July 2005

Equipment Justification: Getting What You Need, Not What You Want

Here's an eight-point plan for aiding the machine purchase decision process.

By Tom Dossenbach

Eight Questions to Ponder in Evaluating an Equipment Purchase

Is this a priority issue for the company and its customers?

Is solving this issue consistent with company goals and objectives?

Is new equipment the best way to solve this challenge?

What are the benefits of the new equipment?

What are the costs associated with this equipment?

Which specific equipment and supplier is best?

Is it good economics to buy this equipment?

Should we buy now or find another solution?

There comes a time when every company is faced with deciding whether or not it can justify acquiring a new piece of machinery.

This month, I offer a pragmatic approach to guide readers through the cost-

justification process. I have broken the process of new equipment justification into eight steps/questions that are essential to consider. These questions are highlighted in the accompanying box and explained below.

Prioritize Needs

One of the first things to remember is that every company has limited resources, though some carry them in larger buckets than others. Even the industry's leading players - the ones who have the biggest buckets - must manage their resources wisely. Equipment costs money and this resource must always be used to yield maximum benefits.

Just as your family puts many different demands on your personal limited resources, a company has many issues that require time, money or both to solve. Choosing what to do first is a key decision. In times of crisis, the decision can be clear, but many times the priority is not so easy to discern.

If someone came to you and said, "We need a new sander," your immediate response would probably be, "Why?" It behooves us all to examine an issue carefully before linking it to the need for new equipment. As the title of this article suggests, buying or leasing new equipment is not a matter of what you or someone else wants, but what the company needs. Thus, as simple as it sounds, identifying and prioritizing needs for improvements of all kinds within the company should be the starting point.

Match Company Goals

All proposals for capital expenditures (or any change for that matter) should be consistent with the short- and long-term goals and objectives of the company. These company strategies form the framework for all decisionmaking that occurs during the course of business. In the past, I have written about the importance of setting goals. Without them, serious miscues are more likely to occur; acquiring the wrong equipment is one of them.

Have you ever gone to an auction at a plant that closed and found yourself salivating at the opportunity to bid dimes on the dollar for a new piece of machinery? Did you buy a machine because it fit your plans or because it was a bargain? If your company does not have a plan for the next three years, do not consider new equipment until you develop a strategy.

Examine Alternative Solutions

Once you have prioritized the needs that are consistent with company goals and objectives, you need to examine and evaluate alternative solutions for meeting them. For example, if you have an old profile shaper that needs new bearings and slides, it may make more sense to replace the parts rather than purchase a new profile sander or a CNC router with sanding capability. Often, a temporary solution is in order until the time is right to replace the machine outright.

On the other hand, some companies are so reluctant to update their equipment and machinery that machines are constantly being patched as part of a misguided "get-by" strategy. It is unfortunate but true that many small companies do this without really looking at the alternatives and comparing short- and long-term costs and consequences. (Remember, at this point in the process, I assume the company knows where it wants to be three years down the road.)

One of the alternatives that can surface today is buying used machinery, including older-model machines that are in good shape. This may be a viable solution for a company looking for ways to increase throughput and shorten lead times for their customers as part of its three-year goals and objectives.

We in the furniture industry used to think that a machine should be running all the time, cranking out parts - any parts - as long as they were going to be needed soon. Thus, we built work-in-process inventories that clogged our plants.

Now, we think lean and consider the advantages of performing as much work as possible in one handling. This helps explain the popularity of machining centers, CNC routers, point-to-point machines, etc. This can also be a good justification for work cells using a group of simple, older machines clustered so that one operator can perform several operations while handling a part.

What Are the Benefits?

Assuming you have decided that a new machine is the likely solution to your priority problem, you need to carefully examine the benefits of all the possible machine solutions. This is a key step that will lead you to verify prior conclusions, modify them or point to a different solution altogether.

There are many considerations, including: capacity compared to requirements, improved yield, inventory reduction, reduced floor space, reduction of changeover time, scrap, labor utilization, indirect labor requirements, quality and accuracy, waste removal and worker safety.

All benefits of all the machines under consideration must be analyzed in detail and compared - even if this had been done to a degree in the previous step. There will likely be several alternatives to consider when shopping for a new machine. Now is the time to look closely at the benefits of each. Nothing beats seeing one in action and talking to other end users to find out about the real benefits and any shortcomings.

What Are the Costs?

During the previous steps, the costs of the alternative solutions were looked at in a general way. Now, it is time to look at details and get formal proposals. In order to receive meaningful quotations, you will want to draw up specifications for the machine requirements that are clear and complete. Make sure that a thorough analysis of the quotes is made so that you are comparing "apples to apples." Make allowances for any of your requirements that will not be met.

The machinery cost is just one non-recurring cost that must be considered in the justification process. There are other costs that occur only once during the life of the equipment or system you are going to obtain. Examples include the freight of shipping the new equipment; removal and disposal of old equipment; taxes; construction permits; and installation costs, including labor, utilities, remodeling, re-wiring and training.

The next set of costs that must be considered are recurring costs. These include operating labor; scrap; maintenance; utilities; and fixed plant costs such as insurance, taxes, waste disposal and depreciation. Remember that recurring costs will go up over time as inflation takes its toll.

Which Supplier to Choose?

During the justification process, you will talk with various machinery salesmen about your requirements and seek their advice for potential solutions. Their response is one of the most important elements - you must discern between those with a true desire to meet your needs and come up with the best solution and those who are more bent on just making a sale.

Hopefully, you subscribe to the idea that your customers come first. Is this the feeling you get from each of the manufacturer and supplier representatives?

Training and service after the sale is absolutely essential. Ideally, you want to partner with a machinery manufacturer or distributor that inventories spare parts and has a good record of rapid response to machinery failures.

What's the Payback?

As I stated at the beginning, every company has limited resources. When a company buys a machine, it essentially cuts into its financial resources. The trick is to invest in machines that will help refill the money bucket.

I also indicated that I would not get into a lot of mathematical details about cost justification. Most companies have an idea of how quickly they want to refill the bucket - a standard payback of two, three, or maybe four years. While this is by no means the only way to justify an equipment purchase, it is usually a good idea to have some idea of a potential payback schedule before you decide to get the accountants involved. Basically, you analyze all of the potential savings the company will incur by acquiring the new equipment. You can do this by taking current costs and comparing them with the realistic cost expectations using the new equipment. Remember to include non-value-added costs, such as quality (rework, customer dissatisfaction, etc.), maintenance, changeovers and inventory in addition to actual process costs.

In addition, remember that money spent on a new machine could have been used to earn a return elsewhere in the plant. Be sure to consider that in your deliberations.

Even though the accountants may not agree, do not forget to include the fact that this equipment will further the intrinsic goals and objectives of the company - such as shorter lead times.

Go or No Go Check

The last step after accounting submits its input is to review the whole process for any flaws. Make sure that exaggerations were not made in order to justify an expenditure. If it does not feel right, shelve the idea for now or look to address the issue in another way. If everything checks out, go for it!

                                                                                                                                                                                           

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