Last week I wrote about the difference between construction equipment owning and operating costs and how both change over time. This week I’d like to explain why it’s important to know these cost behaviors and what you can do with that knowledge.
Finding the Sweet Spot
The fact that construction equipment owning costs tend to decrease over time while operating costs increase means that at some point your rate of total cost of ownership is likely going to reach a minimum. After the minimum, your marginal total cost associated with the piece of equipment will begin to go up. Figure 1 shows this behavior in rate of total cost by showing the sum of the owning and operating costs.
Equipment Management in Action
As marginal costs begin to increase for a piece of equipment, it becomes less and less profitable to operate. That doesn’t necessarily mean you should put it on the auction block immediately, however. Replacing it with new equipment does not mean you’ll return to a lower cost of ownership—just a glance at the typical cost curve in figure 1 shows that initial marginal costs start off higher due to higher costs of ownership.
But you should know when your equipment has entered the zone of increasing marginal costs—see figure 2. When a machine enters the “yellow zone, it’s time to consider reducing amount of use you’re expecting to get out of it, and when it enters the “red zone,” you may want to consider replacement.
All of this may seem a bit theoretical. The way to make it practical is simply to start gathering data. Next week I’ll talk a bit about the types of data you need and some options for collecting it. And as mentioned last week, please see my friend Dr. Mike Vorster’s site www.cempcentral.com for more information on the science of equipment management.
What methods do you use to decide when to reduce or eliminate the use of equipment in your fleet?