When vendors bid on major equipment, they know their price is a major consideration. Because of this, I believe they tend to put forth the lowest possible price with the hope of making up the lack of profit in that price with the profit on future sales of spare parts. Various vendors likely have varying strategies and price/service points, but it seems that this is a key part of most strategies.

Because of this, and as most of you know, OEM parts are often perceived as "expensive" and that cost often drives users to seek alternative sources for those parts in non-OEM suppliers. When you combine this perception with the fact that procurement people are driven and rewarded to "save money" by procuring less expensive parts and maintenance managers are under continuing, and often intense, pressure to reduce their maintenance costs, it is very easy to see how a non-OEM supplier would look attractive.

However, a non-OEM supplier can be a longterm disappointment. Anecdotal evidence suggests that non-OEM part buyers may be disappointed more often than they are pleased, notwithstanding the initial feeling of saving money by getting a better price for the part. This disappointment is generally linked to overall performance of the non-OEM part and the consequential costs thereto. With this in mind, let's consider some of the issues that must be addressed when considering OEM vs. non-OEM parts.

Total Cost of Ownership

Rather than focus on price, it is likely more useful and accurate to use the concept of total cost of ownership. Certainly price is part of the total cost of ownership, but there are so many other costs that occur downstream of the initial price. For example, the following might be examples of the elements used to analyze the total cost of ownership:

  • Price
  • Documents - drawings, bill of material, manuals, etc.
  • Selection effort, including staff time, travel, etc.
  • Procurement transaction, freight, duties
  • Delivery, assembly, installation, startup
  • Warranty coverage
  • Performance capability, efficiency, operability
  • Energy use
  • Maintenance/PM requirements, maintainability
  • Parts stocking or inventory
  • Service levels (or lack thereof).

Of course, there may be other costs of ownership not listed here that must be considered for any given business. These are offered as common ones and should get the thinking process started. The bullet points that are italicized are those that, in my experience, are not given sufficient consideration when making purchasing decisions. We'll come back to this later.

It's been reported by those who study this issue that, on average, the initial price of equipment in a large industrial operation is only about 25% of its total cost of ownership. While this percentage may vary dramatically depending on the equipment being considered, it appears to be a reasonable approximation. For example, one company reported the price for their pumps was only about 10% of the total cost of ownership, with another 10% for maintenance and the biggest component being energy at 80 percent. Another company reported the same 10% in price for their cost of ownership of their pumps, but had substantially different data for energy (~33%), maintenance (20%), installation, operation and downtime (~10% each), and the balance being associated with environmental issues and disposal.

Others report even more different numbers. For tanks, piping and other stationary equipment, these percentages will likely vary dramatically as well, with price being a higher percentage. No matter which data is most characteristic of your operation, the point is that price may be only a small fraction of the total cost of ownership and should be part of a more comprehensive review when making these decisions.

Parts and Total Cost of Ownership

While the above discussion relates to buying major equipment, the same principles should be applied to the purchase of parts, particularly when considering OEM vs. non-OEM parts. What is your total cost of ownership in either case and what are some of the considerations in making this determination?

Since my background includes being a mechanical engineer, I tend to use mechanical equipment for examples. So not straying too far from that, I'll use pumps to illustrate these principles. If you're considering electrical equipment parts or other components, the same principles apply, but of course you'll have to use your specific knowledge of that equipment to apply them. Some questions you should ask, including requesting substantiating documents of tests or other evidence to support the responses, are:

  1. Does the part provide for comparable performance relative to discharge pressures and flows, including suction head requirements? Issues here include energy consumption for a given pressure and flow, and avoiding cavitation under very low suction head or higher fluid temperature conditions. Cavitation destroys pumps, inducing greater costs and production losses. For example, some studies have shown that the use of non-OEM parts can result in a reduction of flow/head and efficiency by up to 15% when compared to OEM.
  2. Are the part materials for the fluid being pumped and the operating conditions suited for the service? That is, do the materials have appropriate durability and reliability for the specific operating conditions? Materials that corrode or erode more quickly, of course, induce greater frequency of repair, lost production (and its related value), and can induce greater energy consumption as the parts wear more quickly.
  3. Do the balancing standards for the parts assure long life and smooth operation? If a machine train is being supplied (pump and motor for example), similarly, do the alignment standards being used assure smooth operation and long equipment life (and lower energy consumption)? Likewise, poorer balancing and alignment standards assure shorter equipment life, more downtime and related repair costs and production losses. What are those worth?
  4. Do the tolerances and precision of the parts or assembly assure a precision fit and optimal performance? Tiny deviations in clearances, e.g., a few thousands of an inch, in the part can make a huge difference in pump performance and life, and can induce substantially higher maintenance costs and production losses.
  5. Do the surface finishes on parts for the interior of the pump assure efficient operation? As with precision of assembly, surface finish can have a substantial impact on flow hydrodynamics and must be considered.
  6. Are the pump flange faces made of the proper material and do they meet strict tolerances and surface finishes to assure ease of assembly and proper operation? From my experience in helping design U.S. nuclear submarines, I understand how critical flange faces and finishes can be in minimizing the risk of leaks, and the criticality of having the proper gaskets installed in a precise manner. Does your supplier facilitate this?
  7. Are the bearings for the pumps of proper quality? Have you specified the L10 (or life) of the bearing? The fit-up standards, e.g., C3 or C4? The ABEC number? Is the bearing the right design for the pump service? If seals are being used, are they the right ones for the intended service?
  8. What other questions should you be asking? This list is just to get you started with thinking about how to make the right decisions to get the lowest total cost of ownership.

Of course, if you don't start up and shut down your pumps properly, or run your pumps at their best efficiency point (BEP), these issues may not matter. You're going to incur substantially higher energy costs, maintenance costs and related production losses because of poor operation, not because of parts selection. But, that's an issue for another day.

Your approach may also vary with the duty of the pump or other equipment. For example, if the equipment is non-critical and only operates infrequently, then buying a cheaper part that does not meet the criteria implied by these questions might actually be the lowest cost approach. Likewise, non-OEM vendors who can demonstrate that their parts and equipment meet the criteria implied in these questions should be selected since they can demonstrate the lowest total cost of ownership.

Parts in Inventory

What parts should be kept in your storeroom? This too, is an age-old question and lots of people have developed models for this. Such models take into consideration cost (working capital), failure modes (and parts needed thereto), failure frequencies (and risk/use rates), failure consequences and related equipment criticality (and loss of production), lead times (and ease of access), along with other factors. Some have used a vendor-stocking model for certain parts, or vendor guarantees for parts availability. Oters in major industrial areas have used a "supplier park" concept wherein they have banded together to have one supplier keep and deliver the most common parts. All these are good things.

At the risk of oversimplifying, I'd like to respond to the question of what parts to keep in the storeroom with a two-part question - What fails most often that impacts production and what parts are needed when this failure occurs? Usually these are things like belts, bearings, seals, fuses, switches, hoses and hose connections, and the like. So, take each equipment and make a list of what fails most often. Make sure you have the parts for this, or have ready access to them.

A second question might be - What doesn't fail very often, but when it does it has a huge consequence to the business? Then we have to balance the capital cost of the part against the risk (probability x consequence) and make a business decision about keeping the part in stock. Also, we might put processes in place to make sure it doesn't fail, or if it does, we can detect the potential failure long before it becomes a functional failure.

Vendors' Strategy

We all understand that vendors must make money to stay in business and that we need good vendor support for the success of our business. I think we also understand that the best vendors supply the best value - not just the cheapest price, but rather the lowest cost of ownership for the equipment and parts provided. Vendors must also understand that if their prices for parts are perceived as high, then their customers will increasingly seek alternatives. The higher the perceived price, the more likely an alternative will be sought. My suggestion to vendors, both OEM and non-OEM, is to make sure their business case includes the concept of total cost of ownership and all relevant business costs for their customers.

Having been the president of a business, our strategy was not to sell instruments and software with certain features and prices. That was a consideration, but our focus was on making our customers' businesses successful. OEM and non-OEM vendors are likewise encouraged to do the same.

Ron Moore is Managing Partner of The RM Group, Inc., Knoxville, TN, and author of Making Common Sense Common Practice: Models for Manufacturing Excellence, now in its third edition and of What Tool? When? A Management Guide for Selecting the Right Improvement Tools, now in its second edition, both from MRO-Zone.com; and of Our Transplant Journey: A Caregiver's Story from Amazon.com.

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