Modeling Equipment Acquisition with Life Cycle Costing Decision (Case in Ethio-Plastic Industry)
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Date
2018-06
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Addis Ababa University
Abstract
Improving the quality of an organization’s products and services is fundamental to business
success. This requires the engagement of highly skilled human labor as well as financial
resources, given the appropriate technological, organizational, institutional and cultural
infrastructure. Furthermore, the equipments or machineries in the organization must be able to
make the owner more competitive and profitable in terms of lower unit costs. In this regard, the
present research is a case study which reveals the challenges related to cost escalation while the
equipment selection decision making is done based on the traditional least cost approach. Hence,
LCC analysis is performed to pin point where the cost escalation will be. Based on the collected
data (cost history of the case machinery), the outcome of the analysis demonstrated that the
traditional approaches adopted for equipment selection leads to a biased decision. As a result, the
company is incurring a blown up unexpected cost because economical criteria outweigh other
factors in their decision making process for equipment selection. The problem with the
traditional approach is that it mainly concentrates on the purchasing price of the equipment and
often ignores those costs that appear when it becomes operational. Nevertheless, in addition to
the purchasing cost, equipment cost is also highly related with operational and maintenance
costs. Moreover, those unexpected costs are also related with the unforeseen quality cost drivers.
Consequently, quality based life cycle costing framework is developed to solve this problem.
The framework is developed customizing/ improving the Fabrycky and Blanchard’s life cycle
cost framework integrating it with the quality cost drivers. When the selection is made with LCC
analysis, it will be only based on the overall minimum life cycle cost. Generally low quality
equipments will have low cost and high quality equipments will have high cost. The new
framework will optimize these costs considering quality cost drivers in addition to minimum life
cycle cost as a selection criterion in their decision making. Above all, taking into account quality
dimensions in the framework may certainly resolve the occurrence of such unexpected cost.
Since practical validation of the framework with real data requires a long period of time, at least
equal to the life span of the equipment, the researcher tried to validate it via expert opinions; and
it is found to be appropriate.
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Keywords
Life Cycle, Costing, Acquisition, Equipment