Calculating 'real-life' costs

by World Grain Staff
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When it comes to making capital decisions, there are many ways to evaluate what you deem to be value for money. Obviously, capital purchase price is a key consideration since it often is the only criteria, particularly in small-project scenarios where the decision you make is not going to materially affect the overall life of the section of plant where the addition is being made.

However, when it comes to evaluating major capital expenditures and projects of significant size, you need to base the decisions on additional criteria.

In the last 12 to 18 months, I have come across an increasing number of people using "real-life" costs in their capital project evaluations. What does the term "real-life" costs mean? Whatever you do, you must take into account the capital cost of an item or a group of items in a project. But then you need to additionally look at: maintenance costs; power consumption; labor requirements to operate such machinery; and legislative costs in the plant operation. For example, you wouldn’t want to buy to the cheapest chain and flight conveyor available on the market only to find that as soon as it experiences a choke condition, it tears itself to pieces and remains inoperable for several days while you organize spare parts and labor to get it running again.

Likewise, you wouldn’t pick the cheapest hammermill on the market only to find that spare parts consumption, beaters and screens were twice the price of the next choice.

Power costs need to be considered very closely, with engineers taking design features into account. Pneumatic versus mechanical discharge from hammermills, for example, can have significant impact on cost per tonne ground. Pre-grind or post-grind both have their advantages and disadvantages in differing circumstances, and capital costs and running costs merge into the overall picture in some circumstances.

Some pieces of equipment can be classified as pressure vessels. For example, steam jacketed pre-press kettles can be classified as pressure vessels and are subject in Europe to all the vagaries of pressure vessel legislation, whereas turbulator conditioners do not fall into this category. Something that influences your choice of supply, not just for ease of operation but also from the cost of legislative compliance, can far outweigh other parameters.

All of these items cumulatively mount up over the lifetime of an asset, and it is these costs, divided by either the tonnage throughput or the time you see the assets being employed, that lead us to a "real-life" or "true-life" cost for an individual or group of assets.

While it is generally desirable to have equipment in which total cost on a "true-life" basis is the lowest, this may not always be the case. For example, in some circumstances, such as regions where the political environment is uncertain, it may be prudent to seek the cheapest way to enter a new market, in which case it may be a least-cost entry scenario you seek to achieve.

It is good to have a stable environment where markets are predictable and everything is safe. But what if you are in an unstable market? If, for instance, you are in a region where there is a risk of a military coup but there are significant margins to be made in the short term, your capital purchasing criteria may be somewhat unconventional. You need to recognize this.

However, given normal trading circumstances and normal market forces, there is an increasing role for "true-life" costs. Correct evaluation of machinery life, accurate evaluation of capacity that can be achieved over the life of a machine, and a good set of data for power consumption based on experience of building, commissioning and running other similar plants all make up reliable information which is now becoming the normal means of evaluating competitive performance of individual machinery.

In the feed milling industry, hammermills, mixers, pellet presses, sieves and similar items are all very even in the expected lifespan, and this significantly impacts "true-life" costs, although it is not the end all in such evaluations.


So when would you consider the use of "true-life" costs? Certainly it should be considered in key capital installations such as new mills, marine unloaders, transport fleets and new site facilities involving the housing of more than 20 employees.

A classic scenario for utilizing this type of cost evaluation is where cooperative investment is being considered. In a recent case where a group of farmers jointly invested in a grain drying and storage facility by acquiring shares that entitled them to the use of the facilities for additional costs, it showed that one choice of contractor was likely to be the preferred supplier. Conveyors were the heaviest duty, elevators showed lowest power consumption and dryers showed low power consumption. But when the data was calculated on a "true-life" basis, a different supplier came out as the clear winner, principally because all of what was being supplied was likely to perform beyond the scope of the other suppliers, not just key elements where you would normally focus your attention.

The major engineers are now beginning to adopt "true-life" costs. They realize the effect their plant can have on climate change and the immediate environment. In many cases, the importance of training is coming to the fore. It is apparent that even small amounts of operator training can be of benefit to "true-life" costs.

Simply add in the cost of the training and look at the effect and results. Power consumption figures can be significantly reduced when operatives know what they are doing. Good training programs are invaluable.

Also, you must not lose sight of automation, for there are some highly intuitive, responsive and innovative packages available in the marketplace that can have a significant impact upon the cost of plant operation. Several engineers have their own bespoke packages, while others choose to adopt an already operational basic framework and add to it. Either way, some useful enhancements are available to millers. You should spend time giving due consideration to them before hastily buying control systems that do not address all of your needs. Using a "true-life" costs approach to such evaluation will assist with making the right choice.

Many of you have your own criteria that you go by (for example, maintenance costs no more than 2% of capital value in the first year, labor costs no more than 6% of the first year’s operating turnover, etc.). You will gather your own data, and many of them are quite accurate, although in this international age it is not easy to mix and match across continents, especially when commodity markets are volatile. But you can use "truelife" costs at a single location quite easily and to good effect.

In many cases, some historical data are required, and several engineers are now building up data in support of their "true-life" costs claims. For many years, you may have taken the engineers’ word for it that their equipment will last for "X" number of years or will use "X" amount of power. Sometimes that data proves to be correct. But in other cases it can be quite wide of the mark, making it difficult to develop a good set of plant costs. Fortunately, more attention is being paid to economics these days and the purchasing decisions are being made by a larger group of personnel than before.

Many of us have complained about our mills being run by accountants, and I am afraid that is increasingly becoming the case. If you are unable to operate your mills in a financially efficient manner, then you have no future and no reason to be in the industry. "True-life" costs are simply a tool in both the accountant’s briefcase and the millers’ tool box, and you should use it whenever possible.

Becoming familiar with these tools will help you become more profitable and help control expenditure. They are not just predictive tools for use when buying new mills; you should be using them all the time. Taking machinery out of use or finding better ways of doing something is a constant search for improvement, but it can be a very interesting and enjoyable challenge at the same time if approached in the right frame of mind.

Jonathan Bradshaw is a consultant to the agribusiness and food processing industries, specializing in project management and bespoke training programs through his company, J.B. Bradshaw Ltd. He has extensive experience in flour and feed milling in Africa, the Americas, Europe and the Caribbean. He may be contacted at