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OPERATIONS MANAGEMENT
CHECK POINT 67: EQUIPMENT EVALUATION AND SELECTION

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1. equipment evaluation and selection questions
2. Lean Operational Guidelines For Equipment Evaluation And Selection
3. factors in the equipment evaluation and selection process
4. new equipment economic viability investigation
5. the accounting rate-of-return method
6. the payback period method
7. the discounted cash flow method
8. additional information for selecting new equipment
9. methods of obtaining new equipment
10. for serious business owners only
11. the latest information online
 

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OPERATIONS MANAGEMENT
CHECK POINT 67: EQUIPMENT EVALUATION AND SELECTION

Please Select Any Topic In Check Point 67 Below And Click.
1. equipment evaluation and selection questions
2. Lean Operational Guidelines For Equipment Evaluation And Selection
3. factors in the equipment evaluation and selection process
4. new equipment economic viability investigation
5. the accounting rate-of-return method
6. the payback period method
7. the discounted cash flow method
8. additional information for selecting new equipment
9. methods of obtaining new equipment
10. for serious business owners only
11. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?
 

WELCOME TO CHECK POINT 67

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Resources Management		 TUTORIAL 3 Financial Management TUTORIAL 4 Operations Management TUTORIAL 5 Marketing
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HOW CAN YOU BENEFIT FROM CHECK POINT 67?
 
The main purpose of this check point is to provide you and your management team with detailed information about the Equipment Evaluation And Selection and how to apply this information to maximize your company's performance.
 
In this check point you will learn:
 
• About equipment evaluation and selection process.
• About lean operational guidelines related to equipment evaluation and selection.
• About factors in the process of equipment evaluation and selection.
• About new equipment economic viability investigation methods.
• About the account6ing rate-of-return method.
• About the payback period method.
• About the discounted cash flow method.
• About methods of obtaining new equipment.
• About cash purchase and rental of equipment.
• About capital lease of equipment... and much more.
 

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 67
 
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.
 
You and your team should adhere to basic lean management guidelines on a continuous basis:
 
• Treat your customers as the most important part of your business.
• Provide your customers with the best possible value of products and services.
• Meet your customers' requirements with a positive energy on a timely basis.
• Provide your customers with consistent and reliable after-sales service.
• Treat your customers, employees, suppliers, and business associates with genuine respect.
• Identify your company's operational weaknesses, non-value-added activities, and waste.
• Implement the process of continuous improvements on organization-wide basis.
• Eliminate or minimize your company's non-value-added activities and waste.
• Streamline your company's operational processes and maximize overall flow efficiency.
• Reduce your company's operational costs in all areas of business activities.
• Maximize the quality at the source of all operational processes and activities.
• Ensure regular evaluation of your employees' performance and required level of knowledge.
• Implement fair compensation of your employees based on their overall performance.
• Motivate your partners and employees to adhere to high ethical standards of behavior.
• Maximize safety for your customers, employees, suppliers, and business associates.
• Provide opportunities for a continuous professional growth of partners and employees.
• Pay attention to "how" positive results are achieved and constantly try to improve them.
• Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. EQUIPMENT EVALUATION AND SELECTION QUESTIONS

EQUIPMENT EVALUATION AND SELECTION PROCESS

Business owners and operations managers must be familiar with evaluation, selection, layout, maintenance, and replacement of equipment which constitutes a major managerial task and requires a thorough understanding of the company’s needs.

Some of the basic questions to be considered by you and your management team in the Process Of Equipment Evaluation And Selection are outlined below.

EQUIPMENT EVALUATION AND SELECTION QUESTIONS

1.

Does the equipment perform the work required in the best possible way and with the required level of accuracy?

2.

Does the equipment have the required operational capacity?

3.

Does the equipment produce sufficient savings in cost, time, labor, and materials?

4.

Does the equipment prove itself more viable with regard to operating methods, production control, and quality of work?

5.

Does the equipment prove itself to be an economically viable proposition?

2. LEAN OPERATIONAL GUIDELINES FOR EQUIPMENT EVALUATION AND SELECTION

LEAN OPERATIONAL GUIDELINES

It is essential that you and your management team take into consideration the prevailing Lean Operational Guidelines during the process of selecting and evaluating new plant, machinery, and equipment.

LEAN OPERATIONAL GUIDELINES
RELATED TO EQUIPMENT EVALUATION AND SELECTION

1.

Maintain low cost automation for manufacturing and operational processes.

2.

Maximize the use of numerically controlled (NC) and computerized numerically controlled (CNC) machines.

3.

Maximize the operational flexibility of plant, machinery, and equipment.

4.

Maintain production capacity at the lowest possible operational and maintenance costs.

5.

Maximize the utilization of high production volume plant and machinery to reduce unit cost for product and services.

6.

Maximize the use of plant, machinery, and equipment which will be suitable for flexible manufacturing purposes.

7.

Maximize the use of plant, machinery, and equipment which will provide the highest quality of products and services.

8.

Maximize the use of plant, machinery, and equipment which will minimize the material handling costs and travel time.

9.

Maximize the use of plant, machinery, and equipment which will minimize the tooling and fixtures costs and allow the use of interchangeable tools.

3. FACTORS IN THE EQUIPMENT EVALUATION AND SELECTION PROCESS

EQUIPMENT EVALUATION AND SELECTION INVESTIGATION

The process of equipment evaluation and selection usually necessitates that management conducts a thorough investigation into the market of new industrial machinery.

The New Equipment Selection Process entails a detailed examination of new equipment manufacturers' catalogues, evaluation of technical specifications, visits to showrooms, exhibitions, and meetings with professionals in allied fields. Some of the important factors which need to be considered at this stage are outlined below.

FACTORS IN THE PROCESS OF EQUIPMENT EVALUATION AND SELECTION

• Equipment Operational Capacity.

It is essential to assess the manufacturing capacity of a specific piece of equipment to ensure that it will satisfy not only current production requirements but also the long-term production considerations.

• Equipment Operational Versatility.

It is important to analyze the operational functions of a specific piece of equipment and to identify all manufacturing processing requirements that can be satisfied by the functional abilities of the new machinery.

• Equipment Operational Reliability.

It is necessary to assess the operational reliability of a specific piece of equipment or machinery, keeping in mind, that unreliable machinery may cause unnecessary and costly  breakdowns. This will disrupt production planning and may jeopardize delivery dates promised to customers.

• Work Preparation Methods.

It is important to select a piece of equipment that will allow easy work preparation methods. Equipment setting up, breaking down, servicing, and cleaning times are non-productive, and should be kept to a minimum in order to increase its productive running period.

• Equipment Maintenance.

Steady service and maintenance of equipment ensures its continuous and efficient performance. New pieces of equipment should be easy to service in order to keep maintenance costs as low as possible.

• Equipment Operational Safety.

A high level of equipment operational safety is necessary to maintain an accident-free production process. Unsafe equipment may cause accidents, decrease production output, lower morale, and cause deterioration in overall labor-management relations.

• Equipment Operational Compatibility.

The operational compatibility of the new piece of equipment must be matched with the specific standard of the existing equipment within the facility. Simplification makes it easier to serve and maintain equipment in good operational order and to keep minimum spare parts. From the operational point of view it will be easier to train operators, plan production, and set the machines for production runs.

• Equipment Availability.

It is necessary to inquire about the delivery dates when the new equipment may become available. These dates should be considered and matched with the production requirements of the facility. The identity of the new equipment suppliers and their ability to deliver the equipment in the required time should also be thoroughly examined.

• Equipment Installation.

The new piece of equipment must be examined from the installation point of view. It is necessary to ensure that the equipment can physically fit into the perceived space and that its dimensions or weight do not exceed relevant permissible criteria.

• Equipment Design.

It must be ensured that the new equipment is designed in accordance with the necessary functional requirements and does not represent half-completed experimental models. The equipment supplier is, therefore, required to produce all the necessary guarantees and sufficient technological back-up to ensure high performance and quality functioning of the new machinery.

• Ancillary Equipment.

The full range of the new ancillary equipment must be identified. This range should be examined and its availability assessed in order to ensure effective utilization of equipment.

• Effect On The Organization.

Selection, purchase, and installation of new equipment often necessitate specific reorganization within the facility. New equipment may require provision of additional air, electrical, or water installations, or it may necessitate moving certain existing machinery into new positions to provide additional floor space. Computerized numerically controlled (CNC) machines and numerically controlled (NC) machines may require additional computer terminal installations.

• Effect On The Production Employees.

New equipment with additional production capacity will certainly affect product design, production planning, and maintenance procedures. It will necessitate that the company's employees upgrade their qualifications and re-adjust their activities in accordance with the technological requirements dictated by the new equipment.

4. NEW EQUIPMENT ECONOMIC VIABILITY INVESTIGATION

NEW EQUIPMENT ECONOMIC VIABILITY INVESTIGATION

As a direct result of preliminary technical selection, a list of optional machinery should be drawn up, concluding the first part of the new equipment evaluation and selection procedure. This list should thereafter be subjected to the New Equipment Economic Viability Investigation.

There are several Methods For Measuring The Profitability Of Capital Expenditure Projects. These methods are discussed below.
 

NEW EQUIPMENT ECONOMIC VIABILITY INVESTIGATION METHODS
   
The Accounting
Rate Of Return Method		   The Payback
Period Method		   The Discounted
Cash Flow Method

The new equipment economic viability investigation is usually carried out by the financial executive, who should be familiar with the appropriate evaluation methods.
 

ADDITIONAL INFORMATION ONLINE
• Average Rate Of Return By Jon Turner.
• The Payback Period Explained By Jon Turner.
• Calculating Payback Period By Dan Slaughter.
• Accounting Rate Of Return By Dee Amaradasa.
• Discounted Rate Of Return By Binny Mathews, Business Finance.

5. THE ACCOUNTING RATE-OF-RETURN METHOD

THE ACCOUNTING RATE-OF-RETURN METHOD

The Accounting Rate-Of-Return Method is a crude, but simple, approach for estimating the performance of capital investment. Because of its simplicity, this method is often used to obtain a preliminary indication of the viability of the proposed capital expenditure. Moreover, this method provides a measure for expected capital expenditure performance by using two variables illustrated below.

                         
Accounting      =  Project's Average Annual After-Tax Net Income      
Rate Of Return                        Average Investment Cost
 
Or:

Accounting                (A - B) x (1.0 - C) 
Rate  Of Return =          (D - E) + E
                                             2

THE ACCOUNTING RATE-OF-RETURN METHOD VARIABLES

1.

Estimated annual after-tax net income from the project.

2.

Average investment cost.

KEY:

A

Projected annual cash revenue generated from the capital equipment ($).

B

Projected operating cost of running the capital equipment ($).

C

Projected company's income tax rate (% /100).

D

Total investment cost ($).

E

Projected salvage value, i.e. equipment value at the end of its’ service life ($).

Note:

Additional information related to the Accounting-Rate-Of-Return Method, its advantages and disadvantages, and a typical example for using this method is provided in Tutorial 3.

6. THE PAYBACK PERIOD METHOD

THE PAYBACK PERIOD METHOD

The Payback Period Method is the second method for measuring the economic viability of a specific capital expenditure proposal. This method is concerned with measuring the period of time it will take to recover the capital investment from future cash inflows as illustrated below.

                                     
Payback  Period    =  Total Investment Cost (In $) 
 (In Years)                  Average Annual Net Cash Inflow (In $)   
 
Where:  

Average        Project’s        Total                    
 Annual          Average         Investment  -  Salvage
 Net Cash  =  Annual       +  Cost                  Value    
 Inflow           After-Tax        Service Life Period 
 (In $)            Net Income    (In Years)

Note:

Additional information related to the Payback Period Method, its advantages and disadvantages, and a typical example for using this method is provided in Tutorial 3.

7. THE DISCOUNTED CASH FLOW METHOD

THE DISCOUNTED CASH FLOW METHOD

The Discounted Cash Flow Method is the most accurate method for measuring the economic viability of a specific capital expenditure proposal. Instead of measuring the accounting rate of return or payback period on a particular investment, this method measures Present Cash Flow values generated from such an investment. This approach to capital investment analysis is termed the Present-Value Method.

The Discounted Cash Flow Method entails the use of Present-Value Tables which are provided at the end of  Tutorial 3: 

• Compound Interest And Present Value Table A-1.
• Compound Interest And Present Value Table A-2.
• Compound Interest And Present Value Table A-3.
• Compound Interest And Present Value Table A-4.

Each table contains a Series Of Multipliers that help determine the Present Value Of The Future Cash Flow. This process is called Cash Flow Discounting and it has two basic variables outlined below.

THE DISCOUNTED CASH FLOW METHOD VARIABLES

1.

Annual interest rate or minimum desired rate of return.

2.

A period of time during which the cash flow is discounted.

Note:

Additional information related to the Discounted Cash Flow Method, its advantages and disadvantages, and a typical example for using this method is provided in Tutorial 3.

8. ADDITIONAL INFORMATION FOR SELECTING NEW EQUIPMENT

EVALUATION OF THE NEW EQUIPMENT

The New Equipment Economic Viability Investigation also requires detailed knowledge of the proposed operation and understanding of labor, tooling, utilities, services, maintenance, insurance, and space requirements. 

Moreover, the evaluation process entails estimating the anticipated value of the additional production output. If the equipment is to manufacture products for stock, it becomes a relatively simple exercise. If, however, the equipment is to be involved in batch production or manufacturing to customer orders, production output cannot be estimated at its' previous accuracy.

The most satisfactory estimate can be obtained by forecasting the anticipated production output of average components and utilizing this forecast on the basis of running cost calculations.

9. METHODS FOR OBTAINING NEW EQUIPMENT

FINAL SELECTION OF NEW EQUIPMENT

The new equipment economic viability investigation represents a combined effort between financial and operations executives. Once the Final Selection Of New Equipment is completed, an appropriate method for obtaining such equipment needs to be devised. Management may use three different methods to obtain equipment as outlined below.

METHODS FOR OBTAINING NEW EQUIPMENT

1.

Cash Purchase Of Equipment.
The company outlays its own cash or borrows money from an external source and acquires the asset outright. In this case, the asset and liability are recorded at the amount-paid level, and the asset is subject to regular depreciation.

2.

Rental Of Equipment.
The company enters into a short-term rental agreement with an equipment rental firm and pays a monthly rental fee. A short-term rental agreement can be  cancelled at any time with a short notice period and all risks of asset ownership lie with the rental firm.

3.

Capital Lease.
This is one of the fastest growing ways of financing the acquisition of plant, machinery, and equipment. This method is also known as a Long-Term Lease and it has several advantages. First, there is no need for an immediate cash payment. The asset is acquired on a basis whereby the purchaser (the Lessee) pays equal monthly installments to the seller (the Lessor) for the use of the asset.

These monthly installments are usually tax-deductible, thereby providing the lessee with an immediate tax advantage at the end of the fiscal period. At the end of the leasing period, when the lessee completed with all payments to the lessor, the equipment will still remain the property of the lessor, unless both parties agree at the beginning of the leasing agreement, that the lessee will have the right to purchase the leased asset from the lessor for a nominal fee of, say, $1.

Upon delivery, the new equipment needs to be positioned in an appropriate place within the production facility in accordance with the overall Plant Layout. This represents another important managerial task and is discussed in detail in Tutorial 4.

ADDITIONAL INFORMATION ONLINE

If you would like to know how to go about Capital Leasing, please send your e-mail for additional free information to Lean Business Club, the Member Benefits Department at: Leasing@LeanBusinessClub.com.

You can obtain additional information about Leasing Procedures from The Equipment Leasing And Finance Association (ELFA) online.

10. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

11. THE LATEST INFORMATION ONLINE
 

LESSON FOR TODAY:
Sometimes You Can't Afford Not To Have The
Equipment You Need, Even If You Can't Afford It!

Go To The Next Open Check Point In This Promotion Program Online.