Effectively managing your company’s capital equipment program is closely tied to managing the long-term growth and profitability of your company. Obtaining the right equipment at the right time and managing its useful life in conjunction with the needs of the entire organization can make a big difference in your company’s long-term financial performance.
Consider a life cycle management approach for critical equipment that includes optimizing your financing options. Business leaders determine what equipment to finance based on balancing costs, competitiveness, and potential obsolescence; when and how they should finance the equipment; and how long they should keep the equipment.
Let’s examine how a life cycle management approach to equipment management and finance works and why it makes sense for most companies.
What is Life Cycle Equipment Management?
Life cycle equipment management is a process that seeks to optimize the management of your equipment and capital purchases by incorporating planning at all phases of the equipment’s life cycle. This starts with planning for equipment acquisition and continues through usage and disposal of the asset.
This approach is one that integrates all facets of the business into a comprehensive planning process. Specifically, management strategy, organizational design and long-term asset planning must all be integrated in this process. Equipment management and capital expenditure planning must be integrated as a mainstream part of the business planning process.
Operationally, life cycle equipment management takes planning in terms of the equipment’s useful life.
All equipment and associated components of that piece of equipment must meet all regulatory and safety regulations. The regulations might change over time and there must be a plan in place to ensure that all the requirements are met on an ongoing basis.
The life cycle/obsolescence plan for equipment and related processes must be clearly communicated to all impacted areas of the company. This includes areas beyond operations and manufacturing, such as sales, marketing, inventory management, and finance, among others.
The life cycle management process should include regular reviews to ensure that everything is on track, not only from an operational and maintenance perspective, but also to integrate the changing needs of the business related to the equipment. For example, is production related to this equipment surpassing the original forecasts? If so, what are the implications on the equipment’s life cycle? Does this deviate from the original plan?
Benefits of This Approach
A life cycle approach to equipment and other capital items allows companies to go beyond the break/fix mentality that was the hallmark of the capital planning for too many companies. This approach allows companies to establish a program to acquire, finance, manage, and dispose of assets in all categories of capital spending programs via an orderly, planned process.
From IT equipment to material handling, robotic production equipment and emerging technologies, there are a number of best practices to consider. Whether it’s determining the optimal life cycle of a certain asset, looking at equipment needs for a short-term project, life cycle management, and the savings and efficiencies that come from it, should be an ongoing focus for your company.
Consulting firm McKinsey suggests a nine-step process for capital investment management. The process stresses the benefits of tapping the collective wisdom of the organization and treating your organization’s capital expenditure program like an investment portfolio. This includes setting targets for ROI, monitoring results and using the results to drive continuous improvement during the life of each capital expenditure project.
The firm cites advantages, including improved cash flow, faster growth and competitive advantages as benefits from this type of integrated process.
Consequences of Not Having an Equipment Life Cycle Management Program
Waiting until the break/fix moment to decide about whether to scrap or repair a piece of equipment may seem sensible to some, but this transactional mentality can be costly. The financial costs can include unplanned repair or replacement costs. For a business, these costs can be more severe and far-reaching. Prolonged downtime can result in the interruption of production for customers, resulting in a temporary or permanent loss of business.
The following are just some of the expenses and operational burdens that a lack of planning can lead to:
- Loss of production (downtime)
- Rental (in some asset classes)
- Emergency maintenance costs
- Loss of secondary market value
- Increased administrative burden
- Employee dissatisfaction (even employee turnover in some cases)
Any one of these issues could create significant and unplanned expenses, or worse, alienate customers, resulting in lost revenue, and perhaps a permanent reduction in business.
This may all be completely avoidable. Could a proactive approach to asset management reduce expenses, increase operational efficiency and even improve financial performance?
Successful equipment life cycle management entails three critical elements, according to Life Cycle Engineering:
Management strategy development. This involves a planning approach that includes buy-in and input from all impacted stakeholders within the organization.
Organizational design. This involves bringing the right people, processes, data and information technology together to form the core of a successful asset management program.
Long-term asset planning. This entails a plan to forecast the timing of equipment needs. Understanding the useful life of the equipment is vital along with having an ongoing schedule for maintenance and upgrading equipment, if applicable. This approach is interdisciplinary and must include a focus on the business’s product and revenue forecasts, as well as financial projections.
Consider Financing Options
Traditionally, equipment and other major capital acquisitions were purchased with cash or financed with debt. While those are still options, today’s savvy CFOs and senior managers are increasingly adding equipment leasing and financing to their list of options.
Creative financing tailored to the unique needs of your business can further assist in implementing an effective life cycle approach to equipment management. The key is to tie equipment expenditures to the anticipated useful life of that equipment and to manage your company’s cash-flow needs.
Leasing is increasingly becoming the financing method of choice for many organizations. PWC cites the willingness of leasing firms to structure leases for the needs of their customers as a major factor in the growth of equipment leasing in recent years. (4)
Whether you lease or finance a purchase, be sure that you understand all of the implications of any transaction you are considering, including the true cost of financing and any issues with equipment removal at the end of the asset’s useful life.
Be sure that any terms you negotiate fit the overall needs of the business in terms of matching the anticipated benefits from this equipment with its costs over time. Above all, be sure you are working with experts who understand your business and have all of the latest financing tools at their disposal.
SLS Can Help.
For more than 30 years, the SLS team has offered uncomplicated finance alternatives to help business owners get the most out of every equipment investment. Let’s talk.