How to optimise Total Costs of Ownership

Total Cost of Ownership (TCO) is not a new concept to the quarrying and extractive industries, or to the broader resources and infrastructure sector. At the most fundamental level, it is about how much a machine costs versus its profitability ? in effect, the purchase price of an asset plus the additional costs of operation in the life of that asset.

In terms of construction machinery – eg an excavator, wheel loader, dump truck, dozer or tracked mobile plant – TCO is about buyers optimising between the productivity and the cost of their plant and equipment.

The three key elements of TCO are as follows:
1. Production per hour (in tonnes per hour or cubic metres per hour – tph or m3/h), ie the output of a single machine working alone or a fleet of machines working together. Equipment capacity, configuration, loader-hauler match, material to be moved, the work schedule, haul distance and fleet size are important factors in the production of a machine fleet.

2. Costs per hour (dollars per hour – $/h), which is calculated on ownership and operating components. The ownership cost relates to the purchase and running of a vehicle in a fleet, eg the purchase price, taxes, financing costs, insurance and the residual value at the time of sale. The operating cost is based on factors like fuel consumption, preventative maintenance, repair, tyres and ground engaging tools (GET). As with all machines, a major part of the ownership cost is the depreciation of the vehicle while for the operating cost it is the increase in age, physical life and eventual replacement of the moving and load bearing components. Combined, the ownership and operating costs determine the economic life ? or the lowest total cost per hour ? of the machine and can assist in equipment procurement and disposal. They also enable the fleet management to decide the optimal duration of keeping the machine in the fleet.

3. The unit cost (dollars per tonne or dollars per cubic metre – $/tonne or $/m3), which allows for the comparison of dissimilar units, for example, the performance of a small loader with small trucks versus a big loader and big trucks. To calculate unit cost, one divides the cost per hour value for a machine or fleet by the corresponding production per hour, eg:

Organisations employ TCO in different ways. In some instances, TCO may refer only to the cost per hour, particularly if a machine is not involved in production and is merely a utility. In cases where the equipment is involved in production, the unit cost will apply.

When calculating TCO in relation to a load and haul fleet, the four key considerations for quarry operators and aggregate producers are as follows:
1. What the best quality machines are to buy.
2. Who can provide the finance for the project.
3. Who can service and maintain the fleet over time.
4. When it is the right time to sell machines and realise their residual value.

In effect, it is not enough now for quarry operators to think about what they hope to gain in the short term from their equipment purchases. They are now being encouraged to think about the full economic life of that asset ? in effect, from the metaphorical cradle to the grave.

Various suppliers of construction equipment to the quarrying industry worldwide ? such as Volvo, Caterpillar and Komatsu ? offer financial, aftermarket and training programmes that advise quarry operators and aggregate producers of the TCO philosophy. Indeed, these suppliers can cover all four of these considerations in the TCO cycle ? sparing the quarry operator the need to purchase a diverse and perhaps overpowered load and haul fleet, to rely on financing from banks and other lending institutions for the capital borrowings, to appoint a non-genuine parts supplier to tend to maintenance, service and components requests, and to then debate after several years if it still has well maintained machines or whether they should be sold or put out to pasture.

A construction equipment supplier can advise the quarry operator what the best machines are to buy, provide capital investment through its financial arm, provide customer support agreements for service and maintenance, and provide fleet management systems and software tools that can analyse a machine?s production and performance, including information on fuel consumption, hours worked, fault detection, diagnostics and prognostics, and when it is due for service. Caterpillar?s Vital Information Management System supervisor software, Komatsu?s Komtrax, Hyundai?s Hi-Mate and Volvo Construction Equipment?s Machine Tracking Information System (MATRIS) and CareTrack telematics systems all play a part in determining the high residual value of the equipment. A machine with a comprehensive service history will generally secure a higher price than a machine whose history and progress have not been adequately recorded.

David Alstr?m, the manager of Volvo Construction Equipment?s Product Management division at its head office in Sweden, says that the application of TCO can play an important part in the range and clout of a load and haul fleet. ?The industry is starting to question the size of equipment,? he explained. ?They can see that they can downsize because a machine today is more productive, compared to its equivalent 10 or 15 years ago. You can make savings on a smaller, streamlined fleet. TCO is about targeting your outward needs rather than buying out of habit or previous size experience without analysis prior to the purchase.

?Quarry site managers and operators will not necessarily complain about having extra capacity in their fleet. It is like having a really large engine in your car, it?s nice from time to time, but you don?t really need it. It is the same with TCO if you look at the actual needs of production. In downsizing, site managers and operators will need to streamline their operation and work it a little bit harder, but they will still meet the needed output with smaller machines and with a smaller investment.?

He adds there is little benefit to having an overpowered, oversized load and haul fleet. ?If you have equipment that is too large for one task, you will push up idling time and lower the utilisation of your machinery,? he asserts. ?This has a great impact on your bottom line because of what it costs to extract one form of material. If you have two large loading units compared to the needed output, one machine will end up being idle the full shift.?

The first step in the TCO cycle is deciding what to buy. An equipment supplier can aid in that process by evaluating what the needs of the quarry operator are with regards to their load and haul fleet and the environmental factors that the fleet will encounter on-site.

David Alstr?m has worked with customers worldwide on identifying the best machines for their load and haul fleet using Site Simulation, a software tool Volvo has developed to help its users get the most from their equipment. The programme can be used to establish productivity and costs as well as provide an overview of operations that can be used to analyse a project and lead to fleet, utilisation and production suggestions for the most efficient solution.

Site Simulation has the capacity to determine the optimum fleet for a particular task, to analyse a current fleet, to compare performances and costs, and to plan fleet enlargements. It can also simulate specific tasks, such as load and haul applications with excavators and haulers or load and carry jobs with wheel loaders. For these simulations, the software will account for the key parameters that the customer must know about the project, eg material density, haul road information, cost data, etc. Once the parameters are entered into the programme, Site Simulation will then provide a complete productivity analysis, including figures for hourly production, fuel consumption, cycle times (including idling and travel) and other key data. Reports can be printed to aid the analysis and the software also features animations that visualise the operation and provide further analysis.

In a practical example, Volvo ran a Site Simulation analysis for a leading European material supplier that specialises in clay extraction. The analysis focused primarily on the customer?s haul road requirements and fleet selection. Volvo concluded from the haul road analysis that, with the placement of concrete pads at areas of very soft ground and consequential high rolling resistance, there would be a fuel saving of 20 per cent. It also concluded that the organisation?s preference for a fleet of 30 tonne articulated dump trucks was too ambitious; it deduced that half the fleet could be 25 tonnes and still meet the expected production targets. The upshot was that the Site Simulation analysis helped the material supplier make critical decisions on road building and invest less on capital equipment, but without impacting on its production targets.

?In the background data of the haul road aspects of this project, we considered both rolling resistance and ground structure,? David Alstr?m elaborated. ?The rolling resistance is key. When you operate machines on soft ground, the rolling resistance has a great impact, especially on fuel consumption because the needed input to move the machine has a direct relation to how much fuel you burn. The customer knows, of course, that big machines need a lot of fuel but it?s difficult without the help of a manufacturer to extract that data from the machinery and actually analyse how much you will save. Without the Site Simulation software, it would not have been possible for the customer to understand the benefits of fuel consumption and travel time if we had not been able to model the impact of creating concrete pads on their haul roads and could not show it was profitable for them to do it. By doing this analysis we could show a framework that was profitable or otherwise.?

Once the quarry operator has worked out with the equipment supplier what is the most suitable machinery for its fleet and how it can improve its operations to incorporate those acquisitions, attention then turns to the financing. Banks and leasing companies are not generally recommended as a finance option because they fail to understand the seasonal and cyclical characteristics of the resources and infrastructure industries. The repayments are often poorly matched to the money the machine generates, resulting in cash flow problems for the owner. The advantage of opting for the financial arm of an equipment supplier (eg Volvo Financial Services, Komatsu Corporate Finance, Caterpillar Financial Services, Hyundai Equipment Finance) means that the supplier understands its own equipment inside out and how it operates in the real world. As a result, appropriate finance packages can be tailored to different requirements, including the option of variable payments in less active periods.

The financial arm of the equipment supplier would also not necessarily advocate the hire of a machine or fleet of machines by a customer. This is largely because the decision to hire is determined by the size of the work backlog and the rental rate including the number of hours. Hire is considered a short term solution when there is uncertainty about the workload, eg if there is a six month work backlog, it would not be prudent to buy a piece of equipment.

The next step in the TCO process is aftermarket service and maintenance. Again, suppliers will encourage their customers to enter into customer support agreements. This is on the premise that again the supplier knows the workings of its equipment intimately and can provide genuine spares and components in the replacement of consumables. They will also contend that preventative maintenance is an important part of the TCO calculation, particularly in relation to reduced downtime and materials handling. A poorly maintained machine will deliver sub-standard performance and offer a lower residual value at resale. However, by utilising the supplier?s genuine parts, the customer will ensure the best performance and protection of the equipment. It is all too tempting for customers to make false economies by using non-genuine spares. When consumables exceed their recommended life, productivity suffers. Not only will fuel consumption rise and performance drop but there may also be premature failure of major components.

Volvo Construction Equipment has introduced a four level system of customer service agreements: gold, silver, blue and white. This enables quarry operators to choose a maintenance programme that will be flexible with regards to utilisation, application and working environment, amongst other factors. Blue agreements, which are the most popular amongst Volvo?s customers, help to maximise a machine?s productivity and uptime. It can include trained engineers carrying out maintenance with the right tools and genuine parts, while the silver agreement may include machine software updates and MATRIS analysis. The MATRIS and CareTrack systems provide owners with information on fuel consumption, hours worked and the machine?s condition compared to others in the fleet. Gold agreements effectively fix the cost of ownership and guarantees availability through a comprehensive maintenance and support programme.

The final step in the TCO process is an extension of the aftermarket service and maintenance. After years of faithful service, the high residual value of a machine will be realised if it has been well maintained and is backed up by a comprehensive service history. In turn, the name of the supplier, coupled with a solid reputation for aftermarket care and a strong global dealer network ? whether that be the likes of Volvo, Caterpillar, Komatsu, Hyundai or others ? will more often than not also play an important, albeit symbolic, part in a machine?s residual value.

David Alstr?m said that while TCO can play a very significant part in raising productivity in a load and haul fleet for quarry operations, its success is still dependent on the quarry operator being forthcoming with the data for its TCO requirements.

?There needs to be teamwork,? he said. ?We are equipment manufacturers but we are not experts on running quarry operations – if we were we would probably operate quarries! Teamwork between our clients and our staff is partly dependent on the data that is collected and how it is analysed. How much data a client is willing to impart greatly helps us in our analysis and enables us to provide quality of service in return. It is also a great help to understand the sensitivity analysis that you can take from the equipment manufacturer?s standpoint if you look at operational and maintenance costs. We can only provide the most effective solutions for our clients with their co-operation. It would be an enormous battle for our engineering departments to make the correct decisions if there are gaps in the data they are analysing.?

References and recommended reading
Kannan, Dr G. Volvo Construction Equipment Total Cost of Ownership. Volvo Construction Equipment, 2009.
Alstr?m D. Total Cost of Ownership ? Volvo Construction Equipment. Presentation delivered to the annual conferences of Civil Contractors Federation and the Institute of Quarrying Australia, Perth, October 2009.
Volvo Total Cost of Ownership. Volvo Advertising Supplement. In: Construction Europe 20(1), January 2009 (Digital edition, KHL Group, 2009.

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