September 2008 – Equipment Procurement
Producers and manufacturers talk about the decision-making process during a slower economy.
by Mary Foster, Contributing Editor
With the economic downturn and its affect on construction spending, it would be a logical assumption that many producers have put equipment purchase plans on hold. But surprisingly, producers seem to be doing what they’ve always done when it comes to equipment purchase decisions, typically following their long-term equipment replacement plans as they work to maintain long service life for their existing machines. And while factors outside their control – such as fuel costs and government regulations – have had to become part of the strategic methods applied to equipment procurement, producers rely on their dealers and manufacturers in much the same way as they have for years.
Replace or repair?
The biggest question producers face when planning for capital equipment purchases is whether to stretch a machine’s life as long as physically possible, or purchase a new machine that ultimately employs newer technology for better production and efficiency.
Paul Campbell, executive vice president of Wheeler Machinery – a Caterpillar dealer based in Salt Lake City, Utah – says companies that have planned replacement cycles in place are continuing to follow those cycles. As chairman of Associated Equipment Distributors (AED), Campbell is in a unique position of being able to see how equipment-buying habits across the country have changed or remained the same in recent months.
And Nashville, Tenn.-based Rogers Group, Inc., seems to fit Campbell’s proposed model. Cameron Druyor, director of equipment operations for Rogers Group, says, “We are pretty much keeping with a rolling five-year replacement plan. There are always exceptions, but for the most part, the way we see it is that equipment purchases will have to happen, regardless of the economy.” Druyor explains that like many large producers, his company has enough production facilities that, if it becomes clear the equipment is not being utilized enough in one location, it can be moved to another location. This is especially true of rolling stock and portable plants. Also, site acquisitions bring additional equipment into the mix and allow fluctuations to equipment purchase plans. “But as long as we keep our utilization up, we’re not changing our buying strategy as a long-range tool,” he says.
That said, aggregate producers have always worked to extend the life of their machines as long as feasibly possible. “It is also our normal business strategy to try and run our equipment as long as it is cost effective to do so,” Druyor adds.
Dick Brannigan, Certified Equipment Manager (CEM) at John R. Jurgensen Companies, based in Cincinnati, Ohio, and president of the Association for Equipment Management Professionals (AEMP) agrees. John R. Jurgensen is a third-generation, family-owned, vertically integrated business group with aggregate and hot-mix asphalt facilities. “We keep our equipment a long time,” Brannigan notes. “But the ability to keep it running efficiently is important. We often look at manufacturers’ certified rebuild programs as one way to extend life while maintaining availability. We constantly strive to achieve the longest lifecycle through good preventive maintenance compliance, repair before failure, and component rebuild by a reliable warranted distributor.”
An important factor in the repair-versus-replace decision is the ability to track maintenance and costs over the lifetime of the machine. This is especially important with fuel costs rising as quickly as they have. Druyor says Rogers Group has become extremely conscious of fuel efficiency during the past couple of years. “We do a five-gas exhaust analysis on our equipment that prompts us to do necessary repairs that help keep our equipment running as lean as possible. We also regularly do an oil analysis for the same reason,” he says. “A benefit is that we’ve discovered our equipment tends to live longer when it runs leaner.”
According to Campbell, companies must be able to determine when the threshold has been crossed and the cost to run a machine on a per-hour basis actually exceeds the cost of buying a new machine. “I’ve learned that the companies that have the lowest operating costs are the ones that track their costs by machine, such that they know what each machine is costing them,” he says. And if a customer decides the most cost-effective choice is to maintain, repair, and keep the same machine running, then Campbell also says the customer must not fall into a pattern of neglect just because capital is tight. “Neglecting maintenance is a huge mistake,” he says. “You might get by in the short term, but long term, it will come back to haunt you in the form of a catastrophic failure. Then you will be faced with an even greater cost to repair – or ultimately replace – the machine. You can’t starve the machine and have it work for you in the long term,” he says.
John Stolowski, general manager, North American marketing for Metso Minerals, says most manufacturers and dealers are dedicated to supporting their customers as they continue to maintain or repair existing machinery. “Of course, we would like to see customers replace old technology, but we know it’s not always economically feasible even in the best of times,” he says. “So it’s important to us and our dealers that we fully support the machines in the field and do what’s necessary to keep them running as efficiently as possible.
“Ultimately, parts purchases go on the books as expenses,” Stolowski continues. “An equipment purchase goes on the books as a capital investment, which makes a difference, even if a catastrophic failure forces a customer’s hand. The capital expenditure is more visible. So it comes down to dollars and cents in their long-range forecasts, and we have to support them in every situation.”
When it’s time to buy
According to Druyor, for Rogers Group’s rolling stock, 20,000 hours of service is the typical average lifespan of components. “We start to intensely scrutinize them at 18,000 hours. We rebuild the major components at 20,000 hours, then run the machine through another cycle. Midway through its ‘second life,’ we evaluate the machine to determine when to replace it with a new machine,” he says, adding a rule of thumb he follows in making the ultimate decision to replace a piece of equipment: “Typically, when we’ve spent as much in repairs as we paid when we bought the machine, then it’s a good time to roll it out of our fleet and replace it.”
This leads to a trend Campbell says he is seeing more of: the elimination of older equipment – through sale or trade – when a producer or contractor buys new equipment. “A couple years ago, customers were concentrating on expanding their fleets. Now they will replace equipment, rather than adding to a fleet,” he says.
And once a producer has decided to purchase new equipment, what factors into a good purchase decision? Cost-of-ownership projections are extremely helpful, and most manufacturers can provide this information. At the same time, Druyor suggests that keeping good maintenance records for existing equipment also helps when it’s time to buy new. “We rely a lot on our own information,” he says. “We look at cost per hour, including fuel dollars spent, total dollars spent on maintenance and repair, availability, utilization, and even ergonomics. Within our five-year plan, then, we also look at production goals for each location. We’ll look at equipment size to make sure it’s appropriate for production requirements and goals, and if it’s not, then we might buy new or move an existing machine.”
Campbell says this data can then be compared to the projected costs provided by the manufacturer/dealer. “It takes the customer that can track the operating costs of existing equipment and a manufacturer and dealer that can give cost formulas for new equipment to provide the real picture of how new equipment will affect operating costs.”
Fuel costs are one example, according to Campbell. “If you look at the lifecycle of the machine, it used to be that fuel costs were about 14 to 15 percent of the total cost to own a machine over its lifetime. Today, fuel costs have become more than 25 percent of the total lifetime cost of a machine. They’ve become a much bigger part of owning and operating a piece of equipment.” Campbell also says that while the purchase price typically comprises 15 percent of a machine’s cost over its lifetime, the most expensive cost involved in owning and operating equipment is still the operator.
While their structures might differ, the ability for larger producers to leverage costs using national or regional accounts is a trend that truly began to take hold with the upswing in the industry’s consolidation. And Druyor says it is a nice tool to have in a purchasing arsenal. “We will use national accounts for leverage when we can,” he says. “When you have a multiple-year contract with a manufacturer, it gets some of the decision out of the way, so you don’t have to worry about that aspect of purchasing for a couple years.”
According to Brannigan, “The Certified Equipment Manager (CEM) program of AEMP is an excellent foundation for fleet managers and continuing education for advancement as a fleet management professional.” This type of training can be invaluable when making equipment purchasing decisions. “Continuing educational sessions at our semi-annual management meetings have included discussions on net present value analysis, lifecycle costing, and fleet replacement planning, as well as general topics such as emissions management, technology and telematics, and fuel management,” he says.
Replace or rent?
Rental has always been an option for fulfilling equipment needs. Campbell says that in recent years, when producers’ and contractors’ businesses were expanding quickly, these customers were more likely to buy new equipment outright as a means to add capacity. “Today, there is more caution,” he says. “We see increasing numbers of customers that will rent to supplement their fleets without long-term commitment. They like having the option to walk away.”
Campbell suggests a simple formula that can be followed when deciding whether to rent or buy. “If you use a machine less than 600 hours per year, then the most cost-effective option is to rent. If you use it 600 to 1,000 hours per year, then you should buy a used machine. If you use a machine more than 1,000 hours in a year, buy new. And if you use it more than 1,200 hours per year, buy new with a service contract or sure way to maintain the machine,” he says.
A different animal
Aggregate processing equipment can offer some different challenges in the purchase process, according to Druyor. “A wheel loader can pretty well shovel rock anywhere,” he notes, “but with aggregate processing equipment, you have to look at the products and applications more closely. There’s a lot more art going into it, in addition to everything else.” Druyor says for these purchases, he will get the plant engineers involved in the decisions, providing input on product mixes, type of rock, and production needs.
And one challenge that aggregate equipment manufacturers are working to solve is that of rising fuel costs. According to Stolowski, in the production flow, as the face of a quarry changes with blasting for new material, “producers often struggle with the fact that the face can be a good mile-and-a-half away from the surge pile or primary.” In answer to that problem – for producers looking to reduce processing fuel costs and/or enhance production – portable equipment can help reduce or eliminate the high fuel costs associated with haulage.
“By adding portable equipment to crush at the face, the producer gets 75 percent of the process done,” Stolowski says. “Alternatively, producers who modify a stationary plant to enhance production find that it’s a difficult process - and a huge capital investment. A new jaw unit might be a lower cost than a track-mounted jaw. But when you consider the other cost factors, including engineering, new foundations, chute work, fabrication, and conveying, there is a lot of added cost. And once it’s in place, it’s fixed. There’s no flexibility like track-mounted equipment can offer. And track equipment is self-contained with the feeder, the processing unit, and conveyors.”
It’s a trend that is definitely growing, Stolowski says. “Two years ago, the trend was fixed installations. Producers would remove smaller crushers and screens and replace them with larger capacity equipment. I think we would still see that today if the economy was the same. And while some people will always be staunch on stationary, others are exploring other ways to enhance production and reduce operating costs.”
The price/quality conundrum
Any producer who attended ConExpo-Con/Agg couldn’t help but notice that there is now a large influx of lower-priced equipment hitting U.S. markets. This trend will continue. And it adds some attractive possibilities for equipment purchasing – provided the buyer is aware of the real parameters set by this equipment.
To some extent, price does equal quality and longevity with heavy equipment. And not a small part of this equation in equipment life is the ready availability of service and parts. According to Brannigan, the influx of low-price models has not affected his buying habits.
“I need my equipment to work every day. There is no excuse for downtime. If I can’t get parts or service, my fleet won’t run,” he says. “I would say that any producer would have to decide his tolerance for downtime. That’s the key question. It’s a willingness to put forth the capital outlay or the willingness to accept downtime when waiting on parts or service.”
Druyor agrees. “I haven’t gained a thing if I purchase equipment that’s attractive in price, but has no support,” he says.
Stolowski says that price should be a factor in the purchase decision, but manufacturers can command a premium price if they provide everything that goes along with the premium – including parts, technical support, and service. “There will always be people who will buy because the price is low,” he says, “but if there is a problem, if the machine malfunctions and parts are not available, it affects the bottom line. When you make the decision to buy a piece of equipment, and you make a large capital outlay, a poor decision can stay with you a long time.”
Service is king
As mentioned earlier, the ability of a manufacturer and/or dealer to provide good service is of utmost importance. And this ability factors into the purchase decision. “When I talk to other producers or contractors and I ask, ‘Why did you buy this product,’ price never comes up,” Brannigan says. “Instead, it’s a matter of parts availability, having a local mechanic that can help with the machine, or a product support rep. There’s a whole laundry list of product support factors that come into play.”
A model employed by AEMP to promote the ideal sales and service relationship is the “equipment triangle,” which in its most simple definition is a three-way relationship between the manufacturer, the local distributor or dealer, and the end user, Brannigan says. With emphasis on high standards for fair and ethical business practices, the equipment triangle concept is carried through sales, service, and even equipment rental. “If you have strong relationships in the triangle, and all are doing what they’re supposed to be doing, it’s a win-win for all three legs of the triangle,” he says. “AEMP’s model has been embraced by several local dealers as well as manufacturers, and takes product support to its highest level.”
“Embrace the relationship you have with your dealers; they can lower your costs over the lifetime of your machine,” Campbell says. “Look for a dealer that can do more than sell the machine, but also provide the resources you need after the sale. Partner with them in the long run to provide the highest productivity and the lowest operating costs.”
Technology and the regulatory pipeline
A volatile variable in the purchase of heavy equipment is the ever-changing regulatory arena. The attempt to lower exhaust emissions first led to the Environmental Protection Agency (EPA) phasing in Tiers I through IV in regulated exhaust levels. Then the California Air Resources Board (CARB) upped the ante in mid-2007. The answers sought by ultra-low-sulfur diesel have proven to be more difficult to achieve, both financially and through infrastructure requirements, than originally estimated – and now consideration for the selective catalytic reduction (SCR) method is creating infrastructure challenges of its own.
“Gaining insight into current and future emissions requirements has been difficult at best,” Brannigan says. “The entire industry is closely watching the CARB versus EPA debate. Once the different models for fleet emissions compliance gain some clarity, our path to regulatory compliance should be slightly easier. Two different approaches to meeting Tier IV emissions are being considered – EGR (exhaust gas recirculation) and SCR. The SCR method has me greatly concerned. It calls for liquid urea to be introduced into the exhaust stream to lower NOx (nitrogen oxide) to required levels. I question the cost of creating an entire new infrastructure for the manufacture, storage, dispensing, and use of urea.
“I remember clearly the original EPA estimate that ultra-low-sulfur diesel (ULS) was going to cost us an additional three cents over the price of low-sulfur (LS) diesel,” he continues. “Obviously, their estimate did not take into consideration the necessary infrastructure changes and profit considerations of the refiners. It’s still hard to believe that in such a short time, the cost of diesel has risen from 50 cents per gallon cheaper than gasoline to 50 cents more.”
Stolowski emphasizes that going green is a good thing. “The green element in our manufacturing processes and the products we make help us to be a good corporate neighbor, and they help the producer to be a good local neighbor,” he says. “At the same time, the need for Tier III engines in California affects buying decisions – either to replace older equipment or to retrofit. You can call it providing what the market needs. And if you want the business, you’d better be there with the technology.”
“We look west all the time for what might be coming down the pipeline to us in new exhaust legislation,” Druyor says, using the CARB ruling as an example. “That’s why we got into our five-gas analysis. We didn’t want to have a knee-jerk reaction to air quality. We wanted to know where our ‘problem children’ were when it came to exhaust emissions. It will help us stay ahead of the curve.”
Mary Foster is a contributing editor to Aggregates Manager. She specializes in covering the construction materials industry.
Rules of Thumb
Make the rent versus used versus new decision:
- If you use a machine less than 600 hours per year, rental is the best bet;
- If you use a machine between 600 and 1,000 hours, buy used;
- If you use a machine more than 1,000 hours, buy new; and
- If you use a machine more than 1,200 hours, buy new with a service contract or a plan for maintaining the machine.
Track existing costs:
- Track all aspects of existing equipment usage:
• Purchase price,
• Fuel and oil use and costs,
• Exhaust contaminants,
• Engine health,
• Total costs of maintenance and repair,
• Utilization, and
• Operator costs;
• For rolling stock, begin to scrutinize component replacement needs at 18,000 hours;
• Rolling equipment should have an average productive component lifecycle of 20,000 hours; and
• If you’re spending as much in repairs as you would in buying a machine, it’s time to replace it.
When looking at new equipment:
- Use tracked data from existing equipment;
- Look at availability and utilization;
- Compare your data with manufacturer cost-of-ownership and operation formulas;
- Look at safety and ergonomics;
- Review aftermarket support capabilities – service and parts;
- Consider price; and
- Leverage buying power of national or regional accounts if possible.