By Mike Sherer
SPECIAL REPORT: WHAT IT REALLY COSTS
Purchase price is just the beginning. Lifecycle cost projections give you a fuller picture.
Yes, you have capital budgets and operating budgets. And yes, you have to track them separately. But theyre not unrelated. What you spend on the capital side has profound implications for the operating side. You know it, and everybody in your office knows it. In the end, theyre two pockets on the same pants.
And still you beat on first cost, intent on the sanctity of the capital budget, often while pushing up operating expenses for years to come.
Fortunately, a growing number of you now are saying enough. As business growth gets harder to come by, youre looking for ways to cut costs and get more productivity out of the kitchen. And then the epiphany hits: As you revamp and replace kitchens, more of you are chucking the conventional viewpoint and trying to figure out what equipment really costs to operate over its useful life. Take that figure, annualize it, and youve got a yardstick.
The buzz now is lifecycle costing, a discovery thats really a rediscovery. In foodservice, the late industry guru Lendal Kotschevar, PhD., formalized the concept decades ago in textbooks like Foodservice Planning: Layout, Design and Equipment.
All Things Considered
Ask yourself what you look for in a piece of equipment, and youll probably say, in this order, performance, durability and quality. Typically, buyers weigh performance against purchase price when deciding among several suppliers, then take into account intangibles such as durability and quality.
Lifecycle costing gives you another way of comparing equipmentor the cost to own itin addition to performance. The idea is to turn intangibles into tangible costs and forecast them over the life of the equipment. By doing so, you can find out if a unit with a higher initial purchase price has the same, higher or lower lifecycle costs as another, lower-priced unit.
First is the performance spec, and that goes without saying. No sense saving money on an item that wont do what you need it to. (Not that youve ever fallen into that trap, right?)
Durability is perhaps the next variable to consider. The life expectancy of the piece of equipment itself can be a big factor in a purchase decision. A low-priced piece of equipment may not be worth the initial savings if it lasts only half or two-thirds as long as a higher-priced competing model.
Now, when the disparity is that pronounced, youll probably notice and think about it. But what if youre comparing two head-on competitors, with maybe only a couple hundred dollars between them? And what if one will last, say, five years, and the other will last six? Are you thinking about it? You should be, but itd be easy to miss. And keep in mind we havent even considered other kinds of costs yet.
Conversely, if youre looking at two pieces that both meet your performance needs, it might be harder to justify paying a premium for the higher-performance unit if it doesnt last as long as one with a little less power or production capacity.
Durability is probably the next biggie. How durable equipment is often depends largely on the environment in which its used.
We know on average our equipment lasts from seven to 10 years, says one fryer manufacturer. Some folks put one in a concession booth and with a little maintenance theyll use it forever. The 24-hour McDonalds in Moscow, though, is a real torture test.
The Happy Hook-Up
In many cases, using a piece of new equipment is as easy as uncrating it and plugging it in. More often than not, however, hooking up equipment is a little more complicated. Even if all you have to do is plug it in, you have to make sure youve specd the right plug set and a unit that conforms to the service, electric or gas, coming into your facilities.
A couple of cases where installation costs can become a big factor in lifecycle cost comparisons are ice machines and steamers. Ice machines, for example, can be self-contained or installed with remote components. Installation cost of the latter system is more expensive, but may extend useful life and/or reduce maintenance costs, resulting in a lower lifecycle cost depending on your
type of operation.
Standard boiler-fired steamers also have a high installation cost because of water hook-ups and drainage requirements. They provide high productivity, but will have a higher lifecycle cost than connectionless steamers, which require no hookups and vastly reduce water consumption. Not that ones better than the other. But you need to double-check your assumptions about how much steaming you need, and which models and types will meet your performance requirement.
Keep installation costs in mind even when considering the costs of gas versus electric equipment. Again, utility service you already have in your facilities will be a primary factor in installation costs.
Energy Tops Your List
Except for really bizarre situations, the biggest component of a piece of equipments lifecycle cost will be energy, or energy plus water. Depending on the type of equipment, you may spend up to three times the initial cost of the unit on energy use in the first five years. Finding the most efficient unit within your performance specs, obviously, could potentially deliver significant savings. In other words, a lower lifecycle cost.
Estimating energy cost isnt easy. First you have to figure out how much energy a given piece of equipment will use in your specific circumstances, which is tricky enough. Then you have to figure out what the cost of energy is in any given market in which you operate.
Rule-of-thumb energy cost calculators are often erroneous, says Don Fisher, of Fisher-Nickel Inc., operator of the Food Service Technology Center, San Ramon, Calif. A 14 kW fryer, for example, will use the same amount of energy per day as a 20 kW fryer under the same circumstances, so its a tricky calculation. And energy costs are so variable across the country.
When you buy a car, the EPA ratings for gas mileage make comparing different models easy. Foodservice equipment is all different. Some equipment uses gas, some electric. Different equipment is designed to do different thingschop, mix, slice, heat, cool, hold, etc. That means there is no equivalent mpg in foodservice yet.
A fryers energy cost, for example, is much more dependent on use than a reach-in refrigerators. While a reach-in will cycle more often and use more energy when its door is opened frequently, average energy use over the course of a day is fairly simple to calculate. On the other hand, a fryer thats turned on for 12 hours per day may be idle for eight hours. When it is actually cooking food, some percentage of that work may be under heavy-load conditions, and some under medium-load and light-load conditions, all of which will impact the energy calculations.
For some categories of equipment, databases of energy use have been developed, making it easier to calculate energy costs. Stats for every ice machine on the market, for example, are listed on the Air-Conditioning and Refrigeration Institute Web site (www.ari.org), including daily production and energy and water use. Reach-in refrigerators, if theyre sold in the state of California, are listed along with their energy data by the California Energy Commission (www.energy.ca.gov). The top 25% in terms of energy efficiency are now listed on the EPAs Energy Star Web site (www.energystar.gov).
Data on other equipment categories are coming together slowly. The FSTC now has energy use calculators based on ASTM test data for fryers, hot holding cabinets, and steamers. In addition, the folks there also have a standard energy use calculator that can be used for just about any piece of equipment if you have ASTM test data to plug in for that particular unit. (Just bear in mind, as Fisher notes, that rules of thumb are only that, and the accuracy of cost calculators rises and falls with the accuracy of their defaults and other detail assumptions. Even the sample-cost grid on full-size ovens in this story is mainly for illustrationcost components are estimates only, and while we feel pretty good about the representative average energy rates, were jumpy about the maintenance figures. Our advice is to build your projections from scratch, using actual historical data and specific regional rates whenever you can.)
A sophisticated lifecycle energy-cost projection might even project future cost fluctuations in gas or electricity over the life expectancy of a piece of equipment. But even more basic is a look at the price of gas and electricity in the markets where you operate. While equipment fueled by one type of energy may be more efficient than another, the cost of that energy may be higher in some markets, giving the equipment a higher lifecycle cost in that market.
Finally, dont forget that installation of many types of equipment, cooking equipment in particular, can affect the load on your HVAC system. That, in turn, can affect your energy costs. The main thing, though, is that your comparisons remain valid, so whatever you calculate, be consistent.
Water, Water Everywhere
Next up is a cost sometimes overlooked. Several categories of equipment use water, and water is a utility you not only pay for on its way in, but one you also have to pay to get rid of.
In the April issue, for example, we told you about how much waterand energyyou can save by using low-flow pre-rinse spray valves. The savings in water result from the cost of water used and also the sewer costs related to water that goes down the drain.
Other categories of equipment that use a lot of water include dish machines and ice machines as well as steamers. ARI data on ice machines include water usage (most of which ends up as ice, but some of which ends up going down the drain). Remember, though, to factor your actual usage when you calculate costs. You may have a 1,200-lb. machine, but use only 1,000 lbs. per day.
Dish machine water usage also depends upon actual use. Working with the manufacturer and your own internal traffic numbers, you may be able to calculate average daily use based on how many loads a machine will wash in a day.
Cleaning & Consumables
Preventive maintenance can play a big role in lifecycle costing. Proper maintenance can extend the life expectancy of equipment and prevent expensive service calls. But maintenance also may be more costly on some types of equipment than on others.
Almost a year ago, Burger King completed the system rollout of its Phase I kitchen. Its been very successful in terms of helping units build sandwiches, says Jeff Cook, BK director of equipment development, but weve found some increased labor costs. The old toaster we used just needed to be wiped down. The new one has to be broken down to be cleaned. The increased maintenance cost caught the franchisee community by surprise. Now we try to do a lifecycle cost analysis before we spec a new piece of equipment.
So labor costsor more precisely, differences in labor costswill matter in your decisions. A self-cleaning soft-serve machine might have a much higher initial cost than a standard machine, for example, but the labor cost to clean the standard machine probably results in a higher lifecycle cost. Cleaning and de-liming a boiler-fired steamer adds a lifecycle cost not incurred by connectionless steamers. Training employees to properly clean and maintain equipment also adds to labor costs.
The cost of supplies in addition to labor should be factored into maintenance costs. Filters for ice machines and fryers, fryer shortening, chemicals to clean and de-lime steamers or ice machines, and other supplies all figure into lifecycle cost.
Oops, It Broke
Though not as heavily weighted as energy, service and repairs also factor into lifecycle costing. When a piece of equipment breaks down, not only do you incur the cost of a service call and repairs, but also the lost time or income while the equipment is down.
Unlike the car business, unfortunately, there isnt a J.D. Power & Associates ranking for foodservice equipment. Estimating service costs is difficult when a piece of equipment is truly new, a model thats never been on the market before. And often, data on service history of equipment thats been out there for years are sketchy or non-existent. The factories can track warranty data, but otherwise things get murky. Commonality of parts confuses things. You change service agents, and your serial-number history starts over. The only reliable records are the ones you keep yourself.
Service calls are something we figure on, but theyre hard to predict, says Carol Davis, senior director of architecture and engineering at Dennys. Manufacturers rarely can provide data beyond the warranty period, and not that many can tell us what service costs average for equipment that is under warranty.
There are ways to get at estimates, however. The first is to ask manufacturers for whatever hard or even anecdotal data they have. Next, ask service agents in markets where you have facilities what experience theyve had with the piece of equipment youre costing. Finally, start keeping data on what your own units spend on service calls for different types of equipment.
We know most manufacturers only track failures during the warranty period, says Burger Kings Cook, so we go to the component manufacturers for expected failure rates on components. We push manufacturers to get information from OEM suppliers that will be representative. I think we also will head in the direction of getting data from our own system.
Again, the thing to consider is whether a higher lifecycle cost due to increased service is outweighed by other factors. Some equipment may need expensive replacement parts more often, for example, but make up for it due to higher productivity or efficiency.
Odds And Ends
A few other variable to keep in mind when youre considering the true cost of equipment are labor to operate it and the real estate it occupies.
Weve already mentioned that labor to maintain and clean equipment can add to costs. Labor to operate equipment can vary, too. For example, if you have a high-volume fry operation, you may weigh the costs of labor to monitor the fry baskets against the potential service costs of buying fryers with basket lifts.
Real estate is another cost that may not seem significant, but could add up if youre talking about a lot of stores. Equipment with a smaller footprintice machines with remote compressors, for examplecan free up kitchen space or even enough space in the front of the house to add more seats. Equipment that is mobile gives you flexibility to make the kitchen more productive or the menu more profitable.
Admittedly, lifecycle costing is pretty new as trends go. But its growing. We are fairly new at it, says Cook, but its been a key focus of mine since I came on board two years ago.
Larger chains like Burger King and McDonalds have the means to research or develop the data needed to do more sophisticated lifecycle cost analysis. Burger King, for example, now requires manufacturers to do energy efficiency testing as part of its spec process, making it much easier to predict energy costs.
As with most new movements, credibility is one of the hurdles. Right now we dont consider lifecycle cost that strongly among all the things on our list of priorities, Davis at Dennys says. Well take a higher operating cost to get better performance. But we would probably pay a lot of attention if someone came in with credible, certifiable third-party lifecycle cost data.
While some of the exercise may still consist of guesstimating, there are places to go for help. FSTC has compiled energy usage data on a wide variety of equipment through ASTM testing. And, as mentioned, it has a standard energy use calculator anyone can use for equipment that has been tested using ASTM.
The Gas Technology Institute (www.gri.org) has a program called kitchenCOST that helps determine lifecycle cost as well as how energy usage varies depending on the mix of equipment used in the kitchen.
More manufacturers also are getting a better handle on how long and how well their equipment lasts under different conditions. It wont be too long before purchasing equipment will be a lot more like buying a car. In the meantime, break out the calculator.