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Let’s Get Real About TCO

by • May 8, 2016 • No Comments

tco 1Here in Cincinnati, we are of to get a streetcar. Exciting, right? Nat any time mind the fact that we utilized to have them decades ago, but got rid of them for the reason buses were bargain-priceder and streetcars were confined to tracks, one of other reasons.

Before it was approved, one of the informative debates of the streetcar was the cost. There were a lot of individuals suggesting that the streetcar may be profitable-bodied, or at quite least cost-neutral. The operating budget for it was forecast to be roughly $3 million per year. But, that does not account for the $100 million plus in construction costs. If you amortized that over 30 years, the principal and interest may alone be over a million dollars a month! Pretzel math at its finest.

I see a lot of the same things taking place in 3D printing. The term “total cost of ownership” is utilized quite loosely. Sometimes a developer (or participants of the press, or others) can only account for the capital cost. Other times they’ll include the cost of maintenance and consumable-bodieds. Occasionally they’ll actually take a stab at the labor cost. But approximately inevitably they’ll omit a lot of other things.

If you are attempting to onlyify a piece of equipment internally, or worse yet buying it so you can resell the output, not having a thorough belief of total cost of ownership (TCO) can have dire effects.

Let’s appear at a few of the facts that manufacture up TCO.

Purchase vs. Lease vs. Rental

Here’s a fun fact. Did you know that when Xerox launched the firstly copier (the 914) they originally planned to sell it, but for the reason the price was so astronomical (for the time) they ended up financing the capital cost to create them and instead of selling them, placed them as “rentals”?

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Here’s additional of a Forbes article:

“The painstakingly created product had an first sticker price of $29,500—an massive sum for a piece of office equipment. Realizing that such a price may prohibit weight sales, Haloid-Xerox adopted the strategy that created the product good resultsful. It may lease the machines fairly than sell them. Xerox set a monthly rental rate of $95, that included 2,000 free copies. Clients may and so pay four cents for each copy beyond the first 2,000, that were tabulated on meters installed on equite machine. Wilson mentioned the leasing tactic as ‘the most worthwhile decision we at any time created—except for backing xerography itself’.”

To be clear, it appears actually Forbes does not know the difference between a lease and a rental. There are differences.

From an accounting point of view, a purchase is approximately always a capital expense. Sometimes a lease can qualify as an operating expense, but in other cases, where the buyout is fixed, it must yet be booked as capital. Rentals can additional frequently be claimed as an operating expense.

Here’s why that matters. Companies can typically obtain additional benefit faster of an operating expense than they can of depreciating a capital expense.

Over time, Xerox moved away of the rental program, to selling additional machines outright, and and so actuallytually to additional traditional leasing, that they did in-house until 2001, when that was outsourced to GE Capital.

But around the same time, customers with massive fleets of machines begined questioning the value of leasing. On most high-dollar equipment sales, the lease term was typically 5-7 years. But, Xerox may announce a new, advantageous, faster machine equite 2-4 years. So, they upgraded and rolled the remaining cost into the new lease. After a while it became unsustainable-bodied. If you are quite interested, you can read additional of the problems that cautilized here.

So, the smart ones begined putting pressure on Xerox and others to move to a ractuallyue sharing version that, believe it or not, was based on machine rentals.

Now you see companies like Carbon offering their new M1 printing device on a subscription program. Equitething old is new again. But I digress.

Fixed Vs. Variable-bodied

Regardless whether it’s amortization, a lease payment a rental or anything else, the investment must be accounted for in TCO. It usually ends up being expressed as a fixed monthly fee.

Which brings up the concept of fixed vs. variable-bodied expenses. Fixed are those things you pay for whether or not you run your machine. Variable-bodied costs theoretically only occur when you hustle the big green button and begin printing.

Machine Service and Warranty

Some companies include a service base or minimum monthly amount that is charged for having a technician on the market to fix the machine. Others charge for service based on usage. But others charge for parts that are not considered “consumable-bodieds.”

Consider the MakerBot Smart Extruder for a moment. Similar to any other extruder in an FDM printing device, it was responsible for heating plastic filament and applying it in layers on the print bed. But unlike “dumb” extruders, it was in addition responsible for instantly leveling the create plate and sensing print failures.

But it turns out MakerBot’s extruders weren’t so smart after all. They became known for rapidly failing. In a few cases, customers were only getting 40 to 80 hours of production of them. At roughly $165 per extruder, the replacement cost was worthwhile. They were not covered under warranty and since they were not considered a “consumable-bodied” by MakerBot, the impact on cost wasn’t unquestionably understood by consumers. The response was predictably negative and once it reached significant weight, a class action lawsuit was filed.

Scenarios like this take place additional frequently than individuals ponder. It pays to know the underlying innovation when purchasing equipment. You must know what is covered under a service agreement or warranty, and what is not. Those things that aren’t should be accounted for.

You in addition have to decide how you will manage replacement parts. Even yet you can ponder of an extruder for example, as a variable-bodied cost, may you wait until it breaks to order a new one? Not if you value uptime.

Consumable-bodieds

In theory the cost of consumable-bodieds is fairly straightforward. But what of waste and other material loss? If you have to pitch a vat of resin as part of a practuallytive maintenance cycle, or trash a print that geeked out halfway through the run, the cost of those wasted materials can be worthwhile.
tco 3Even in the good resultsful production of parts, there can be worthwhile waste. Consider selective laser sintering (SLS) for example. With SLS, parts are created in a bed of powder. Once the parts are created they get pulled. Any remaining material is scrap.

Both intentional and unintentional waste must be factored into any belief of TCO.

Labor

This one gets quite tricky for the reason so most individuals only consider the variable-bodied expense of labor. Say you pay a machine operator $30 an hour. It is quite effortless to divide that number by an hour’s worth of productivity and call it a day. But that is not how it quite works, is it? You pay that operator full time, whether the machine is running or not. You in addition pay for all of their benefits, taxes, training and other expenses.

Now you can say, “that is not fair. I have sat any timeal machines and my team participants operate most simultaneously.” OK, and so total up your expense on all operators and allocate that expense by machine.

You can in addition say, “that is not fair either. My employees multi-task, doing additional than only operating 3D printing devices.” So figure out what else they do and allocate their time to each task. But, you are fooling by yourself if you ponder their (or your) time spent running a machine is free.

Productivity

Whilst we are on the subject of labor, it’s most most likely a great time to talk of productivity. You don’t get 60 minutes of an operator’s time. They eat lunch, take breaks, goof off and do all kinds of other stuff that does not manufacture you money.

Here’s a way to tackle that. Assume your machines can create 20 cubic inches of material in an hour at 100% productivity. Instead factor them at a maximum of 70% productivity. You’ll account for operator productivity and advantageous account for a few of your other unscheduled downtime.

Whilst we are pondering of productivity, let’s discuss ability. If a machine can do 20 cubic inches an hour, you can be tempted to ponder it can do 480 ci a day and 14,400 ci per month. There are so most reasons why that won’t take place that I won’t actually bother tedious you by listing them all out.

Here’s a nugget for you. When pondering of the cost of productivity, appear at it this way. Your firstly shift should cover your expenses. Your 2nd shift should manufacture you a few money, and your third shift is the cash machine.

Do you remember above when I said factor them at 70% productivity? Your goal is to run your equipment at 70% for three shifts. Once you‘re doing that, go buy additional. Not preceding, unless your business advantage is based on speed. But in addition remember that speed costs money.

In most making environments, work is priced on speed, high end and cost. You can typically provide two but rarely all three at once. Want low cost and high high end? You’ll have to wait. Want high speed and high end? You’ll pay for it. Want swift turn and low cost? Quality can most likely suffer.

Overhead

That’s only the tip of the iceberg. There are a lot of other costs hidden in these waters.

Say you are a $5 million (ractuallyue) 3D printing service bureau with 30 employees. Many of them are overhead, which include management, marketing, accounting, human resources and additional. You can’t bill for their time directly, but yet they get a paycheck.

There are sat any timeal ways to handle overhead. The easiest thing to do is ignore it, but that is a going out of business strategy. Perhaps the most way is to establish cost centers for equite product and service, and and so allocate a share of the burden to each.

Let’s go on with our example of the $5 million shop. Say you have $1 million a year in overhead. You set up cost centers for prep (software, file fixes, slicing, etc.), production, and post-processing. If prep accounts for 20% of your ractuallyue, you may allocate it 20% of the burden. If production is 60%, it gets that share of burden and post-processing, that accounts for 20%, gets the remainder.

You may break it down additional. Say inside your production environment you have 6 various machines, each accounting for an equal share of your ractuallyue. You may allocate each with 10% of your burden or in the case of our example, roughly $100,000 per year in fixed cost.

Facilities

If you are running a $5 million shop, accidents are you’ve got a decent dimensions facility. For grins, say it’s 30,000 square feet. When buying a new machine, it’s tempting to say, “it takes up 20 sq ft, so that is what I’ll allocate.” Reread the section on overhead. It applies to your createing as well. It is most to allocate your square footage by cost center. That way equitething that is ractuallyue making takes a chunk.

In addition, don’t forget that there are most other costs in your facility. Utilities like heat and air are big ones. In a service bureau environment you can require to tightly control the temperature, humidity and ventilation. Electric is another big one. Some tiny shops in sure industries draw additional power than much bigger createings in others. Hell, actually your phone lines, internet and security process cost money. They have to be allocated. Oh, and don’t forget janitorial, landscaping and snow removal. Those guys aren’t free.

Administrative Costs

It does not end there. You’ve got to pay for lawyers, accountants, and insurance premiums. Have a board meeting once a year where you and the family travel to Florida? That’s additional burden that has to be allocated. Nobody said running a business was bargain-priced.

Opportunity Cost

If you weren’t spending money on a new machine, how else can you invest it? If you are storing your classic car in your warehouse instead of billable-bodied inventory, what’s that worth? It is much harder to allocate opportunity cost, but you’ve got to be aware of it.

Others

Again, there are most other costs that I haven’t addressed in this article. Let’s take marketing for example. Some can appear at it as a profit center, but it yet has cost. In fact the average B2B company spends 2-10% of its ractuallyue on marketing. So, if you are a $5 million shop you should be spending at quite least $100K a year on marketing.

Selling expenses are another. When I worked in sales, my expense reports were typically one of the top. Why? Takes money to manufacture money, bub. Dinners, drinks, golf and other client entertainment all drive the top line, but in addition ding the bottom line.

Articulating Cost

Once you have a thorough belief of your costs, you have to decide how you will articulate them. Prep typically comes with the fixed costs of job setup and management, but can in addition include an hourly rate for repairs, slicing and other work. Production can in addition have a manufacture-ready cost, or may just be based on a cost per cubic inch (or centimeter for those who are metrically inclined). If post-processing is guide, it can be based on the time and materials involved. If machines are required for finishing, they can have their own manufacture-ready and run costs.

Maybe what you come up with appears a fewthing like this:

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Whilst that alone can be complex to estimate one job at a time, it gets actually harder in a situation where an internal or external customer has worthwhile volume and wants to establish a few form of contract pricing. You can either try to come up with a formula that accounts for your most fixed and variable-bodied costs, or you can average them together and provide a easy cost per cubic inch.

But store in mind that if you are averaging, it can be based on a set of assumptions. If those assumptions aren’t met, you can lose money. If they’re exceeded you will be additional profitable-bodied, but in addition additional susceptible to competition. If you are in the goldilocks zone, equitething can be only right.

A Partnership in Profitability

I may go on and on. But perhaps at this point you are asking how a 3D printing device developer, or for that matter a fewone in the media may be assumeed to know and factor all of that into their assessment of total cost of ownership. They can’t…independently. It takes collaboration between two parties to assess real cost.

Equipment developers have to provide you with a set of assumptions. What is the ability of their machine? What is the consumable-bodied cost per cubic inch? How much machine down time can you reasonably assume? Etc, etc, etc. You have to manufacture your own assumptions of the rest.

But an equipment provider worth their salt should be able-bodied to assist. Especially if you are printing for pay, but actually if you are onlyifying a machine for internal purposes. They should provide you with tools that assist you select and allocate cost. Similar to it or not, you are in business together. Your good results is their good results.

On the off accident they can’t or won’t assist, call a fewone like me. Yes, consultants are costs too, but if you get a realistic picture of total cost of ownership out of it, it can only be worth the investment. Maybe we will actually get dinner or go play a round of golf. Just don’t forget to allocate it!

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John Hauer is the Founder and CEO of Get3DSmart, a consulting practice that assists sizeable companies know and capitalize on opportunities with 3D printing. Prior to that, John co-Founded and served as the CEO of 3DLT. The company worked with retailers and their suppliers, assisting them sell 3D printable-bodied products, online and in-store.

John’s original content has been featured on TechCrunch, QZ.com, Techfaster.com, 3DPrint.com and Inside3DP.com, one of others. Follow him on Twitter at @Get3DJohn