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Determining Total Cost of Ownership

Many factors go into figuring out the total cost of owning foodservice equipment over its life cycle.

In the foodservice equipment industry, determining total cost of ownership or TCO, is like trying to figure out how much owning a car, with its tune-ups, gas, oil and maintenance expenses, will cost over its life cycle. The information is out there, but with so many variables to take into account, the job of consolidating this information and making it usable is daunting.

In the next year or so, NAFEM's Life Cycle Steering Committee aims to accomplish this task by developing an Equipment Life Cycle Cost formula and make the results available to those in the industry most affected by TCO.

The association defines TCO, or life cycle cost analysis, as “a method of calculating the cost of ownership of a piece of equipment over its entire useful lifespan.”

“This process began when NAFEM's Customer Advisory Task Force suggested one of the things they were most interested in was TCO. This interest was driven by maintenance issues,” says David Zabrowski, senior research engineer at San Ramon, Calif.-based Fisher Nickel, an engineering consulting firm specializing in the foodservice industry and operator of the Foodservice Technology Center, a scientific testing facility for benchmarking the energy performance of equipment used in commercial kitchens.

Information for this project will come from manufacturers, end-users, dealers, reps, consultants and service agents.

Zabrowski heads up the Life Cycle Steering Committee's model developing team, representing the utility side. “After we started to explore this topic, we found that there are more things that go into determining TCO than just maintenance problems, so the Life Cycle Steering Committee was formed.”

Life Cycle Elements
  • Equipment costs
  • Purchase price
  • Freight
  • Installation
  • Energy consumption
  • Parts and labor for repairs
  • Other equipment costs
Operating Costs
  • Education and training
  • Preventative maintenance
  • Cost of procurement and disposal of consumables
  • Disposal
  • Other operating costs

The committee is looking at all of the options for this project while working with a task force comprised of end-users, equipment reps, dealers, manufacturers and service agents. At press time, the first step of the two-part process was nearing completion with the development of Life Cycle Elements. The committee's Data Integration Task Team will perform the next task, which over the next six months will be to investigate, recommend and develop methods to gather and disseminate service data.

“We looked at all aspects of TCO, from the initial capital purchase, utility costs, accessories, labor, disposal and everything from cradle to grave,” says Charlie Souhrada, director, member services, at NAFEM. “Our plan is to create a template or tool to send to the industry for review and comments in early 2006,” he says. (See the related article on page 30 for more details on NAFEM's plan.)

The goal of the Life Cycle model is for operators to look beyond purchase price, Zabrowski says. “In today's business climate, it's hard for operators to spend more money up front for equipment and for manufacturers to take the cost out of equipment. If the industry has a tool for TCO, end-users can justify paying more now for a piece of equipment that will cost less to operate or maintain in the long run or that has a longer operating life,” he says.

Determining TCO

Rick Cartwright, director, warewash engineering at Troy, Ohio-based Hobart Corp., serves as chairman of NAFEM's steering committee for the TCO project. “The big thing about this model is that it will not offer exact figures,” he says. “Instead, it will provide operators with a comparison tool to help them make purchasing decisions or help them decide whether it's time to replace their equipment.”

Cartwright says that the first step in the process was developing a finance model. “This took all of the total life cycle cost pieces and rolled them up into a number or a way to compare products,” he says.

To do this, the Life Cycle Analysis Committee broke the finances down into equipment costs and operating costs. (See related table on page 31 for a breakdown of these costs.) However, many agree each cost contains many variables that warrant consideration.

“For example, the installation costs include the cost of the labor to receive the equipment and uncrate it. Operating costs are affected by the cost of fuel or electricity. How and how often equipment is operated also can change TCO,” says John Egnor, president of JEM Associates, a consultant in Pleasantville, N.J.

Another important variable that operators must consider is equipment usage. “The Life Cycle model will have a heavy use number, a moderate use number and a light use number. We can segment users on the energy side, as well, in terms of equipment usage,” Zabrowski says. “This is because equipment in a high-volume restaurant or casino that is heavily used and not well-maintained will have a shorter lifespan than the same equipment at a grade school that's used for shorter periods and meticulously maintained.”

It's a matter of comparing hours of usage. One such example is a fryer that is powered up but not being employed to prepare product to the manufacturer's usage guidelines. According to Roger Kauffman, president of EMR Service, a Baltimore service agent, “Manufacturers may say their fryer has a 12- or 15-year service life, but this life cycle is affected by its usage rate. Most fryers operating in restaurants that are open for 12 hours will only be frying about a third of that time,” he says. “Unfortunately, actual equipment usage can only be estimated through observation.”

Operational costs can seem overwhelming when revenue is not factored into the equation.“

If you estimate that it will cost $200,000 over five years to operate a $3,000 fryer, that may seem out of line. The key is taking into account how much the fryer is used and how much food it produces. When you consider the markup of the food in addition to the revenue it brings in, the fryer may contribute $400,000 over its life cycle, providing a profit of $200,000. The projected revenue factors into the TCO,” Kauffman explains.

Knowing life cycle operating costs also can be an important factor. “Say a fryer costs $1,500 up front but costs $600 less to operate over its life cycle than a similar unit. That is generated revenue,” Zabrowski says. “Having a TCO formula will give manufacturers and dealers an opportunity to upsell better equipment instead of just matching the price on a bid.”

Ventilation requirements represent another critical factor to consider when calculating TCO because operational and purchase costs increase when exhaust hoods become part of the equation.

Along the same lines, energy efficiency makes a difference when estimating TCO. “For example, does one dishwasher have a higher efficiency motor than another? If so, it will use less electricity and cost less to operate,” Egnor says.

One area Zabrowski brings to the table for the model team is the ability to estimate and project energy and utility consumption (gas, electric and water) and cost. “Historically, the energy and utility consumption is hard to estimate. There are cost procedures for 35 categories of equipment that provide a standard equivalent to an automobile's miles per gallon,” he says. “We've found we can project energy consumption based on lab data pretty closely, within a 90 percent confidence level.”

While it is feasible to estimate energy consumption, energy prices are less predictable. With gas prices jumping dramatically in recent months, and electricity prices also on the rise, factoring in these costs may prove to be more difficult. “Also, water is a more prominent resource. Many jurisdictions are increasing what foodservice operators pay for water coming in and going out of their establishments,” Zabrowski says. “Oftentimes, the sewer charges vary by location. For instance, San Francisco charges $10 a unit for its water, while Dallas charges $2 a unit.”

Proper maintenance also has a huge effect on equipment life cycles. Preventative maintenance costs include the daily chores that keep equipment running properly. “If doors are losing gaskets that are not being replaced, the unit will be operating harder, and this will negatively affect its life cycle,” Egnor says.

Operators can rack up additional costs by using inexperienced personnel. “We've gone in to perform repairs and found that, during a cleaning, the personnel left out the unit's ‘o' rings, which allowed food product to infiltrate the equipment and contaminate the machine,” Kauffman says. “This operator's repair was due to annual preventative maintenance that wasn't performed properly. They ended up paying extra to have the equipment cleaned.”

Kauffman says that knowing TCO helps take some of the guesswork out of equipment replacement. “Knowing how much it will cost to operate a piece of equipment over its lifetime helps with understanding when to replace it if operators track annual preventative maintenance and repair costs,” says Kauffman. “Say a fryer runs well for four years without any maintenance, but then a switchboard burns out and costs $500 to replace. This amount is significantly more than the cost of four years of maintenance would have been. TCO provides better insight into these cost savings.”

Consequently, Kauffman predicts that having a TCO formula may prompt better preventative maintenance practices. “We will need to look at operators' preventative maintenance schedules and how closely they are following manufacturer recommendations to prevent emergency repairs. Yet, it's obvious that devoting more time to preventative maintenance saves costs in the end,” he says.

Part of the challenge in developing a formula for TCO is limited maintenance data. “Manufacturers can track equipment maintenance during the warranty period, but once equipment is out of warranty, no one has complete records on what is being done,” Zabrowski says.

Consumables, like filters and other expendable items needed for equipment, are another factor in life cycle costs.

In addition, equipment disposal expenses can sometimes be a big component in determining TCO. “These occur at the end of the equipment's life cycle and may include equipment tear-down costs, trashing equipment and special disposal needs for hazardous material like mercury switches, which can be pricey,” Kauffman says.

How TCO Affects Operators

John Egnor President, JEM Associates

While more sophisticated operators, like larger chains and resorts with multiple outlets, look for information on TCO, JEM Associates' Egnor says most operators buy according to price and don't consider equipment costs over the long haul. “With most operators we specify for, the issue of TCO has never been discussed. The people we work with are more worried about producing the food they need at the volume required. Their needs are more immediate, and they just want reliable equipment,” he says. “It's the operators that have in-house engineering and purchasing that do analyses on how pieces of equipment affect their bottom line in the long term that are concerned with TCO.”

Zabrowski agrees, adding that end-users like McDonald's have been looking at performance data in equipment specifications, in addition to features and costs, to find efficient equipment that will meet their production needs.

Jim Coffey, engineering manager for Oak Brook, Ill.-based McDonald's, confirms that his company is contributing its knowledge to the NAFEM project. “We do most of the work ourselves in terms of field testing equipment. We have staff that look at all of the variables. We can compare equipment and have manufacturers change it to meet our needs, where mom-and-pop operators can't afford to do the research. What the NAFEM project will help us with is getting equipment suppliers to rate their units using the same variables, which will save us time when we do our in-house evaluations,” he says.

He adds that, for some pieces of equipment, McDonald's may rely solely on the NAFEM Life Cycle Steering Committee information. “But our grills and fryers are specially made for us; we do thorough testing and find out what works best. We don't have time to do this with smaller equipment, and there are no good standards for measuring its efficiencies,” Coffey says.

McDonald's equipment in its 30,000 restaurants is heavily used during the lunch rush between 11:30 a.m. and 1:30 p.m. “The rest of the day it is mainly idling. We need power to get through the lunch peak, where a different restaurant may use its equipment more regularly throughout the day or have different peaks of service,” Coffey says.

The company recently developed a spreadsheet where numbers can be plugged in for different equipment usage variables, such as percentage of “on” time. “For example, a unit may be running 10 percent of the time or 90 percent of the time. We've done tests to measure equipment usage and its effect on life cycles,” Coffey explains.

Because each piece of equipment is different and applications vary, he says this is only a guideline to provide equipment performance information. “Performance numbers for the same piece of equipment may be completely different for two operators. You're testing apples and oranges. There are so many variables with TCO that there will never be absolutes,” Coffey says.

Even within McDonald's and its differing store layouts, many subjective and unknown variables continue to exist. “Store volume and equipment maintenance play major roles, as well. There are shake machines that are 20 years old that look brand new and units that are less than a year old that look like they've been around 20 years,” Coffey says.

Although Coffey says the cost of equipment, its expected service life and energy usage are all considerations during purchasing, so is the amount of labor required to operate the unit. “We look at how much labor is required and the skill level. We would be more likely to choose a piece of equipment that offers one-button operation than a unit that we need to train an employee to use,” he says.

In some cases, McDonald's looks at what effect a piece of equipment has on the processing of raw food. “We need to consider if the equipment can be used with raw bulk food or with processed food. With our clamshell grills, the thickness of our meat patties has to be tight, which drives up the cost of food production,” he says.

Rege Braun, director of equipment and process R&D for Arby's, based in Ft. Lauderdale, Fla., says his company's equipment protocol is twofold — developing better equipment for the restaurants and developing equipment in response to new menu items. “Our culinary group develops our menu items in a lab and works with equipment manufacturers to design specialized equipment. About 30 percent of our equipment is customized for our company and 70 percent is off-the-shelf,” he says.

He says the company's three top concerns when looking at TCO are the complexity of the equipment, its labor efficiency and how safe the unit is for Arby's employees to operate. “In the field, most of the equipment operators are teenagers, so we need the equipment to be as easy to operate as possible and simple to clean,” Braun says. Even before testing, Arby's equipment passes through a number of screens. “Many screens are related to TCO. Serviceability is on the top of my list, because if equipment is elegantly or simplistically designed, it doesn't cost as much to run over time as more complicated equipment would. And more complicated equipment costs more to service,” Braun says, adding that operators get more frustrated over equipment downtime than anything else.

When equipment is complicated to maintain, TCO can often increase. “If it takes an hour to take a machine apart and put it back together, the employee most likely won't do it correctly. This will cause the machine to fail or need servicing. Our job is to make maintenance as easy as possible in the field, because our employees' No. 1 priority is servicing customers,” Braun says.

Another screen has to do with food quality. “The equipment has to deliver the food as it was designed in our culinary group and work in the field as it does in the lab,” Braun says. “Arby's beef has to be 1/2 millimeter in thickness. It doesn't matter how cheap a machine is, we won't buy it if it can't deliver this requirement.”

Speed of use also tops the list. “When you have an expanding menu, something has to give,” Braun says. “This means new equipment must deliver products in the preparation and assembly stages faster than before.”

Equipment size is an important factor, as well. “Given that we have 3,500 stores already established, the equipment must fit into that package,” Braun explains.

Efficiency also is a priority to operators like Arby's. “We consider how long it takes to clean a piece of equipment and whether it has to be oiled regularly. We also look at how many parts make up a piece of equipment because the fewer number of parts, the lower the TCO, and the less parts there are to clean, replace and repair,” Braun says. “Labor is more about maintaining the equipment than operating it.”

He says employee safety also relates directly to TCO. “For example, if you're developing a slicer and don't have the proper safeguards, employees will cut themselves while cleaning it and that will result in higher costs to maintain employees and higher insurance premiums,” Braun explains.

Consolidating Data Egnor says, like Arby's and McDonald's, many operators are looking for a device or tool to understand TCO. “Dealers could also use this formula as a selling tool,” he says.

Yet, many agree that it won't be an easy task. The NAFEM Life Cycle project includes many data points, compounded by the number of places a single one could come from, Zabrowski says.

Kauffman concurs, and adds, “Information can come from six or seven different sources, depending on who is involved with the sale or installation of equipment. For example, the model includes equipment lifespan, which can come from the end-user, operator, dealer or manufacturer. Information on installation can come from service agents, contractors, consultants, end-users or even manufacturers. Service agents like us are one of the points of data collection because we do a lot of installations for manufacturers and end-users.”

Because there is so much data in service agents' computer databases, the main problem is how to consolidate it. “The complication is how do you gather it from the variety of databases and hardware platforms out there? One of the requests is that the data be gathered and housed by a third party. This third-party processor will have the ability to draw data from all of the sources and put them in a database. The information would not be kept with a manufacturer or service agent, but with someone who could collect the information and keep certain things confidential,” Kauffman says.

“When completed, NAFEM's TCO project will put the smaller operators on more equal footing with the big chains in terms of decision making,” Zabrowski says. “We're just trying to provide tools for the rest of industry to do what the big chains are already doing, which is comparing different aspects of equipment to determine TCO.”

Although determining TCO may not change operating habits, Kauffman predicts it will impact operators more at the corporate level. “Operators are looking at this as a directional tool to help them make decisions. End-users are looking for guidelines to help lower their costs for use of the capital in their stores. Although we don't know how this formula will be used or how often, we want to provide the tools to be a part of the operators' decision process,” he says.

“If operators want to buy equipment based on price or quality, they know they will be able to,” Cartwright says. “There's no question that TCO is a different way of looking at purchasing equipment.”

NAFEM's Life Cycle Project The goal of NAFEM's Equipment Life Cycle Cost Project is to develop a TCO tool for use in making quick comparisons. “We want the tool to be useful for people who don't have all of the inputs or numbers they need to help estimate equipment life cycle costs,” says David Zabrowski, senior research engineer at San Ramon, Calif.-based Fisher Nickel and head of NAFEM's steering committee for the project.

End-users don't want a book of raw data, says Roger Kauffman, president of EMR Service, a Baltimore service agent. “They want an answer. They want someone to take the raw data and do something with it so they can get a bottom-line answer to what a piece of equipment will cost to own,” he says.

As this article went to press, the committee was about to finalize its first project, determining the cost variables. “We first had to evaluate various approaches and come up with a consolidated model that took the best elements of what's being done in this industry and other industries and tailor these to foodservice. Our next task is identifying standard default values to find the numbers to plug into the model,” Zabrowski says. He admits that some of this data is not easy to find.

Part of the challenge for the data integration team will be to find companies to provide the needed information and identifying the fields in each source's software that contain this necessary data. “We need to find this information in each company's computer system so a third party can consolidate it,” Kauffman says. “This will take money and time.” How much is yet to be determined.

The data integration team has the most complicated job in this project, says Rick Cartwright, director, warewash engineering at Troy, Ohio-based Hobart and chairman of NAFEM's steering committee for the TCO project. “Operators will want information on all costs so they can run the numbers and make comparisons. People in the industry have different views on how this will happen. Some believe a repository containing all the necessary information would work best for easy access, but this may not happen because the model may contain sensitive information that manufacturers and others don't want to disclose.”

The Life Cycle Cost draft is currently in a spreadsheet format. “The vision that has been discussed is that this will be a web-based tool on NAFEM's web site that's Java- or html-based,” Zabrowski says. The results won't be published in a Consumer Report format, but instead will offer customizable tools that end-users can utilize to determine their TCO.

When completed, the model will provide standard numbers that can be formulated with operators' specific information to estimate TCO. “Operators will be provided with data points that are a compilation of industry averages and will plug in numbers specific to their operations,” Kauffman explains. The result will be a net value of expenses. “It will come down to a number that they can relate to and compare equipment options.”

Once all of the inputs have been confirmed, Zabrowski says, the end result may be manufacturers creating equipment based on the formula outcome.

Committee members say that, although this model will not offer a panacea for TCO, it will offer operators the tools to make more informed equipment buying decisions. “This is a hot topic that's capturing attention from all parts of the industry,” Zabrowski says.