When choosing between two devices, usually a single number is looked at: the purchase price. Yet, this number often represents less than half of the total cost.
Equipment bought cheaply can cost much more through high maintenance costs and frequent downtime. The only way to see this difference is to track the asset throughout its entire life.
In this article, we explained the lifecycle stages, how the total cost of ownership is calculated, and the disposal decision.
Table of Contents
Lifecycle stages
Every asset goes through similar stages. Having these stages defined in the system clearly shows where the asset is.
The first stage is procurement and commissioning. The asset enters the inventory, is labeled, and is prepared for use.
The second stage is active usage. During this period, custody, location, and maintenance records accumulate.
The third stage is declining efficiency. The asset still works, but the frequency of breakdowns and maintenance costs increase.
The final stage is disposal. The asset is sold, donated, or scrapped, and the record is closed.
Procurement and commissioning
Lifecycle tracking begins at the moment of purchase. Records created later are always incomplete.
Purchase amount, supplier, and invoice information must be recorded. This trio is the starting point for all subsequent cost analyses.
Commissioning costs must also be added. Installation, shipping, and training expenses are part of the asset's cost.
The expected useful life should also be determined at this stage. Depreciation and replacement planning rely on this estimate.
Connecting the purchasing process to inventory registration naturally ensures this discipline.Purchasing process article.
Usage period
The usage period is the longest and most data-generating phase of the lifecycle.
Custody changes accumulate during this period. How many people used a device provides insight into wear and tear.
Location movements are also recorded. Assets that are moved frequently wear out faster and produce more breakdowns.
If usage intensity can be measured, this data is also valuable. Operating hours or mileage information feeds the maintenance plan.
Keeping these records regularly directly determines the quality of decisions to be made in subsequent stages.
Maintenance and repair cost
Maintenance and repair is the most overlooked component of total cost. Small expenses individually seem insignificant, but their total is large.
Linking every intervention to the asset card ensures this total is formed. Unlinked expenses get lost in overhead.
Spare part costs must also be included. Parts issued from stock should be reflected in the relevant failure record.
The cost of downtime, on the other hand, is usually never calculated at all. In production or field equipment, this item can be larger than the repair invoice.
We covered the failure flow in the failure tracking article.
Total cost of ownership
Total cost of ownership is the sum of all expenses generated by an asset throughout its lifespan.
Purchase price, commissioning expenses, maintenance and repair, consumables, and energy consumption enter the equation.
The revenue obtained during disposal is deducted from this total. A high resale value significantly reduces the total cost.
This calculation makes it possible to compare similar assets. The true cost of two models doing the same job can only be seen this way.
Cost per unit of usage can also be calculated; this makes assets used at different intensities comparable.
Depreciation and book value
Depreciation is the conversion of an asset's value into an expense over its lifespan. It is a mandatory calculation on the accounting side.
Matching the inventory record with the accounting record significantly simplifies period-end operations.
An asset with a zero net book value may still be in use. This situation must be clearly visible in the inventory.
During disposal, the difference between the book value and the sales proceeds creates a financial impact.
Depreciation methods and periods are subject to tax legislation; clarify the implementation with your financial advisor.
Disposal decision
When an asset should be disposed of must be determined by data, not intuition.
The ratio of annual maintenance cost to replacement cost is the most practical indicator. When this ratio exceeds a certain threshold, replacement becomes logical.
Downtime frequency is also decisive. Equipment that frequently stops generates losses beyond its direct cost.
Second-hand value also affects timing. For assets whose value drops rapidly, early selling reduces total cost.
The disposal transaction must generate a record and the asset's status must be closed. Unclosed records mislead the inventory.
Using data in subsequent purchases
The real value of lifecycle data is that it improves future purchasing decisions.
Total cost comparison on a brand and model basis shows which choice is actually economical.
Evaluation can also be made on a supplier basis. A supplier with weak service support takes back the cheap price many times over.
Comparing the actual service life with the expected life is also instructive. Assets that constantly expire early indicate that selection criteria need to be reviewed.
This data also serves as input for supplier evaluation; supplier evaluation read the article.
Points to consider
Lifecycle tracking only generates value when records are kept completely from start to end. Incomplete records lead to misleading results.
Therefore, it is necessary to keep the scope realistic. Fully tracking a small number of assets is more valuable than incompletely tracking a large number of assets.
Starting with high-value and heavily used assets is the approach where the return is seen the fastest.
Attaching cost records to the asset also requires habit; expenses written to general overhead fall out of the analysis.
Records in the inventory module tracked and can be associated with cost centers.
Frequently asked questions
Which assets should have their lifecycle tracked?
High-value and maintenance-requiring assets take priority; for low-value items, tracking costs outweigh the benefits.
Is depreciation calculated in the system?
It is tracked on the inventory side; we determine the integration setup with the system where financial records are kept during installation.
How is downtime cost calculated?
It is a business-specific calculation; it can be estimated based on hourly production or service value and added to the failure record.
Is the same structure used for vehicles as well?
Vehicles are tracked with a separate setup; fleet management you can check out the article.
Lifecycle tracking is a structure that shifts purchasing decisions from price comparison to cost comparison. The scale of the difference surprises most businesses at first calculation.
Start by keeping the scope limited to high-value assets; the return is visible fastest there.
Associate every maintenance and repair expense with the asset. Amounts written off as general overhead are completely lost from analysis.
Make sure to also close disposal records; open dead records mislead all inventory reports.
By consulting with the EQLEM team you can plan your asset management setup.