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The Perfect Tool for Process Industry
Jerry Belanger With increasing pressure on manufacturing quality products by using fewer resources, Total Cost of Ownership (TOC) is becoming a greater factor in the future of the process industries. The article discusses this modeling tool to show manufacturers how much they can expect to spend during an automation asset's full lifecycle.

Total Cost of Ownership (TCO) has been likened to other acronyms such as ROI (return on investment), TBO (total benefits of ownership), TCA (total cost of acquisition) and in some cases, TVO (total value of ownership). With all of these interpretations abounding, it is easy to see why many donĘt fully grasp the concept of TCO. All indications, however, point to TCO becoming a greater factor in the future of the process industries as manufacturers are constantly tasked with producing higher-quality products by using fewer resources.

Maximising monetary resources will go a long way towards achieving this ?? which means it would behoove most companies to have as tight a grasp on the concept of TCO as possible. The most critical truth to realise is that a longer product lifecycle means a lower TCO that a company can expect to pay each year.

What is TCO?
It is just as important to understand what TCO doesnĘt do as it is to understand its primary function. TCO does not calculate overall value of a technological purchase, or return on investment. Rather, TCO is a modeling tool that exists to show manufacturers how much they can expect to spend during an automation assetĘs full lifecycle. It only looks at the cost side of the equation.

As such, it does not easily capture the valuation of intangible, ÂhiddenĘ assets such as knowledge base, IP investment, integration, etc. As a result, costs impacted outside the automation investment are frequently missed. Examples of this include costs incurred from reconfiguring advanced process control or manufacturing execution systems. TCO also does not assess risk and efficiency of an overall system, nor does it place value on options such as scalability and flexibility. All of these factors considered, TCO can be difficult for companies to align with strategic goals and quantify in complex situations where a large installed base is involved. A technologyĘs lifecycle, of course, is not static. There isnĘt a set amount that a company can expect to pay each year. Rather, that amount will be heavily influenced by factors such as some components lasting longer than others, updates and migrations that increase life expectancy and cost effectiveness, and selected upgrades for higher-frequency items instead of opting for ripping and replacing.

Although the premise of TCO has been carried on over time, there is no well-established methodology or ways to calculate TCO in the automation industry. The most-likely reason for this is the overall complexity of automated systems themselves. While most manufacturers generally look at TCO in some regard, they donĘt comprehensively examine all the costs and impacts. They view TCO from an operations and maintenance perspective. Looking at TCO in that light, some of the costs are very tangible, such as how much a company pays for hardware. It is important, however, to not fixate on this perspective, as the intangible costs can get overlooked and lost in the shuffle.

As it applies to automation assets, TCO generally consists of three phases, Procurement/Deployment, Operations/ Maintenance and End-of-Life Management.

An effective way of managing direct and indirect costs is by using a value calculator that assists customers in evaluating an asset investment both in terms of TCO and projected benefits. It provides a structured method of working through the evaluation process, categorically working through typical contributions of cost and benefits. Calculations address the initial deployment and ongoing operations. Decision tools such as break-even analysis are embedded.

Minimising TCO
In general, maximising the life expectancy and capital depreciation cycle enable companies to minimise TCO. Shorter lifecycles, by contrast, have a greater probability of generating additional costs associated with knowledge, training, intellectual property, risk, efficiency and other factors. For example, products with shorter lifecycles ultimately mean a company will spend more resources training personnel to use new equipment. Operators accustomed to working with a certain platform for many years - sometimes decades - will need training and time to get up to speed on a newer platform. That training and time will cost money both in terms of training resources and lost production.

Setting a Timetable
It sometimes becomes more expensive to maintain legacy technology as it ages, rather than just replace it. In most cases, risk is what ultimately drives a manufacturer to replace a system on obsolescence. For instance, an obsolete system could pose a risk of catastrophic failure, in which case the capital investment in new equipment far outweighs the cost of ripping and replacing. Ideally, the benefits side of the equation will be the primary driver. That is, the decision to migrate from one platform to another should be based on the fact that the benefits of the newer platform far outweigh the costs of maintaining the legacy system.

The complexity of automation systems has made applying Total Cost of Ownership principals one of the more difficult tasks in the process industries. As a result, the true meaning of TCO has been broad and often misunderstood. But the fact of the matter is that the concept of TCO may finally be ready to play a major part in the success of manufacturers tasked with optimising their balance sheets. In many ways, TCO will become just as critical to plant operations as having the right instrumentation, process control, advanced process control and Manufacturing Execution System (MES) to create an interconnected facility that brings the right information to the right people.


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