Life cycle costs

Terotechnology, or life-cycle costing as it is better known, is a cradle-to-grave process of ascertaining total asset costs and is a function of acquisition, ownership, operational and administration costs. For terminal operators, however, getting accurate information from manufacturers is not always that easy.

At the outset of the procurement stage, says Sharjah-based terminal operator Gulftainer, it is evident a number of associated cost elements can only be estimated. The ability to calculate overall life cycle costs is therefore contingent on the accuracy of these forecasts. This is easier when taking short term factors into consideration, but much harder when looking longer term. Relatively minor inaccuracies in estimates can therefore significantly affect the overall life cycle cost.

A spokesperson remarks that it is debatable whether objective and unbiased life cycle costs can be obtained from suppliers. It is clearly in a supplier’s interest to promote an attractive life cycle cost of ownership in order to enhance a competitive edge.

While it tries to obtain sufficiently comprehensive like-for-like information from suppliers at the tender stage, it also goes to considerable lengths to obtain comparative data from other end users, particularly those operating in comparable climatic conditions, to enable it to make an objective appraisal of product quality, reliability and manufacturer claims of operating costs.

John Miller, operations engineer of Axis Engineering at the Port of Auckland, says that, as part of its procurement process, it asks manufacturers to supply actual service schedules and to give costs for all spare parts. This information allows the company to fairly accurately estimate life cycle costs.

“Manufactures and component suppliers are able to provide expected service schedules of reasonable standard in their operating maintenance manuals,” he claims.

Spanish container terminal operator Marítima Valenciana asks manufacturers for life cycle costings only on very high value equipment, notes terminal director, Alfonso González. In general, he believes manufacturers are able to provide accurate information, while like-for-like comparisons are also routinely made available to potential purchasers.

When DP World issues a tender, it only seeks full information regarding life cycle costs if one of the company’s business units is requesting a full contract maintenance package with the equipment, as is the case with London Gateway.

“Our requirements focus more on the structural integrity of equipment,” observes Andrew Adam, vice president of Engineering & Operations. “In our tender specifications, we request the hourly life expectancy of the components we order, which basically helps us ascertain what to buy and when. This potentially saves our business units from ordering large quantities of parts they wouldn’t require for a few years!”

He characterises as “quite poor” feedback sent back to manufacturers by international operators in respect of life cycle costings. In his experience, terminals will only contact an equipment supplier when a significant problem is identified. Many smaller issues, which would help in more accurately predicting life cycle costs, tend to slip under the radar.

Manufacturers are nevertheless keen to get feedback from operators on life-cycle costs, although they do get part of this information from their spare parts sales, points out Axis Engineering’s Mr Miller. Auckland always feeds back its experience whenever it purchases equipment, especially with regard to any short comings.

“In general, we don’t get requests from manufacturers looking for feedback and statistics on our experience with life-cycle costs, although interest does increase when we have bought or are selling some equipment,” says Marítima Valenciana’s Alfonso González. “However, we prefer to be particularly discreet when it comes to exchanging information in this area.”

DP World takes a wholly contrasting viewpoint. Andrew Adam points out that many manufacturers have to estimate life-cycle costs because of the lack of a two-way flow of information involving terminals. Ports could do much better in this area, he says.

“Wrapping arms around a piece of information thinking it’s a competitive advantage is absolutely not the answer. We could be blocking some important information from outside that could improve/enhance what we have and the way in which we work.”

Significantly, the Port of Auckland has changed supplier because of perceived better life-cycle costs, says Mr Miller, citing the decision to source straddle carriers from Noel at the expense of Kalmar. However, he stresses that, in general, the main reason for switching manufacturer is usually rising prices or a lack of support.

DP World’s Andrew Adam agrees, pointing out that one of the big issues terminal operators face globally is support. “I know operators have changed components and products in favour of companies that provide better support and service levels,” he reveals.

Although Marítima Valenciana has never changed suppliers because claimed life-cycle costs have not lived up to expectations, Alfonoso González nevertheless reveals that claims have been made when equipment has not performed as expected.

Gulftainer policy is to form close, long-term partnerships with its suppliers. The two-way communication flow that results from this relationship is mutually beneficial and contributes to honing designs to the company’s requirements.

Most terminal operators contacted by Port Strategy conceded that local climactic conditions do impact on life cycle costs. Indeed, conditions in the Persian Gulf are viewed as so extreme that Gulftainer incorporates stringent specifications at the tender stage to ensure product design is appropriate to operate there.

“Clearly, with adequate consideration at this stage of procurement, many climate-related issues can effectively be designed out and their impact on overall life cycle costs can be minimised,” notes the spokesperson.

Andrew Adam of Dubai-based DP World does not agree. Life cycle costs are not greatly affected by local climactic conditions, rather higher costs reflect more the international standards, regulations and laws that a region/country must comply with.

“Neither heat, humidity nor sand need necessarily impact on life cycle costs. As long as the original specification is well written, technical solutions are available to ensure the equipment performs well in any specified climate,” he insists. “Extreme temperatures, heavy rain, significant ice and snow and high winds are not issues we would typically be concerned with, providing our specification is correct.”

Axis’ John Miller adds: “High humidity means we have to apply far higher corrosion protection compared to a machine operating in places such as Australia or Dubai. As a result, we do need higher IP ratings and painting standards. Because of our high ultra violet radiation levels, even the best paint coating is good for only ten years maximum in New Zealand. It does add to life-cycle costings, but not significantly.”

The prevailing humidity means that electrical items are cooled via ventilation and have to be kept in air-conditioned e-rooms. All others vulnerable components are cooled via heat sinks and therefore remain sealed.

The high levels of heat and humidity encountered in a Spanish summer also have a dramatic impact on electrical systems, with component failure often highest, even when they are embedded in other systems. Clearly, this “Valencia cost” does impact negatively on life-cycle costs.

“Because of our humid climate, electric and electronic components rarely perform under dry conditions. Autumn rain is an additional problem and is the cause of a decrease in the availability of some equipment,” says Mr González.

Although outsourced maintenance can help avoid potentially nasty surprises in terms of long terms life cycle costs, none of the terminal operators PS contacted was hugely in favour of this approach.

Gulftainer argues that, to continue monitoring and controlling life cycle costs, it prefers to keep maintenance in-house. Virtually all engineering activities are therefore conducted by its own personnel. This ensures a high degree of control on costs and provides for considerable flexibility in labour levels and assignment between its divisions, something that would be impractical to do if activities were contracted out.

In Auckland, outsourcing is only seen as applicable for low volume work, such as on forklifts, where the local agent is contracted to undertake maintenance.

“Where we have much larger work volume, we prefer to do this in-house using a specialist team in purpose-built facilities. If you outsource too much work you end up not being able to control things, simply because you don’t understand how equipment and procedures really work. By doing the work ourselves, we have built up a good understanding of the cost drivers,” says Mr Miller.

Outsourced maintenance contracts have also been avoided by Marítima Valenciana, with outside contractors only used during warranty periods and then only when supplied by equipment suppliers. However, Mr González says that original equipment manufacturers (OEM) are currently maintaining some pieces of equipment as a means of guaranteeing life-cycle costs.

Andrew Adam, in contrast, is not a fan of inviting OEMs to do maintenance.

“We could have possibly 20 OEM suppliers on one crane. It would not be economical or best practice to engage each OEM to maintain their part of the crane or to give one sole responsibility for the whole crane. Furthermore, the crane supplier would also not be best placed to maintain the entire crane, given their focus primarily on what they manufacture,” he says.

Mobile equipment is a little different as the equipment OEM has for some years now provided full maintenance packages covering the entire piece of equipment, given that it is considered a more off-the-shelf product. There are many companies who specialise in maintenance contracts for the heavy equipment side of our business, says Adam.

He believes that the financial case for outsourcing maintenance as a means of controlling life cycle costs varies greatly from port to port and region to region. Factors such as organised labour, unemployment levels and internal politics all play a part. The dynamics of each site have to be studied and plans created to fit the requirements, he stresses.