I see a lot of the same things happening in 3D printing. The term \u201ctotal cost of ownership\u201d is used very loosely. Sometimes a manufacturer (or members of the press, or others) will only account for the capital cost. Other times they\u2019ll include the cost of maintenance and consumables. Occasionally they\u2019ll even take a stab at the labor cost. But almost inevitably they\u2019ll omit a lot of other things.<\/p>\n
If you\u2019re trying to justify a piece of equipment internally, or worse yet buying it so you can resell the output, not having a thorough understanding of total cost of ownership (TCO) can have dire consequences.<\/p>\n
Let\u2019s look at some of the factors that make up TCO.<\/p>\n
Purchase vs. Lease vs. Rental<\/b><\/p>\n
Here\u2019s a fun fact. Did you know that when Xerox launched the first copier (the 914) they originally planned to sell it, but because the price was so astronomical (for the time) they ended up financing the capital cost to build them and instead of selling them, placed them as \u201crentals\u201d?<\/p>\n
\u201cThe painstakingly developed product had an initial sticker price of $29,500\u2014an enormous sum for a piece of office equipment. Realizing that such a price would prohibit mass sales, Haloid-Xerox adopted the strategy that made the product successful. It would lease the machines rather than sell them. Xerox set a monthly rental rate of $95, which included 2,000 free copies. Clients would then pay four cents for each copy beyond the initial 2,000, which were tabulated on meters installed on every machine. Wilson described the leasing tactic as \u2018the most important decision we ever made\u2014except for backing xerography itself\u2019.\u201d<\/p><\/blockquote>\n To be clear, it seems even Forbes doesn\u2019t understand the difference between a lease and a rental. There are differences.<\/p>\n From an accounting perspective, a purchase is almost always a capital expense. Sometimes a lease can qualify as an operating expense, but in other cases, where the buyout is fixed, it must still be booked as capital. Rentals can more often be claimed as an operating expense.<\/p>\n Here\u2019s why that matters. Companies can typically receive more benefit faster from an operating expense than they can from depreciating a capital expense.<\/p>\n Over time, Xerox moved away from the rental program, to selling more machines outright, and then eventually to more traditional leasing, which they did in-house until 2001, when that was outsourced to GE Capital.<\/p>\n But around the same time, customers with huge fleets of machines started questioning the value of leasing. On most high-dollar equipment sales, the lease term was typically 5-7 years. But, Xerox would announce a new, better, faster machine every 2-4 years. So, they upgraded and rolled the remaining cost into the new lease. After a while it became unsustainable. If you\u2019re really interested, you can read more about the problems that caused here<\/a>.<\/p>\n So, the smart ones<\/a> started putting pressure on Xerox and others to move to a revenue sharing model which, believe it or not, was based on machine rentals.<\/p>\n Now you see companies like Carbon offering their new M1 printer on a subscription program<\/a>. Everything old is new again. But I digress.<\/p>\n Fixed Vs. Variable<\/b><\/p>\n Regardless whether it\u2019s 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.<\/p>\n Which brings up the concept of fixed vs. variable expenses. Fixed are those things you pay for whether or not you run your machine. Variable costs theoretically only occur when you push the big green button and start printing.<\/p>\n Machine Service and Warranty<\/b><\/p>\n Some companies include a service base or minimum monthly amount that is charged for having a technician available to fix the machine. Others charge for service based on usage. Still others charge for parts that are not considered \u201cconsumables.\u201d<\/p>\n Consider the MakerBot Smart Extruder for a moment. Like any other extruder in an FDM printer, it was responsible for heating plastic filament and applying it in layers on the print bed. But unlike \u201cdumb\u201d extruders, it was also responsible for automatically leveling the build plate and sensing print failures.<\/p>\n But it turns out MakerBot\u2019s extruders weren\u2019t so smart<\/a> after all. They became known for quickly failing. In some cases, customers were only getting 40 to 80 hours of production from them. At roughly $165 per extruder, the replacement cost was significant. They were not covered under warranty and since they were not considered a \u201cconsumable\u201d by MakerBot, the impact on cost wasn\u2019t clearly understood by consumers. The response was predictably negative and once it reached critical mass, a class action lawsuit<\/a> was filed<\/a>.<\/p>\n Scenarios like this happen more often than people think. It pays to understand the underlying technology when purchasing equipment. You must know what is covered under a service agreement or warranty, and what is not. Those things that aren\u2019t should be accounted for.<\/p>\n You also have to decide how you\u2019ll manage replacement parts. Even though you might think of an extruder for example, as a variable cost, would you wait until it breaks to order a new one? Not if you value uptime.<\/p>\n Consumables<\/b><\/p>\n In theory the cost of consumables is pretty straightforward. But what about waste and other material loss? If you have to pitch a vat of resin as part of a preventive maintenance cycle, or trash a print that geeked out halfway through the run, the cost of those wasted materials can be significant. Both intentional and unintentional waste must be factored into any understanding of TCO.<\/p>\n Labor<\/b><\/p>\n This one gets really tricky because so many people only consider the variable expense of labor. Say you pay a machine operator $30 an hour. It\u2019s very easy to divide that number by an hour\u2019s worth of productivity and call it a day. But that\u2019s not how it really works, is it? You pay that operator full time, whether the machine is running or not. You also pay for all of their benefits, taxes, training and other expenses.<\/p>\n Now you might say, \u201cthat\u2019s not fair. I have several machines and my team members operate many simultaneously.\u201d OK, then total up your expense on all operators and allocate that expense by machine.<\/p>\n You might also say, \u201cthat\u2019s not fair either. My employees multi-task, doing more than just operating 3D printers.\u201d Then figure out what else they do and allocate their time to each task. But, you\u2019re fooling yourself if you think their (or your) time spent running a machine is free.<\/p>\n Productivity<\/b><\/p>\n While we\u2019re on the subject of labor, it\u2019s probably a good time to talk about productivity. You don\u2019t get 60 minutes of an operator\u2019s time. They eat lunch, take breaks, goof off and do all kinds of other stuff that doesn\u2019t make you money.<\/p>\n Here\u2019s a way to tackle that. Assume your machines can produce 20 cubic inches of material in an hour at 100% productivity. Instead factor them at a maximum of 70% productivity. You\u2019ll account for operator productivity and better account for some of your other unscheduled downtime.<\/p>\n While we\u2019re thinking about productivity, let\u2019s discuss capacity. If a machine can do 20 cubic inches an hour, you might be tempted to think it can do 480 ci a day and 14,400 ci per month. There are so many reasons why that won\u2019t happen that I won\u2019t even bother boring you by listing them all out.<\/p>\n Here\u2019s a nugget for you. When thinking about the cost of productivity, look at it this way. Your first shift should cover your expenses. Your second shift should make you some money, and your third shift is the cash machine.<\/p>\n Remember above when I said factor them at 70% productivity? Your goal is to run your equipment at 70% for three shifts. Once you\u2018re doing that, go buy more. Not before, unless your business advantage is based on speed. But also remember that speed costs money.<\/p>\n In most manufacturing environments, work is priced on speed, quality and cost. You can typically provide two but rarely all three at once. Want low cost and high quality? You\u2019ll have to wait. Want high speed and quality? You\u2019ll pay for it. Want quick turn and low cost? Quality will likely suffer.<\/p>\n Overhead<\/b><\/p>\n That\u2019s only the tip of the iceberg. There are plenty of other costs hidden in these waters.<\/p>\n Say you\u2019re a $5 million (revenue) 3D printing service bureau with 30 employees. Many of them are overhead, including management, marketing, accounting, human resources and more. You can\u2019t bill for their time directly, but still they get a paycheck.<\/p>\n There are several ways to handle overhead. The easiest thing to do is ignore it, but that\u2019s a going out of business strategy. Perhaps the best way is to establish cost centers for every product and service, and then allocate a share of the burden to each.<\/p>\n Let\u2019s continue 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 revenue, you could allocate it 20% of the burden. If production is 60%, it gets that share of burden and post-processing, which accounts for 20%, gets the remainder.<\/p>\n You could break it down further. Say within your production environment you have 6 different machines, each accounting for an equal share of your revenue. You could allocate each with 10% of your burden or in the case of our example, roughly $100,000 per year in fixed cost.<\/p>\n Facilities<\/b><\/p>\n If you\u2019re running a $5 million shop, chances are you\u2019ve got a decent size facility. For grins, say it\u2019s 30,000 square feet. When buying a new machine, it\u2019s tempting to say, \u201cit takes up 20 sq ft, so that\u2019s what I\u2019ll allocate.\u201d Reread the section on overhead. It applies to your building as well. It\u2019s best to allocate your square footage by cost center. That way everything that\u2019s revenue producing takes a chunk.<\/p>\n Also, don\u2019t forget that there are many other costs in your facility. Utilities like heat and air are big ones. In a service bureau environment you might need to tightly control the temperature, humidity and ventilation. Electric is another big one. Some small shops in certain industries draw more power than much bigger buildings in others. Hell, even your phone lines, internet and security system cost money. They have to be allocated. Oh, and don\u2019t forget janitorial, landscaping and snow removal. Those guys aren\u2019t free.<\/p>\n Administrative Costs<\/b><\/p>\n It doesn\u2019t end there. You\u2019ve 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\u2019s more burden that has to be allocated. Nobody said running a business was cheap.<\/p>\n Opportunity Cost<\/b><\/p>\n If you weren\u2019t spending money on a new machine, how else might you invest it? If you\u2019re storing your classic car in your warehouse instead of billable inventory, what\u2019s that worth? It\u2019s much harder to allocate opportunity cost, but you\u2019ve got to be aware of it.<\/p>\n Others<\/b><\/p>\n Again, there are many other costs that I haven\u2019t addressed in this article. Let\u2019s take marketing for example. Some might look at it as a profit center, but it still has cost. In fact the average B2B company spends 2-10% of its revenue on marketing. So, if you\u2019re a $5 million shop you should be spending at least $100K a year on marketing.<\/p>\n Selling expenses are another. When I worked in sales, my expense reports were typically among the highest. Why? Takes money to make money, bub. Dinners, drinks, golf and other client entertainment all drive the top line, but also ding the bottom line.<\/p>\n Articulating Cost<\/b><\/p>\n Once you have a thorough understanding of your costs, you have to decide how you\u2019ll articulate them. Prep typically includes the fixed costs of job setup and management, but might also include an hourly rate for repairs, slicing and other work. Production can also have a make-ready cost, or could simply be based on a cost per cubic inch (or centimeter for those who are metrically inclined). If post-processing is manual, it might be based on the time and materials involved. If machines are required for finishing, they might have their own make-ready and run costs.<\/p>\n Maybe what you come up with looks something like this:<\/p>\n![\"tco](\"https:\/\/3dprint.com\/wp-content\/uploads\/2016\/05\/tco-2.jpg\")
<\/a>
\nHere\u2019s more from a Forbes article<\/a>:<\/p>\n
\n![\"tco](\"https:\/\/3dprint.com\/wp-content\/uploads\/2016\/05\/tco-3-1024x576.jpg\")
<\/a>Even in the successful production of parts, there can be significant waste. Consider selective laser sintering (SLS) for example. With SLS, parts are made in a bed of powder. Once the parts are made they get pulled. Any remaining material is scrap.<\/p>\n
![\"tco](\"https:\/\/3dprint.com\/wp-content\/uploads\/2016\/05\/tco-4.png\")
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