Lifecycle Cost Management and Capital Efficiency
It’s a challenging time in mining with reduced commodity prices and it is critical in this market to ensure that capital spend is optimised. This means that it is essential to ensure that any capital decision will actually deliver the best business bottom line outcomes.
As a machine age, more of its components need replacement. This can lead to greater cost and more downtime. The simple solution is to dispose of the machine before this is required, avoid the costs of maintenance and purchase a new unit. But what about the cost of capital, what about the changing costs of repair and other options? For good capital efficiency, the decision is not that simple. The options can be numerous including replacement, hire, and various repair options.
Bluefield is often asked, “When is the best time to replace a machine?”
The best time to replace a machine is when the economics of replacement provide a better business outcome compared to the economics and risks of keeping the machine and repairing it.
At this point, it is important to dispel one of the common mistakes. Sometimes companies think it is possible to set a policy for machine replacement at the start of its life or there is one point for a machine that is the best economic time for replacement in all cases. Unfortunately, it is not that simple due to the variability of the inputs to the economic decision. Some of the variables include:
- The capital cost of new equipment,
- Cost of used machines,
- Hire machine rates,
- Maintenance labour cost,
- Salvage value,
- New technology advances that improve productivity or reduce operating costs
These can all vary depending on the market. As we have seen over the past few years in mining these inputs have all changed markedly and when management asks for capital to replace equipment in line with the life cycle policy the answer s something like, "I don't care what the machine lifecycle policy says, there is no capital in this market or it needs to be justified again". For this reason, the equipment life is something that needs to be assessed, as part of the business planning process, at least annually. It is also something that must align with the actual planning system.
So how do you evaluate the best economic alternative?
Bluefield prefers to use an Equivalent Unit Cost (EUC). The EUC method represents a simple effective way to compare a range of alternative solutions, even for machines with different lives, costs, and capacities.
In developing the EUC for specific options one of the most challenging tasks is developing the life cycle costs going forward and assessing the likely machine availability performance. The labour costs can be estimated with a high level of certainty and the scheduled downtime can be set and followed. Some of the variables in these life cycle estimates are unscheduled downtime, major component life, major component condition, machine structural condition. When these inputs are estimated in the model, it is also important to document what tasks are necessary to achieve these outcomes.
The assumptions of future availability and reliability need to have a robust case behind them. It is not sufficient to just assume that an older machine loses availability as this is not necessarily the case and sometimes new machines come with greater availability risks than tried and true technology.
Once the life cycle forecasts for each of the options has been modeled an EUC analysis of the options can be completed to determine the best option.
For support machines or fleets where there is excess capacity, the loss of the machine may not lead to a loss of production. In these cases, we build the EUC using hours as the unit i.e. Cost/hour. It is sometimes difficult to justify replacement in these situations as the cost of repair usually represents the best economic outcome. In these cases, the risks associated with continued operation also need to be considered. The risks include a major structural failure which could present a hazard or put the machine out for a period of time where it causes a production impact.
Bluefield has assisted clients to optimise their capital expenditure and significantly improve capital efficiency, by not only developing the real lifecycle costs and assessing options for specific projects but by also assisting clients to develop the necessary internal processes and discipline as part of the business planning cycle and long-term planning processes. This work has delivered many millions of dollars in savings for our clients.