Cost analysis in procurement of industrial equipment fantasy: Not all the false

A K M Anwarul Islam, FCMA

Answer to a quick and extremely specific question about the real procurement cost of industrial equipment is not an easy job. To explore the answer to any question what is the cost of capital equipment or machineries has been attempted to navigate on-the-spot answer to visualize the aggregated costs in a single unit. Most commonly, analysis of the life cycle cost is the essential device to ensure achieving precious performance results for both the operational and financial management over the years of activity.

Life-cycle cost refers to the whole life cost and also very commonly known as “womb to tomb” costs. Calculation of total cost in accounting may be relatively simple than ascertainment of life cycle costs that is starting from acquiring to active life. Considering the environmental and social costs are more difficult to quantify and assign in numbers. Hence the technical and financial evaluation of equipment has become a crucial issue for the modern management. At the time of procurement planning or acquisitioning of capital assets (both the tangible and intangible) the investor must assess the life cycle costs to arrive at real cost outlay vis-à-vis inflow benefits.

General scope of cost includes only the disbursement of design, construction, installation, acquisition and handover costs. Only considering the currently visible aggregated costs outflow and inflow benefits of the industrial capital equipment at the time of procurement may lead the management to a faux pas. To ensure the efficiency of the assets management and to achieve the organizational goal at the optimal, life cycle cost analysis in evaluation process will interpret and solve tricky inquiry.

The scope of life cycle cost analysis assists to aware of costs over the full life span of operations and maintenance, fuel consumption, major and minor repairs, renewal and rehabilitation, insurance and wear items, depreciation, cost of finance, replacement or disposal, residual or salvage value, environmental hazards, social and legal enforceable costs. The system of life cycle cost analysis and the factors of evaluation will definitely vary in accordance with the requirement of industry to industry, equipment to equipment and investment to investment.

How to apply life cycle cost analysis tools in evaluation of procurement offer and to conglomerate the variable factors to elicit the visible result may be enumerated here by assuming some key points of a generic vehicle:

Procurement price:         Purchase price of the equipment including any options, commissioning cost and delivery to site (i.e. BDT 50,00,000.00)

Equipment life in Hours: The life of equipment in operating hours after which the equipment will be sold or scrapped (28,000 Hours)

Residual value(%):           The sale or scrap value as a percentage of purchase at the end of equipment’s life (15%).

Interest rate(%):              The annual interest rate of the investment or cost of capital (12%)

Annual usage:   The annual usage of the asset in hours (4000)

Insurance (%):   The annual insurance cost as a percentage of purchase price (1.10%)

Annual major cost:          The annual cost of major repairs to the equipment (BDT 145,000.00)

Annual servicing cost:    The annual cost of servicing the equipment (BDT 80,000.00)

Labor to Hours Ratio:The number of labor hours required to maintain the equipment as a ratio to operating hour (0.35).

Labor rate per hour:       The hourly cost of maintenance labor (BDT 60.00)

Unassigned cost ratio: The cost of unassigned/ miscellaneous costs as % of maintenance costs (15%).

Fuel cost (litre):                The costs of fuel per litre (BDT 80.00)

Fuel consumption (L/hr): The hourly fuel consumption (30)

Cost of tyres/tracks:       The required brand or flexible cost of tyres/tracks (BDT 38,000.00)

Life of tyres/tracks:         The life of tyres or tracks (4,500)

Cost of bucket/blade/body: The cost to overhaul the bucket, blade or body (55,000)

Life of bucket/blade/body: The number of hours between overhauls of bucket, blade or body(20,000).

On the basis of above assumptions of vehicle the nearest hourly cost may be calculated to compare  the same factors of other similar type of vehicle :

Ownership cost per hour (BDT):                251.79 Depreciation 151.79 Interest         86.25 Insurance 13.75

Maintenance cost per hour (BDT):           85.69 Major components               36.25 Service and repair 20.00 Labor 21.00 Unassigned cost     8.44

Consumables cost per hour (BDT):           2411.19 Fuel 2400.00 Tyres/Tracks 8.44 Bucket/Blade/Body 2.75 Total cost per hour for 7 years period (BDT) 2748.67

In quest of calculating the concrete costs data of the abovementioned vehicle for both the intrinsic and stated cost of many qualitative and quantitative factors will advise evaluating the total comparable cost of different power options and cost-effective system designs over the life of equipment. This style of life cycle cost analysis process will describe the key-data analysis in detail to assess the best possible alternatives to have the economic justification and long-term operational efficiency.

Comparative analysis of life cycle cost will assist to arrive at prudent decision rather than traditional evaluation of unit and total cost. Life cycle cost analysis will protect the sustainable interest of organization in broader sense by considering not only the simple present disbursable cost and payback analysis but also taking many other visible and invisible long term financing and investment factors. There is an adage of renowned financial analyst John Ruston: “It’s unwise to pay too much, but it’s foolish to spend too little” – this is the principle of life cycle cost analysis.

To enhance the organizational efficiency the quality is the prime theme and quality has no compromise or alternative and it’s boundless. Life cycle cost analysis does not mean the lowest cost selection recommendation and it reveals the investment efficiency to watch over the market share competitiveness and managing of conventional risk factors in a rational way, i.e. the supply-chain management techniques and vision of quality management. Hence the thoughtful settlement of cost and quality within a conflict situation in procurement/investment decision is a challenge to the management to resolve.

The most invaluable outcome of life cycle cost analysis may be searched out when it is conducted by the joint collaboration of expert financial analyst, cost analyst and technical experts of the relevant field. To guarantee uninterrupted operation and to achieve the ultimate goal of the organization the life cycle cost analysis is the most practical tool to validate the strategic decision in all sorts of procurement of industrial capital equipment.

> <pw�s=�1b 0e >Reigning all through the political horizon, in his personal home works, Napoleon was simple and never indulged in any excess, except, excess of works. To ride 100 miles in the course of morning and evening was not an extraordinary thing for him.


But to the end, the glory of magnificent career of the emperor of war, the great Emperor of France, General Napoleon Bonaparte in his short lived life term went to an inevitable end.

Some of his ministers were treacherous and intrigued against him. Talluyrand intrigued with the Tsar of Russia, Founche intrigued in England. In Bangladesh, Bangabandu Sk. Mujibur Rahman, father of the Nation, became the victim of treachery in the same manner, by some of his most reliable persons that led to the tragic end of his life along with the most of his family members, leaving only two survivals. Sk, Hasina and Sk. Rehena, daughters of Bangabandhu, who were at abroad on personal tour earlier, days before that earlier hours of August 15, 1975, the hour of ever brutal killings in history since the inception of civilization. Sk. Hasina, the eldest issue of Banglabandhu, has become thereafter, the President of Bangladesh Awami League by People’s verdict and to her credit, has been elected the hon’ble Prime Minister of Bangladesh (for two terms, the time of writing the article). Under the dynamic and prudent leadership of Prime Minister Sk. Hasina her democratic Government has arranged successively legal judgment for the treacherous and the killers of the father of the nation and the killers of his family members an the national leaders too.

Notably here to note, Napoleon caught “the men” in their treacherous fault but merely upbraided them and even allowed them to continue as his ministers, and so was Napoleon, as he was named -the man of destiny.