Manufacturing equipment: 6 steps to plan your purchase
Acquiring manufacturing equipment for your company may be one of the biggest financial decisions you make this year.
Purchasing new equipment doesn’t have to be daunting, says Lance McLellan, Manager, Ontario Automotive Industry at BDC. But purchasing new equipment requires planning.
He offers the following steps to ensure you successfully plan your equipment purchases.
1. Assess the equipment you have now
McLellan recommends you start by taking a deep dive into your company’s long-term goals, which includes an audit of your existing equipment.
“It’s important to understand the efficiency of the equipment you have before deciding to replace aging equipment,” says McLellan.
Track the machine’s cycle time and uptime, which is when the machine is producing revenue, as well as any downtime required for regular or unscheduled maintenance. This information will allow you to determine if newer equipment will generate the return on investment required to justify the purchase.
2. Create a capital expenditure plan
You will then be ready to map equipment purchases to your company’s long-term plan.
“A capital expenditure plan includes additions of new equipment, but it should also consider planned downtime of your existing equipment, and predict end-of-life, so you can prepare for replacement cycles,” says McLellan.
Don’t fall into the trap of upgrading for efficiency just because your supplier is marketing a new model.
“If you’ve done your capital expenditure plan and understand the cycle times of your equipment, you’ll know if the newest model is truly a cost-effective choice,” says McLellan. “Don’t be afraid to shop around for a different supplier.”
3. Have a contingency plan for unscheduled breakdowns
It’s difficult, if not impossible, to replace large pieces of equipment quickly. The purchase of large equipment is usually a custom order and requires long lead times.
“Large equipment pieces are not sitting on a retail shelf,” says McLellan. “After an order is placed, it could take six, eight or 12 months for your supplier to manufacture new pieces.”
Lead times are longer for foreign manufacturers and you might have to make progress payments as the equipment is being made.
“90% of the money is out the door before you even have the equipment on site,” says McLellan. “In most cases, Canadian banks don’t provide funds for these payments because, until the machine is on Canadian soil, they can’t register a security charge.”
He recommends bringing your financial institution into the planning discussions as early as possible.
4. Do a cost benefit analysis
Acquiring new equipment isn’t always the best solution, says McLellan, particularly if you only need the machine for a short period of time, or for small parts of a larger project.
Consider the long-term usage of the equipment and how much profit it will generate in its lifespan.
“If you’re only using the equipment to fulfill a three-year contract and you don’t see other profitable opportunities, maybe it’s better to outsource that piece of work for three years.”
5. Calculate your total cost of ownership
“If you decide to buy or lease, recognize that your equipment acquisition costs are more than just the base price. There is the principal amount, but there are also costs associated with using floor space, interest on financing, installation, training your employees on the equipment and downtime associated with maintenance.”
After calculating your total cost of ownership, you may find the costs of outsourcing to be lower. Or you could find a different piece of equipment that has potential to generate more overall revenue, and one that can offset other costs.
6. Consider your physical location
“Manufacturing equipment can be large and take up a lot of square footage on a shop floor,” says McLellan. “You need to think about where the equipment will go and what sort of lead time is required to prepare the space.”
Depending on the size and weight of the equipment, you may need to check the strength of your building’s foundation or consider adding pits, if the machine needs to sit below ground level. This should be considered when calculating your costs.
5 best practices when acquiring new manufacturing equipment
1. Take a test drive
Most equipment manufacturers have demonstration facilities so you can get a clear idea of how the equipment looks, feels and operates.
2. Determine what’s included in the price
Warranties on new equipment are usually for one year. But some include a maintenance or service agreement for a short period after purchase.
“Equipment manufacturers usually provide support until the machine is operational,” says McLellan.
Most new equipment also includes limited training for staff. It’s worth paying for additional training for key production staff so they can train others in the future.
3. Consider buying used equipment
If you’re looking to replace something standard, you may be able to save money by purchasing pre-owned equipment.
“Used equipment in the manufacturing space can offer huge cost savings,” says McLellan. “Considering the life span of some pieces is 15 or more years, companies can often pick up a piece at a huge discount and still have a good 10 years of life left in them.”
4. Examine different payment methods
The two payment options are leasing or financing.
“Your best option is to match your financing or leasing term to the length of your contract,” says McLellan. “If the equipment will be used across your business, match your payments to the estimated life of the equipment.”
Look for a financing option that allows you to postpone principal at the beginning of the loan to give you time for installation, testing equipment and training staffs. With a postponement, principle payments would ideally start once your equipment is operational and generating revenue.
5. Consider digital integration
Forward-thinking companies are integrating their digital and information technology strategy into all capital purchase decisions. There are cutting-edge technologies on the market that can help you improve tracking and productivity.
“Always look for equipment that allows for data collection,” says McLellan. “Whether it’s new or used, the technology must be upgradeable and interconnect with your existing equipment and planned acquisitions.”