
Are the province of
specialists in accounting.
9
OPERATING COSTS
Have to do with oil,
grease, parts and labor.
Are the province of field
operations specialists.
They have different DNA
© CEMPCentral Inc.
1. O&O costs have different DNA
Acquire
One very big one or
several big ones every
month regardless.
Buy
Borrow
Lease
Rent
© CEMPCentral Inc. 2014.
Keep
A large number of small
ones every month
regardless.
License
Insurance
Property Tax
Interest
10
Sell
One big one, hopefully,
at the end.
Residual market value
Auction price
Sale price
Trade in
5
© CEMPCentral Inc.
1. O&O costs have different DNA
11
Owning
1.
Depreciation
Equipment is a depreciating asset. The value of our investment
decreases with age - you must recognize this and set funds
aside to replace the asset
2.
Interest
Our investment in equipment must provide a return on the
amount we have invested
3.
Other Owning
There will be additional costs for keeping a machine in our
fleet. These include the cost of licenses, insurances, property
taxes and the like
Have to do with
accounting, finance and
administration.
© CEMPCentral Inc.
1. O&O costs have different DNA
12
Owning
Hourly owning cost
goes down with age.
It depends on the rate at which
residual market value
decreases and the number of
hours worked in a year.
Owning Cost
$18
$ per hour
$16
$14
$12
$10
$8
$6
5000
6000
7000
8000
9000
Hours Worked
© CEMPCentral Inc. 2014.
6
© CEMPCentral Inc.
1. O&O costs have different DNA
13
Operating
Acquire and Keep
Run
Sell
Fix
A very large number of
small ones every hour
that the machine works
Fuel
Wear parts
Tracks
Service and P.M.
A small number (hopefully)
of big ones depending on
hours worked.
Repair labor
Repair parts
Rebuilds
© CEMPCentral Inc.
1. O&O costs have different DNA
14
Operating
1. Fuel
Cost times factor times consumption
2. Wear parts (implement)
Cost times factor times life
3. Tires or tracks (traction)
Cost times factor times life
4. Preventive maintenance
Cost times interval
5. Repair parts and labor
The big uncertainty
- comes in chunks
- increases with age
- dependent on conditions
© CEMPCentral Inc. 2014.
Constant
7
© CEMPCentral Inc.
1. O&O costs have different DNA
966 loaders
Plot the data andRepair cost growth ‐
add a trend
line
15
y = 423.59x2 + 1,837.41x
R² = 0.94
$160,000
$140,000
$120,000
$100,000
1756
Maint cost $80,000
to date
1942
1992
$60,000
$40,000
$20,000
$0
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
Meter reading in hours
© CEMPCentral Inc.
1. O&O costs have different DNA
16
Linear Component of cost
Exponential Component of cost
The final result
2
y = 0.0022x + 3.0292x
2
R = 0.9544
Cumulative Repair Costs
$520,000
$480,000
$440,000
Cumulative Repair Cost
$400,000
$360,000
All
101
102
103
104
105
Poly. (All)
$320,000
$280,000
$240,000
$200,000
$160,000
$120,000
$80,000
$40,000
$0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Hours worked
© CEMPCentral Inc. 2014.
8
© CEMPCentral Inc.
1. O&O costs have different DNA
17
The final result
Cumulative cost of repair parts and labor
= A
X
age + B
Linear Component
X
age 2
Exponential Component
© CEMPCentral Inc.
1. O&O costs have different DNA
18
Total cost = Ax + Bx2
Total Repair Cost $
A is the linear component.
Measures expenditure with age
Increasing A
Age, x
© CEMPCentral Inc. 2014.
9
© CEMPCentral Inc.
1. O&O costs have different DNA
19
Total cost = Ax + Bx2
Total Repair Cost $
B is the exponential component.
Measures increasing expenditure with increasing age
Increasing B
Age, x
© CEMPCentral Inc.
1. O&O costs have different DNA
20
You will have an “A”
 Measures expenditure with age
$ per hour stays the same as the machine ages
You MUST manage “B”
 Measures increase in
expenditure with increase in age
$ per hour increases as the machine ages
© CEMPCentral Inc. 2014.
10
© CEMPCentral Inc.
21
CAT PHB
Edition 42
Yes, but do you know
your “A”s and “B”s
© CEMPCentral Inc.
1. O&O costs have different DNA
22
What A and B Tell Us
“A” measures the rate at
which total cost increases
with age.
If “A” is small then the line is
relatively straight and the
cost per hour does not increase a lot with age.
If “A” is big then the line slopes more but does not
curve more. The cost per hour will be higher but it will
not increase quickly with age.
Increasing maintenance expenditure and taking action
that prevents failure results in a high value of “A” but
the line is relatively straight.
Under these conditions, cost per hour will be higher
but it will increase slowly with age. Higher costs that
do not increase with age are better than low hourly
costs that increase rapidly.
Money invested in “A” reduces “B.”
Well built and maintained machines working within
their design capability have higher values of “A” but
low values for “B.”
140
120
100
80
60
40
20
0
0
© CEMPCentral Inc. 2014.
1
2
3
4
5
6
7
8
“B” measures the rate at
which total cost increases
with increasing age. In other
words, it measures the
curvature as opposed to the
slope of the line.
140
120
100
80
60
40
20
0
0
1
2
3
4
5
6
7
8
If “B” is big, the line curves a lot. Not only does the
total cost increase rapidly with age but the cost per
hour also increases rapidly as the machine ages.
High values of “B” occur when machines are working
beyond their capability or when action taken to
prevent failure is not producing the desired results.
Under these conditions, cost per hour increases
rapidly with age. Hourly costs that increase rapidly
with age give good reason to sell the machine.
P 98
Machines with high values of “B” have a short
economic life.
Under all conditions – work to reduce “B.”
11
© CEMPCentral Inc.
1. O&O costs have different DNA
23
Lets be clear – cumulative cost to date
$140
$120
$100
Total cost of
Repair parts $80
and labor, $60
Life to date
Life to date costs
and cost per hour
Period costs and
cost per hour
$40
$20
$0
0
4
8
12
16
20
Age, Life to date
© CEMPCentral Inc.
1. O&O costs have different DNA
24
Repair parts and labor cost
$500,000
$450,000
Total cost to date
$400,000
$350,000
$300,000
$250,000
$200,000
Average rate to 16,000 hours = $200,000 ÷ 16,000 = $12.50 per hour
$150,000
$100,000
$50,000
$0
0
4,000
8,000
12,000
16,000
20,000
24,000
28,000
Hours worked
© CEMPCentral Inc. 2014.
12
© CEMPCentral Inc.
1. O&O costs have different DNA
25
Repair parts and labor cost
$500,000
$450,000
Average rate 16,000 – 24,000 hours
= ( $450,000 - $200,000 )÷ 8,000
= $250,000 ÷ 8,000
= $31.25 per hour
Total cost to date
$400,000
$350,000
$300,000
$250,000
$200,000
Average rate to 16,000 hours = $200,000 ÷ 16,000 = $12.50 per hour
$150,000
$100,000
$50,000
$0
0
4,000
8,000
12,000
16,000
20,000
24,000
28,000
Hours worked
© CEMPCentral Inc.
1. O&O costs have different DNA
26
Operating
Hourly operating cost
goes up with age.
It depends on the rate at which
expenditure on repair parts and
labor increases as the machine
ages.
2
y = 0.0022x + 3.0292x
Cumulative Parts and Labor Cost
2
R = 0.9544
$500,000
$450,000
$400,000
Cumulative costs
$350,000
We must be able to define the
relationship between cost and
age and determine the rate at
which costs increase with age.
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Cumulative hours worked
© CEMPCentral Inc. 2014.
13
© CEMPCentral Inc.
1. O&O costs have different DNA
OWNING COSTS
Have to do with finance
and cost of capital.
Are the province of
specialists in accounting.
27
OPERATING COSTS
Have to do with oil,
grease, parts and labor.
Are the province of field
operations specialists.
They have different DNA
© CEMPCentral Inc.
28
A Philosophy of Equipment Costing
2. With cost, actions speak louder than budgets.
Produce actionable cost information
© CEMPCentral Inc. 2014.
14
© CEMPCentral Inc.
2. Actions speak louder than budgets
Use actionable information and understand variances.
When
someone
shouts
FIRE
know which
door to take.
© CEMPCentral Inc.
2. Actions speak louder than budgets
30
Define
Set budgets using
best available
information.
Act
Measure
Control risk.
Optimize the
future. Minimize
the downside.
Monitor and record
actual costs.
Calculate earned
values.
Predict
Highlight trends.
Forecast future
earning and
spending.
© CEMPCentral Inc. 2014.
Compare
Analyze variances.
Understand
reasons and
causes.
15
© CEMPCentral Inc.
2. Actions speak louder than budgets
Horizontal slicing.
All units
All costs
Total
1
2
3
4
If you have
enough things
then on the
average the
5
6
34
35
36
37
average will be
123
average.
124
125
234
235
236
237
Budget
Actual
Variance
© CEMPCentral Inc.
2. Actions speak louder than budgets
Horizontal slicing.
Manage by
category
Each category
and class looks
after itself.
No cross
subsidizing.
© CEMPCentral Inc. 2014.
Cat Class
A1
1
A1
1
A1
1
A1
2
A1
2
A1
3
A1
A2
1
A2
2
A2
2
A2
3
A2
C4
1
C4
1
C4
1
C4
D7
1
D7
1
D7
2
D7
2
D7
All costs
B A V
B A V
B A V
B A V
Budget
Actual
Variance
16
© CEMPCentral Inc.
2. Actions speak louder than budgets
33
The curse of the one liner
Unit
Z 225
Z 238
Life to date
Year to date
This month
Hours Revenue
Cost
G/L
Hours Revenue
Cost
G/L
Hours Revenue
Cost
G/L
7,852 $ 392,600 $ 422,016 $ (29,416) 458 $ 23,358 $ 15,489 $ 7,869
80 $ 4,160 $ 1,600 $ 2,560
3200 $ 160,000 $ 227,000 $ (67,000) 678 $ 34,578 $ 56,200 $ (21,622) 120 $ 6,240 $ 35,000 $ (28,760)
What does this all mean.
Age (too young, too old)
Utilization
Application
Operation
The so what barrier.
© CEMPCentral Inc.
2. Actions speak louder than budgets
34
The Rate Splits.
Owning and Operating costs
$55.79 per hour
$15.35 Owning costs Operating Costs $37.64
Depreciation $10.50
Fuel
Interest
Wear parts
$6.24
Tires
$2.61
P. M.
$4.16
$2.05
Licenses,
insurance etc. $2.80
Only at 4yrs and 8,000 hours
$14.87
Repair parts
and labor
$9.91
And $2.80 to the overhead account
© CEMPCentral Inc. 2014.
17
© CEMPCentral Inc.
2. Actions speak louder than budgets
Earned value budgets.
A
1
B
C
D
E
F
EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE
2
Equipment Category/Class
3
Unit
EX
G
H
I
Life to date
PERIOD
M
0703
6
Owning costs
$13.78
3,721
Earned
Value
Budget
$51,275
7
Operating costs
$24.97
3,721
$92,913
$88,600
$4,313
$24.97
$23.81
95.4%
8
Fuel
$14.87
3,721
$55,331
$60,750
($5,419)
$14.87
$16.33
109.8%
9
Contribution to overhead
$2.80
3,721
$10,419
$11,461
($1,042)
$2.80
$3.08
110.0%
10
TOTALS
$56.42
$209,939 $221,011 -$11,072
$56.42
$59.40
105.3%
4
Budget Hours
Rate Worked
5
Rate per hour
Actual
Cost
G/L on
Budget
Budget
Actual
Act/Bud %
$60,200
($8,925)
$13.78
$16.18
117.4%
Generate earned value budgets for at least 4
principal cost types. Compare these with actual
costs in each principal cost type.
P 212
Information at one level finer than your decision.
© CEMPCentral Inc.
2. Actions speak louder than budgets
Vertical slicing.
Cat Class Owning
Manage by
category and
cost type
Each category,
class and cost
type looks after
itself.
No cross
subsidizing
between
categories,
classes and cost
types.
A1
A1
A1
A1
A1
A1
Operating
Repairs
Fuel
OHD
Total
1
1
1
2
2
3
A1
A2
A2
A2
A2
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
1
2
2
3
A2
C4
C4
C4
1
1
1
C4
D7
D7
D7
D7
1
1
2
2
D7
BAV
Budget
Actual
Variance
© CEMPCentral Inc. 2014.
Constant
BAV
Budget
Actual
Variance
BAV
B AV
BAV
B A V
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
18
© CEMPCentral Inc.
2. Actions speak louder than budgets
Variances.
OWNING COSTS
Closely aligned to accounting and
finance.
OPERATING COSTS
Closely aligned to operations in the
field.
Expert in acquisition, finance and
disposal.
Expert in maintenance, and shop
operations.
Set by the quality of the deal when
you bought it.
Set by age, operation and application.
Occur on an annual basis because you
have the machine in your fleet.
Occur on an hourly basis because you
have put the machine to work.
© CEMPCentral Inc.
2. Actions speak louder than budgets
Variances.
© CEMPCentral Inc. 2014.
Owning cost variances
VOLUME VARIANCES
Operating cost variances BUYING
VARIANCES
Annual costs - largely predetermined
when you ink the deal.
Costs are mostly proportional to
hours worked.
Uncertainty is the number of hours
worked per year.
Uncertainty is the actual cost of
the resources used.
19
© CEMPCentral Inc.
2. Actions speak louder than budgets
Manage by categories.
Cat Class Owning
Volume variance.
Buying, operation,
over application
or waste.
A1
A1
A1
A1
A1
A1
Age, operation or
over application.
Buying or waste.
C4
C4
C4
Operating
Repairs
Fuel
OHD
Total
1
1
1
2
2
3
A1
A2
A2
A2
A2
Constant
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
1
2
2
3
A2
1
1
1
C4
D7
D7
D7
D7
1
1
2
2
D7
BAV
Budget
Actual
Variance
BAV
Budget
Actual
Variance
BAV
B AV
BAV
B A V
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
© CEMPCentral Inc.
Class or category cost information
© CEMPCentral Inc. 2014.
40
20
© CEMPCentral Inc.
2. Actions speak louder than budgets
Figure 12.7
Category EX : Class M
$12,000
Well utilized
Expensive to operate
Well utilized
Economical to operate
G/L: Owning Cost Budget
$8,000
EX M
0605
$4,000
0701
0702
$0
0703
0801
0802
($4,000)
0803
0804
($8,000)
Under utilized
Expensive to operate
($12,000)
($12,000)
($8,000)
Under utilized
Economical to operate
($4,000)
$0
$4,000
$8,000
$12,000
G/L: Operating Cost Budget
Units above the line have a positive owning cost variance and are well utilized. Units to
the right have a positive owning cost variance and are operating within budget.
P 215
© CEMPCentral Inc.
2. Actions speak louder than budgets
Benchmark owning and operating costs
$ per hour for owning costs.
How do I recover the fixed costs
of ownership.
Depends on utilization and life
$ per hour for operating costs.
How do I recover the costs of
running it and fixing it.
Depends on day to day field
decisions
© CEMPCentral Inc. 2014.
21
© CEMPCentral Inc.
2. Actions speak louder than budgets
43
Actions speak louder than budgets.
Budgets, budgeting and cost control are important. But actions speak louder than
budgets and get the job done. Nothing is achieved by walking up to the plate, kicking off
the dust and staring firmly at the score board while the umpire calls “Play Ball”
Keep your eye on the ball not the scoreboard
This won’t win the game – no matter how often you look at it !
P 225
© CEMPCentral Inc.
2. Actions speak louder than budgets
Use actionable information and understand variances.
When
someone
shouts
FIRE
know which
door to take.
© CEMPCentral Inc. 2014.
22
© CEMPCentral Inc.
45
A Philosophy of Equipment Costing
1. Owning and operating costs have different DNA.
Manage each with the skill it deserves.
2. With cost, actions speak louder than budgets.
Produce actionable cost information
3. Age management is critical.
Know your sweet spot, manage it
4. It is not as complicated as it looks.
Understand the bumper stickers
5. A picture is worth a million numbers.
Develop them, use them
© CEMPCentral Inc.
46
A Philosophy of Equipment Costing
3. Age management is critical.
Know your sweet spot, manage it
© CEMPCentral Inc. 2014.
23
© CEMPCentral Inc.
3. Age management
47
Owning costs go down with age as we accumulate an
ever larger number of hours worked over which to
spread the purchase price.
Operating costs go up with age we accumulate ever
higher repair parts and labor costs.
Economic life is that period which ends
when the average owning and operating
costs to date reach a minimum.
© CEMPCentral Inc.
3. Age management
48
Hourly owning cost goes down
with age.
Hourly operating cost goes up
with age.
It depends on the rate at which
residual market value decreases and
the number of hours worked in a
year.
It depends on the rate at which
expenditure on repair parts and
labor increases as the machine ages.
120
100
80
Total cost / total hours
60
C*
40
20
0
0
© CEMPCentral Inc. 2014.
1
2
3
4
L*
5
6
7
8
9
Total hours
24
© CEMPCentral Inc.
3. Age management
49
A Formal Definition of Economic Life
Many texts define economic life as
“That period that ends when the average hourly cost to date reaches a minimum.”
That period that ends when the average
hourly cost reaches a minimum
200
Costt
The terms used in the formal description
are shown in the diagram on the left.
150
Minimum hourly
cost to date
100
50
0
0
1
2
Hourly Owning
As can be seen from the diagram on the
right there is very little difference.
Sweet spot is a broader, softer, more
easily understood and accepted term.
4
5
6
7
8
Hourly O&O
200
Timing of the sweet spot
150
Costt
We use the term “sweet spot” to avoid
the
quantitative
precision
and
narrowness of definition implied in the
term “economic life.” There is much
more to the concept of an economic
ownership period than is captured in the
formal definition.
3
Hourly Operating
Magnitude of the
sweet spot
100
P 110
50
0
0
1
2
Hourly Owning
3
4
Hourly Operating
5
6
7
8
Hourly O&O
© CEMPCentral Inc.
50
© CEMPCentral Inc. 2014.
25
© CEMPCentral Inc.
51
© CEMPCentral Inc.
3. Age management
52
$120
Owning
Total
Constant Oper
Lifetime Equipment Rate ($/hr)
$100
Repair
Operating
$80
$60
$40
$20
$‐
0
10
20
30
40
50
60
70
Total Hours Worked (in thousands)
© CEMPCentral Inc. 2014.
26
© CEMPCentral Inc.
COST
MANAGEMENT
Magnitude of
the sweet spot
$ per hour
Depends on
how long you
keep it
3. Age management
$120
Owning
Total
Constant Oper
$100
Lifetime Equipment Rate ($/hr)
How much
does it
cost ??
Repair
Operating
$80
$60
$40
$20
$‐
0
10
20
30
40
Total Hours Worked (in thousands)
Timing of the sweet
spot
Life in hours
Depends on cost
50
How long
do I keep
it??
60
70
FLEET AGE
MANAGEMENT
© CEMPCentral Inc.
3. Age management
Age benchmarks are critical. There must be a
formal process of defining and measuring where
we are relative to fleet average age.
It is a three step process
1. Establish your benchmark ages
2. Collect your actuals
3. Produce actionable information
© CEMPCentral Inc. 2014.
27
© CEMPCentral Inc.
3. Age management
1. Establishing benchmark ages
Cost per hour - Life to Date
$70.00
$60.00
Intuition
Analysis
Cost per hour
$50.00
$40.00
Total
Operating
$30.00
Repairs
Owning
$20.00
$10.00
$0.00
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Hours Worked
It does not matter how you do it – you must know:
HOW LONG YOU PLAN TO KEEP IT
WHEN IT WILL BECOME PROGRESSIVLY MORE COSTLY
WHEN IT WILL BE DONE
P 109
© CEMPCentral Inc.
3. Age management
Age benchmarks are critical. There must be a formal process of
defining and measuring where we are relative to fleet average age.
It is a three step process
1.
Establish your benchmark ages
2.
Collect your actuals
3.
Produce actionable information
It is not as easy as it sounds:
Collect the hours worked to generate
the earned value budget and drive
the fleet age system – You can mess
them both up.
© CEMPCentral Inc. 2014.
28
© CEMPCentral Inc.
3. Age management
A
B
Unit numbe Current age
7002
7003
7001
7004
7022
7150
7161
7157
7160
7152
C
D
Expected age at end of
E
F
Now +1
Now + 3
Now + 4
18092
Se ll
15304
< 2
Now + 2
13326
15126
< S e ll 1
12317
14117
15817
10374
12174
13874
15574
< Se ll 1
7156
8956
10656
12356
14056
6182
7982
9682
11382
13082
4921
6721
8421
10121
11821
4875
6675
8375
10075
11775
4588
6388
8088
9788
11488
Buy
1700
3400
5100
6800
2 >
1700
3400
5100
6800
Buy 1 >
1700
3400
5100
Buy 1 >
1700
3400
Buy 1 >
1700
< Se ll 1
P112
© CEMPCentral Inc.
3. Age management
Anticipated maximum life for class
Anticipated annual utilization for class
6,000
500
Green
0.6 to 0.8 Target
Unit
Make
Model
Hours now
1
185 CFM Air Compressor - Diesel
20-1637 D
INGERSOLL RAND
P185WJD
3,748 4,248
20-2031
INGERSOLL RAND
P185WJD
3,386 3,886
20-2010
INGERSOLL RAND
P185WJD
3,215 3,715
20-1970
INGERSOLL RAND
P185WJD
3,012 3,512
20-2078 D
INGERSOLL RAND
P185WJD
3,000 3,500
20-1973
INGERSOLL RAND
P185WJD
2,929 3,429
20-2033
INGERSOLL RAND
P185WJD
2,472 2,972
20-2215
Ingersoll-Rand
P185WJD
2,410 2,910
20-2014
INGERSOLL RAND
P185WJD
2,001 2,501
20-2032
INGERSOLL RAND
P185WJD
1,799 2,299
20-2237
Ingersoll-Rand
P185WJD
1,664 2,164
20-2236
Ingersoll-Rand
P185WJD
1,454 1,954
20-2225
Ingersoll-Rand
P185WJD
989 1,489
20-2226
Ingersoll-Rand
P185WJD
911 1,411
375 CFM Air Compressor - Diesel
20-1888
SULLAIR
DPQ JD
5,653 6,153
20-2065 D
INGERSOLL RAND
P375WJD
2,806 3,306
400 CFM Air Compressor (High Pressure)- Diesel
20-2124
INGERSOLL RAND
VHP400WCU
5,345 5,845
© CEMPCentral Inc. 2014.
Orange
Red
0.8 - 1.2 Target
More than 1.2 Target
Expected hours in the given number of years ahead
2
3
4
5
6
7
8
4,748
4,386
4,215
4,012
4,000
3,929
3,472
3,410
3,001
2,799
2,664
2,454
1,989
1,911
5,248
4,886
4,715
4,512
4,500
4,429
3,972
3,910
3,501
3,299
3,164
2,954
2,489
2,411
5,748
5,386
5,215
5,012
5,000
4,929
4,472
4,410
4,001
3,799
3,664
3,454
2,989
2,911
6,248
5,886
5,715
5,512
5,500
5,429
4,972
4,910
4,501
4,299
4,164
3,954
3,489
3,411
6,748
6,386
6,215
6,012
6,000
5,929
5,472
5,410
5,001
4,799
4,664
4,454
3,989
3,911
7,248
6,886
6,715
6,512
6,500
6,429
5,972
5,910
5,501
5,299
5,164
4,954
4,489
4,411
7,748
7,386
7,215
7,012
7,000
6,929
6,472
6,410
6,001
5,799
5,664
5,454
4,989
4,911
6,653
3,806
7,153
4,306
7,653
4,806
8,153
5,306
8,653
5,806
9,153
6,306
9,653
6,806
6,345
6,845
7,345
7,845
8,345
8,845
9,345
29
© CEMPCentral Inc.
3. Age management
Age benchmarks are critical. There must be a formal process of
defining and measuring where we are relative to fleet average age.
It is a three step process
1.
Establish your benchmark ages
2.
Collect your actuals
3.
Produce actionable information
16,000
Age
18,000
20,000
22,000
Hours in Inventory
© CEMPCentral Inc.
3. Age management
Hours in inventory ‐ Five units ‐ Rate class 22‐3
60,000
Busy year
40,000
20,000
Quiet year
‐
Buy one
Rebuild one
Buy two
(20,000)
Rebuild one
(40,000)
Date
Living off the new fleet
© CEMPCentral Inc. 2014.
Maintaining the fleet
30
© CEMPCentral Inc.
3. Age management
Enter the Burnolator
Current Hours
Unit #
Worked
End Yr 1 "Hours"
1st Year
In stock
Action
"Worked"
In stock
1
13,000
0
R
1,000
11,000
2
12,000
0
B
6,000
6,000
3
9,000
3,000
11,000
1,000
4
8,000
4,000
10,000
2,000
5
6,000
6,000
8,000
4,000
6
9,000
3,000
V
6,000
6,000
7
7,500
4,500
9,500
2,500
8
8,000
4,000
V
5,000
7,000
9
7,000
5,000
9,000
3,000
10
3,000
9,000
5,000
7,000
11
2,000
10,000
4,000
8,000
12
1,000
11,000
3,000
Total hours in stock
59,500
Average Hours in stock
9,000
66,500
4,958
5,542
Replacements
$150,000
Capitalized rebuilds & renovations $210,000
Total cost
$360,000
© CEMPCentral Inc.
3. Age management
Enter the Burnolator
Annual Spending and Hours in Stock
12,000
8,000
5,000
3,500
2,500
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2006
Total for Five Year Plan
Replacements
Capitalized rebuilds & renovns
Expensed renovations
Total cost
Cost per hour
Ave Ave Hours in Stock
Ave Stock
$1,000,000
$900,000
$800,000
$700,000
$12.50
$11.25 $600,000
$12.00 $500,000
$14.29 $400,000
$14.00 $300,000
$200,000
$100,000
$0
Annual Spending
6
2,000
12,000
12
$150,000
$90,000
$60,000
$50,000
$35,000
2007
2008
2009
Hours per Unit in
Stock
Spend
Expected life, yrs
Hours per year
Expected hours
# units in fleet
Replace, R
Capitalized Rebuild, B
Capitalized Renovate, V
Expensed Heavy, H
Expensed Light, L
$450,000
$1,170,000
$0
$1,620,000
$13.50
6,000
2010
Year
2006
End 2005 Hours
End 2006 "Hours"
Action "Worked" In stock
Unit #
Worked In stock
1
13,000
0
R
1,000
11,000
2
12,000
0
R
1,000
11,000
3
9,000
3,000
11,000
1,000
4
8,000
4,000
10,000
2,000
5
6,000
6,000
8,000
4,000
6
9,000
3,000
V
6,000
6,000
7
7,500
4,500
9,500
2,500
8
8,000
4,000
V
5,000
7,000
9
7,000
5,000
9,000
3,000
10
3,000
9,000
5,000
7,000
11
2,000
10,000
4,000
8,000
12
1,000
11,000
3,000
9,000
59,500
71,500
Total hours in stock
4,958
5,958
Ave Hours in stock
Replacements $300,000
Capitalized rebuilds & renovations $120,000
Expensed renovations
$0
Total cost $420,000
© CEMPCentral Inc. 2014.
2007
Action
B
B
B
$0
$270,000
$0
$270,000
End 2007 "Hours"
"Worked" In stock
3,000
9,000
3,000
9,000
5,000
7,000
4,000
8,000
10,000
2,000
8,000
4,000
3,500
8,500
7,000
5,000
11,000
1,000
7,000
5,000
6,000
6,000
5,000
7,000
71,500
5,958
2008
Action
B
B
B
$0
$270,000
$0
$270,000
End 2008 "Hours"
"Worked" In stock
5,000
7,000
5,000
7,000
7,000
5,000
6,000
6,000
4,000
8,000
2,000
10,000
5,500
6,500
9,000
3,000
5,000
7,000
9,000
3,000
8,000
4,000
7,000
5,000
71,500
5,958
2009
Action
V
B
B
$0
$240,000
$0
$240,000
End 2009 "Hours"
"Worked" In stock
7,000
5,000
7,000
5,000
9,000
3,000
8,000
4,000
6,000
6,000
4,000
8,000
7,500
4,500
6,000
6,000
7,000
5,000
3,000
9,000
2,000
10,000
9,000
3,000
68,500
5,708
2010
Action
B
B
R
B
End 2010 "Hours"
"Worked" In stock
9,000
3,000
9,000
3,000
3,000
9,000
2,000
10,000
8,000
4,000
6,000
6,000
1,000
11,000
8,000
4,000
9,000
3,000
5,000
7,000
4,000
8,000
3,000
9,000
77,000
6,417
$150,000
$270,000
$0
$420,000
31
© CEMPCentral Inc.
3. Age management
(Burnolator)
Annual Spending and Hours in Stock
Spend
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2006
2007
2008
2009
Annual Spending
Ave Stock
Hours per Unit in Stock
Annual Spending
Spend
Ave Stock
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
2010
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2006
2007
Year
2008
2009
Hours per Unit in Stock
Annual Spending and Hours in Stock
2010
Year
And many more
Annual Spending and Hours in Stock
Annual Spending and Hours in Stock
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2006
2007
2008
2009
Annual Spending
Spend
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Ave Stock
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
2010
Year
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2006
2007
2008
2009
Hours per Unit in Stock
Ave Stock
Hours per Unit in Stock
Annual Spending
Spend
2010
Year
© CEMPCentral Inc.
64
A Philosophy of Equipment Costing
4. It is not as complicated as it looks.
Understand the bumper stickers
© CEMPCentral Inc. 2014.
32
© CEMPCentral Inc.
4. It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
Capitalizing repairs.
You do reduce
equipment costs by:
Repairing it right the
first time.
© CEMPCentral Inc.
4. It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
Changing the
depreciation
schedule.
© CEMPCentral Inc. 2014.
You do reduce
equipment costs by:
Selling at the right
time for the right
price.
33
© CEMPCentral Inc.
4. It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
Deferring
replacement.
You do reduce
equipment costs by:
Managing age.
© CEMPCentral Inc.
4. It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
Underreporting
hours worked.
© CEMPCentral Inc. 2014.
You do reduce
equipment costs by:
Using reliable data
effectively.
34
© CEMPCentral Inc.
4. It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
Reducing the
internal rate.
You do reduce
equipment costs by:
Attacking the causes
of cost.
© CEMPCentral Inc.
70
A Philosophy of Equipment Costing
5. A picture is worth a million numbers.
Develop them, use them
© CEMPCentral Inc. 2014.
35
© CEMPCentral Inc.
5. A picture is worth a million numbers
Edward Tufte
© CEMPCentral Inc.
5. A picture is worth a million numbers
Anticipated maximum life for class
Anticipated annual utilization for class
6,000
500
Green
0.6 to 0.8 Target
Unit
Make
Model
Hours now
1
185 CFM Air Compressor - Diesel
20-1637 D
INGERSOLL RAND
P185WJD
3,748 4,248
20-2031
INGERSOLL RAND
P185WJD
3,386 3,886
20-2010
INGERSOLL RAND
P185WJD
3,215 3,715
20-1970
INGERSOLL RAND
P185WJD
3,012 3,512
20-2078 D
INGERSOLL RAND
P185WJD
3,000 3,500
20-1973
INGERSOLL RAND
P185WJD
2,929 3,429
20-2033
INGERSOLL RAND
P185WJD
2,472 2,972
20-2215
Ingersoll-Rand
P185WJD
2,410 2,910
20-2014
INGERSOLL RAND
P185WJD
2,001 2,501
20-2032
INGERSOLL RAND
P185WJD
1,799 2,299
20-2237
Ingersoll-Rand
P185WJD
1,664 2,164
20-2236
Ingersoll-Rand
P185WJD
1,454 1,954
20-2225
Ingersoll-Rand
P185WJD
989 1,489
20-2226
Ingersoll-Rand
P185WJD
911 1,411
375 CFM Air Compressor - Diesel
20-1888
SULLAIR
DPQ JD
5,653 6,153
20-2065 D
INGERSOLL RAND
P375WJD
2,806 3,306
400 CFM Air Compressor (High Pressure)- Diesel
20-2124
INGERSOLL RAND
VHP400WCU
5,345 5,845
© CEMPCentral Inc. 2014.
Orange
Red
0.8 - 1.2 Target
More than 1.2 Target
Expected hours in the given number of years ahead
2
3
4
5
6
7
8
4,748
4,386
4,215
4,012
4,000
3,929
3,472
3,410
3,001
2,799
2,664
2,454
1,989
1,911
5,248
4,886
4,715
4,512
4,500
4,429
3,972
3,910
3,501
3,299
3,164
2,954
2,489
2,411
5,748
5,386
5,215
5,012
5,000
4,929
4,472
4,410
4,001
3,799
3,664
3,454
2,989
2,911
6,248
5,886
5,715
5,512
5,500
5,429
4,972
4,910
4,501
4,299
4,164
3,954
3,489
3,411
6,748
6,386
6,215
6,012
6,000
5,929
5,472
5,410
5,001
4,799
4,664
4,454
3,989
3,911
7,248
6,886
6,715
6,512
6,500
6,429
5,972
5,910
5,501
5,299
5,164
4,954
4,489
4,411
7,748
7,386
7,215
7,012
7,000
6,929
6,472
6,410
6,001
5,799
5,664
5,454
4,989
4,911
6,653
3,806
7,153
4,306
7,653
4,806
8,153
5,306
8,653
5,806
9,153
6,306
9,653
6,806
6,345
6,845
7,345
7,845
8,345
8,845
9,345
36
© CEMPCentral Inc.
5. A picture is worth a million numbers
Hours in inventory ‐ Five units ‐ Rate class 22‐3
60,000
The replace
decision
depends on
current
inventory
and future
activity.
40,000
20,000
‐
(20,000)
(40,000)
Date
Future
Past
© CEMPCentral Inc.
5. A picture is worth a million numbers
Ford F150 milage travelled
Now
2 years time
250,000
Miles travelled
200,000
150,000
100,000
50,000
0
0
20
40
60
80
100
120
140
Number in the fleet
© CEMPCentral Inc. 2014.
37
© CEMPCentral Inc.
Repair and Maintenance Hours per Hour W orked
5. A picture is worth a million numbers
0.28
Labor Factor
0.26
0.24
0.22
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
96
rT
3'
ire
s
Lo
ad
Tr
en
er
s
ch
R
ol
Tr
le
uc
rs
ks
C
-D
om
um
pa
p
ct
or
s
-D
irt
D
oz
er
Ex
s
ca
va
to
Tr
rs
uc
ks
-F
A
ue
rt
W
ic
l
he
s
el
-V
ed
ol
vo
Ex
ca
Tr
va
uc
to
ks
rs
-T
ra
ct
or
s
B
ac
kh
oe
's
G
ra
de
rs
R
ub
be
sp
ha
Tr
lt
ac
k
D
ril
ls
Pa
ns
-A
C
om
pa
ct
or
s
B
ro
om
s
0.00
Fleet
© CEMPCentral Inc.
5. A picture is worth a million numbers
Mitchell Curve Category
Bell B30D - Discard Application
2009 Rate
Poly. (Bell B30D - Discard Application)
R 5,000,000
R 4,500,000
R 4,000,000
Cumulative Cost
R 3,500,000
y = 0.004x2 + 19.346x + 1,418,872.556
R² = 0.912
R 3,000,000
R 2,500,000
R 2,000,000
R 1,500,000
R 1,000,000
R 500,000
R0
Life (Hours)
© CEMPCentral Inc. 2014.
38
© CEMPCentral Inc.
5. A picture is worth a million numbers
Mitchell Curve Category
Bell2706 - Coal _(Machines now at Manganese site)
R 5,000,000
R 4,500,000
Cumulative Cost
R 4,000,000
R 3,500,000
R 3,000,000
y = 0.004x2 + 15.723x + 1,663,942.969
R² = 0.954
R 2,500,000
R 2,000,000
R 1,500,000
R 1,000,000
R 500,000
R0
Life (Hours)
© CEMPCentral Inc.
5. A picture is worth a million numbers
© CEMPCentral Inc. 2014.
39
© CEMPCentral Inc.
5. A picture is worth a million numbers
Fleet Utilization
60
50
40
% of fleet 30
reporting
Production
Support
20
On road
10
0
0 to 60 hrs
60 to 120 hrs 120 to 160 hrs Over 160 hrs
Hours worked in last 4 weeks
© CEMPCentral Inc.
5. A picture is worth a million numbers
© CEMPCentral Inc. 2014.
40
© CEMPCentral Inc.
5. A picture is worth a million numbers
$2,500,000
y = 0.5804x + 720830
R² = 0.7517
$2,000,000
y = 0.0944x + 625167
R² = 0.2742
y = 0.2226x
R² = 0.5837
$1,500,000
y = 0.1636x
R² = 0.5994
Cost
$1,000,000
y = 0.0999x + 95663
R² = 0.3358
Total cost
$500,000
Owning costs
Operating costs
$0
Fuel costs
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Equipment revenue
Overhead costs
P 159
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82
A Philosophy of Equipment Costing
1. Owning and operating costs have different DNA.
Manage each with the skill it deserves.
2. With cost, actions speak louder than budgets.
Produce actionable cost information
3. Age management is critical.
Know your sweet spot, manage it
4. It is not as complicated as it looks.
Understand the bumper stickers
5. A picture is worth a million numbers.
Develop them, use them
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© CEMPCentral Inc.
A Philosophy of Equipment Costing
83
Yes, I do have a philosophy.
And…
It is very simple.
What I want you to take home
Mike Vorster.
CEMPCENTRAL, Inc. [email protected]
www.cempcentral.com
© CEMPCentral Inc.
O&O costs have different DNA
84
Owning
Hourly owning cost
goes down with age.
It depends on the rate at which
residual market value
decreases and the number of
hours worked in a year.
Owning Cost
$18
$ per hour
$16
$14
$12
$10
$8
$6
5000
6000
7000
8000
9000
Hours Worked
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© CEMPCentral Inc.
O&O costs have different DNA
85
Operating
Hourly operating cost
goes up with age.
It depends on the rate at which
expenditure on repair parts and
labor increases as the machine
ages.
2
y = 0.0022x + 3.0292x
Cumulative Parts and Labor Cost
2
R = 0.9544
$500,000
$450,000
$400,000
Cumulative costs
$350,000
We must be able to define the
relationship between cost and
age and determine the rate at
which costs increase with age.
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Cumulative hours worked
© CEMPCentral Inc.
Actions speak louder than budgets
86
Define
Set budgets using
best available
information.
Act
Measure
Control risk.
Optimize the
future. Minimize
the downside.
Monitor and record
actual costs.
Calculate earned
values.
Predict
Highlight trends.
Forecast future
earning and
spending.
© CEMPCentral Inc. 2014.
Compare
Analyze variances.
Understand
reasons and
causes.
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© CEMPCentral Inc.
Actions speak louder than budgets
Manage by categories.
Cat Class Owning
Volume variance.
Buying, operation,
over application
or waste.
A1
A1
A1
A1
A1
A1
Age, operation or
over application.
Buying or waste.
C4
C4
C4
Operating
Repairs
Fuel
OHD
Total
1
1
1
2
2
3
A1
A2
A2
A2
A2
Constant
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
BAV
BAV
BAV
B AV
BAV
B A V
1
2
2
3
A2
1
1
1
C4
D7
D7
D7
D7
1
1
2
2
D7
BAV
Budget
Actual
Variance
BAV
Budget
Actual
Variance
BAV
B AV
BAV
B A V
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
Budget
Actual
Variance
© CEMPCentral Inc.
Actions speak louder than budgets
Use actionable information and understand variances.
When
someone
shouts
FIRE
know which
door to take.
© CEMPCentral Inc. 2014.
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© CEMPCentral Inc.
Age management
1. Establishing benchmark ages
Cost per hour - Life to Date
$70.00
$60.00
Intuition
Analysis
Cost per hour
$50.00
$40.00
Total
Operating
$30.00
Repairs
Owning
$20.00
$10.00
$0.00
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Hours Worked
It does not matter how you do it – you must know:
HOW LONG YOU PLAN TO KEEP IT
WHEN IT WILL BECOME PROGRESSIVLY MORE COSTLY
WHEN IT WILL BE DONE
P 109
© CEMPCentral Inc.
Age management
Hours in inventory ‐ Five units ‐ Rate class 22‐3
60,000
Busy year
40,000
20,000
Quiet year
‐
Buy one
Rebuild one
Buy two
(20,000)
Rebuild one
(40,000)
Date
Living off the new fleet
© CEMPCentral Inc. 2014.
Maintaining the fleet
45
© CEMPCentral Inc.
It is not as complicated as it looks
Understand the bumper stickers!
You do not reduce
equipment costs by:
You do reduce
equipment costs by:
Capitalizing repairs.
Changing the depreciation schedule.
Deferring replacement.
Underreporting the hours worked.
Reducing the internal rate.
© CEMPCentral Inc.
A picture is worth a million numbers
Edward Tufte
© CEMPCentral Inc. 2014.
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© CEMPCentral Inc.
A picture is worth a million numbers
Fleet Utilization
60
50
40
% of fleet 30
reporting
Production
Support
20
On road
10
0
0 to 60 hrs
60 to 120 hrs 120 to 160 hrs Over 160 hrs
Hours worked in last 4 weeks
© CEMPCentral Inc.
People often ask....
Owning cost
$ per hour to have the
machine in your fleet.
© CEMPCentral Inc. 2014.
Hours in inventory
Fleet average age relative
to “the sweet spot”.
Operating cost
$ per hour to put it to
work and keep it working.
47
© CEMPCentral Inc.
People often ask…..
Owning cost
Hours in inventory
Operating cost
Labor factor
Technology gradient
Red work orders
$ per hour to have the
machine in your fleet.
Labor hours spent on the
machine per operating hour.
© CEMPCentral Inc. 2014.
Fleet average age relative
to “the sweet spot”.
Are new machines safer,
more reliable and more productive.
$ per hour to put it to
work and keep it working.
Number of “red work orders”
per operating hour.
48

(Microsoft PowerPoint