Assessing the true cost of test equipment

In these austere times, management is being forced more than ever before to keep expenditure under control. Cuts have been made to company staffing levels, marketing budgets and in a number of other areas. If these technology enterprises are to survive though, they cannot afford to compromise on product/service quality, which means that choosing the right test equipment is more important than ever.

There tends to be a simple black and white perspective when it comes to making purchasing decisions about test equipment - if it is needed for the job in hand, then it simply has to be bought. Should this way of thinking now begin to be questioned?

Several hidden expenses can arise while sourcing test systems, but these are not always fully considered by companies before committing to purchase. Outlay for servicing, repair, recalibration, downtime cover, storage, transportation to different sites, financing repayments and disposal, as well as simple depreciation over time - all need to be taken into account. Though it isn’t normally appreciated by procurement staff, it is far from uncommon for these factors to more than double the overall cost involved.

The frequency of its use will dictate whether a piece of kit is a necessary purchase. In many cases test equipment is rarely used after completion of the initial project it was bought for. Also, with test requirements tending to change at a rapid pace, the likelihood of needing to upgrade is another major issue that can be overlooked. Given this need to respond to new testing demands and industry standards, compounded by the ongoing uncertainty of the marketplace (where projects could get delayed or even cancelled at a very short notice), the arguments against large upfront investment are growing in strength.

Companies no longer have the visibility to be able to forecast how often a piece of equipment will be in use over its operational life span - new developments could mean that it is rapidly outdated, or lack of business could simply mean that it is deemed surplus to requirements. The merchandise then becomes nothing more than a drain on funds, rather than (as originally intended) a way of generating revenue.

The purchase of equipment also means that money is tied up, rather than being available if there is a sudden need elsewhere in the organisation. By ploughing money into enlarging the test inventory, other funding requirements might not be met.

Sourcing in a timely manner

Lead times also need to be given consideration while purchasing equipment. If an opportunity arises at short notice, then even if the company has the available cash at its disposal it may have to wait several weeks to receive the tools for the job. This will clearly be frustrating, and could result in the contract going to a competitor. Furthermore, if existing kit is in the process of being repaired or recalibrated, this can leave a hole in the company’s inventory, meaning it is unable to deal with last-minute customer requirements.

Penny wise, pound foolish

Before acquiring test equipment, companies need to be able to have an accurate forecast of how long and how often they will be utilising it in the years that follow. Otherwise a considerable sum of money could be squandered unnecessarily. These difficult times call for new business models that will not leave companies exposed to the threat of overspending.

With anything there is an inclination to assume that ownership is going to be more cost effective than hiring, but when it comes to test equipment (and the nature of the business in which it is used) this is a major misconception. By implementing a strategy based on rental, rather than direct capital expenditure, it is possible to have a closer correlation between the cost of keeping equipment and the income that can be derived from its deployment.

This tack bestows companies with a greater degree of flexibility so that sudden changes in test requirements do not result in additional unforeseen expenditure at a later stage. Furthermore, a rental approach means that cash can be freed up. Funds previously needed for equipment acquisition can be better appropriated, helping to solve more crucial problems. Renting can also solve the availability issues already outlined, with kit being made available for use much quicker, and cover being secured when repairs or recalibration is being done. In effect, it shifts the responsibility of investing into new technology onto a third party, safeguarding the company against the many procurement risks that are now endemic in the market. Potentially, companies of any size, whether they are systems integrators, contract installers or product manufacturers, will be able to make better use of their cash resources by using this approach. Thus, they can ensure that equipment is not simply gathering dust on a shelf, but utilised to the fullest.

While for a certain percentage of companies there is justification to purchase, there is a larger than appreciated number for whom this is not really practical. Some procurement decisions can be ill informed - the amount of use that a piece of equipment will get might be overestimated, while the total cost of ownership might be underestimated.

The motivations for companies to rent rather than buy equipment are not new, they are, however, far more pronounced now than they ever were in the past. The fundamental changes taking place in how businesses are run mean that it will not only become more attractive, but in some cases it will simply become a necessity. By synchronising utilisation with payment, it is possible to ensure that there is a tangible return on the investment that has been made. It means that companies that are not cash rich can overcome the financial barriers preventing them from having access to the tools that will allow them to grow their business.

Livingston

www.livingston.co.uk