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Selling Total Cost of Ownership in the Industrial Environment

by Christopher Bursack, ISC Companies

Chris Bursack"Your price is too high! I can get that cheaper from your competitor! Your product is the same as everyone else's, why should I pay more?"

We hear these and similar objections every day. The real answer is: it's not that the price is too high; the value of the product has not been explained in terms of total cost of ownership.

Total cost of ownership (TCO) is a familiar concept to many of us. In simple terms it is the total of all the direct and indirect costs associated with an asset during its entire life cycle. In the case of an automobile, TCO must include the purchase price (including finance costs) plus the cost of fuel, maintenance and repair, insurance, licensing, taxes and any other associated cost. Obviously, the purchase price has an impact on the total cost of ownership, but may not be a good indicator of what a vehicle will cost over its entire life time.

That raises the question, "Just what are the cost drivers associated with products in an industrial setting?" The main cost drivers are: energy, repairs, unplanned downtime including lost production and maintenance costs.

Energy costs seem like an obvious place to start when you consider electric motors. According to the Department of Energy, electric motors consume 63 percent of electricity used in industry. For the typical motor, electricity accounts for about 97 percent of the total cost of ownership, so you can see why a small change in motor efficiency can have a huge impact on the total cost of ownership.

But what about opportunities for energy savings beyond the motor? In some belt applications, simply changing from a wrapped v-belt to a molded notched v-belt can reduce energy consumption by three percent. That may not sound like a lot, but if that belt is attached to a 50 HP motor running continuously and there are 10 of these drives on a ventilation system, that three percent can translate into many thousands of dollars in energy savings with a very small investment.

Another example is in speed reducers. Worm gear reducers remain a popular choice because of the low investment cost. But in higher ratios, that same reducer may be operating at 70 percent (or less) efficiency. The rest is going to heat the plant—perhaps leading to higher cooling costs. New designs of helical reducers, even in high ratios, can have efficiencies of well over 90 percent. The energy savings will quickly pay for the higher initial cost of acquisition.

Repair and replacement costs represent another area for savings. One of the best examples is in roller chain. Most chain manufacturers offer premium roller chain with features such as self-lubricating bushings, ground and polished pins and other features that incrementally increase the life of chain, particularly in harsh applications. Yes, this chain costs significantly more up front but if it lasts many times as long as "standard" chain, the savings from multiple repurchases and installation costs will offset the higher initial costs many times over.

It's 1:00 a.m. and a critical piece of equipment goes down, shutting an entire production line. Production personnel have nothing to do. Material in process is ruined. Production schedules are missed. "I sure hope I have that bearing on the shelf." We've all seen it happen. We've all had that phone call in the middle of the night.

What if there was a way of knowing the condition that piece of equipment was in so you could help your customer do something proactive about it during non-production time? Well, there is. Condition monitoring can provide valuable insight into the health of equipment. Once this service was available only to huge facilities that could afford the investment in expensive monitoring equipment and the training costs to make sense of the mountains of data collected.

Today, condition monitoring equipment is available with minimal investment and the data can be interpreted using an outside source providing expert insight into the condition of critical assets. Yes, there is a cost to this—but just how much did that recent breakdown at 1:00 a.m. cost by the time you added everything up?

It seems that every plant has certain pieces of equipment that are prone to going down. Replacement parts are kept on hand. The maintenance people have gotten so good at changing the failed parts out you might think they were a pit crew at the Indy 500, except your customer is paying overtime for them to be there. In other words, your customer has learned to live with it.

Today, there are so many options available in both products and design software that you can usually find a properly applied solution that will outlast many times what your customer has learned to put up with. The well-equipped distributor has the tools and the expertise to look at the overall design of a piece of equipment and make a recommendation based on the factors involved in the application rather that just replacing what is currently on the machine. In short, don't just supply the same parts that everyone else supplies, dig into the application and find a solution.

This is certainly not an exhaustive list of all the cost drivers associated with operating an industrial production facility but it is real world. What's more, it's easy to document the savings discussed here. There is always a lower priced product available and to say that purchase price is not a component of the total cost of ownership would be false. But it is just that: a component and often a fairly small component at that.

Of course there are those who are not interested in hearing any of this. They are transactional buyers whose only focus is on the purchase price. My suggestion: move on. For those who will listen, you can help increase their efficiency while reducing downtime and waste. In the end, that's where the real savings are.

Chris Bursack has been with Minneapolis, Minn.-based Industrial Supply Co. Inc. for 22 years, beginning as an outside sales representative before moving into management. He is currently director of marketing for ISC's three business groups (bearings & power transmission, machining & fabrication and sensors & controls). Chris is a lifelong Minnesota resident and graduate of the University of Minnesota.

Posted from: Jonathan Bein, 12/2/11 at 10:54 AM CST
Chris -
Your comments about TCO are well heeded in the distribution space where many buyers focus only on price. Some of the solutions offered by distributors should be evaluated by ROI, not just TCO. I am aware of some large distributors who do this level of economic value modeling. I would enjoy further discussion if you are amenable.
TCO and More
Posted from: Fabio Montero, 11/21/11 at 6:56 AM CST
Chris you are right, good article. But how to implement in the real world, and explain that to purchase managers ( with short term vision) and maintenance managers with limited budgets? I think sell quality is a very challenging task these days, the training from companies teaching sales forces how to add value and how to communicate it, should be double, I think this is the point (agree with Frank Hurtte) it happens not just in U.S., I'm in Latin America and every day we have to face same situation.
TCO and More
Posted from: Frank Hurtte, 7/21/11 at 8:09 AM CDT
Chris, you have hit the nail squarely on the head. Distributors must understand the value of the knowledge (and service) they provide to their customers. American business continues to "lean" out their operations. I believe distributors are performing services today their customers once performed for themselves. Today, the ability to sell these is tied directly to your ability to understand, measure and communicate this value in dollars and cents.
Posted from: Keith, 7/21/11 at 7:03 AM CDT
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