How to cut your costs by seeing the bigger picture
The life cycle cost (LCC) approach requires a radical restructuring of contracting and procurement practice. Bob Went, group consultant for ITT Water & Wastewater, comments on why it is essential for all pump installations
It was in my previous role, as principal mechanical engineer for a leading utilities supplier, that I first got involved with life cycle cost (LCC), because we were beginning to suffer problems with pumping installations that were procured on a least-cost basis. At that time, contracts and procurement processes generally focused on lowest purchase price. We would issue a technical specification and the product meeting that specification at the lowest cost would be awarded the contract.
Another factor that led to LCC becoming increasingly important was the move towards value engineering about 15-20 years ago. The drive to develop cheaper ways of manufacturing products resulted in pressure on the manufacturer to lower pump capital costs.
Purchasers put very little pressure on contractors to take into account factors such as reliability, energy consumption and blockages, which lead to selection of product on price alone. This resulted in many installations being expensive to operate and maintain, plus huge issues with reliability and downtime.
What does LCC mean?
LCC takes into account capital costs, electricity costs, maintenance (parts and labour) costs and overhaul costs over the life of the pump. In order for a business to apply LCC and look further than the capital cost of the product, it needs its departments to work together and adopt a holistic approach.
For example, LCC will not work if the capital projects department cannot spend slightly more to enable the operations department to save much more on their maintenance and energy costs. It is also important for third-party contractors to be contractually bound to use the LCC approach, in order that the system is followed in every aspect of the business.
For LCC to be at the heart of a specification, it is vital that companies adopt a model to form an easy and accurate decision. Factors include capital cost, energy cost and increase in energy cost due to wear, maintenance and repair costs, load factor, location of installation from maintenance base and access issues.
The output from such a model can be presented in pie chart or graphical formats, to give a clear indication of the key cost contributors to the life of the pump. The wmodel reveals that it is not necessarily right to buy the least expensive pump. But, by investing slightly more in the pump, it is possible to significantly reduce energy costs – a vital factor in the reduction of a company’s carbon footprint.
There is currently no standard approach to procurement using LCC in the UK. Going forward, the development of an appropriate model is an essential requirement to the pump industry – with the reliability of the pump, revealed in blockages and downtime, factored into the calculation.
Reliability is a key requirement for a product with a long asset life. Adopting the LCC approach in procurement will ensure that a reliable product with minimal planned and reactive maintenance requirements will be purchased. This approach will reduce costs significantly.