In our interview on the total cost of ownership (TCO) Jaroslaw Niebisch, technical sales manager for KHS in Bad Kreuznach, Germany, tells us about the vast potential left unexploited by many companies, the many and varied efforts made by KHS to become a real pioneer in this field and why he sometimes feels like a lone voice in the wilderness. Timo Jakob, head of Order Coordination and Product Management at the Filling Technology Product Center and on business in the USA when we conducted the interview, joined us in a video conference for some of the talk.
KHS competence: Mr. Niebisch, when it comes to investment management the total cost of ownership or TCO is gaining in importance as an operative controlling tool. How do you define TCO?
Jaroslaw Niebisch: Although the term “TCO” has been around for almost 30 years, as opposed to many other key figures in economics no binding rules or standards yet exist for it. There are therefore many different ways of calculating TCO. Many of our customers, for example, understand TCO to be the cost of procurement and at best the energy consumption of a system, plus – very selectively – the cost for spare parts. We stretch this further; our study doesn’t end with the capital expenses or CAPEX (the initial cost of investment), which in our opinion only make up the smallest portion of the total operating costs – regardless of which line we’re talking about. We also ask about the operating expenses (OPEX) which go beyond energy and spare parts, namely those for maintenance, personnel, media consumption and materials.
“Our study doesn’t end with the cost of investment, which in our opinion only makes up the smallest portion of the total operating costs.”
Why is this holistic perspective so important for companies in your view?
Our customers naturally want to first minimize their cost of investment – which is why when contracts are awarded there’s a battle over every single cent and euro. The consequential costs are then often disregarded. You see, even with the most complicated line with a very high level of technical sophistication and extremely complex packaging technology, experience tells us that the actual cost of investment is usually up to 10% of the TCO. The operative costs thus make up the lion’s share, where in our line of business the material costs alone constitute around 90%. You’d therefore think it’s obvious what our customers must focus their attention and efforts on in order to boost their effectiveness and economic efficiency. Surprisingly, this isn’t always the case, however. We know that even among the world’s leading manufacturers there’s vast potential for increase. Together with our key accounts we’re thus developing new production strategies and new line formats which enable bottlers to use our systems as effectively and profitably as possible. Only those who have the full TCO strategy in mind still have the chance of making enough profit as prices drop.
How come many companies can’t see the bigger picture when it comes to deciding whether to invest or not?
KHS was one of the first companies in our branch of industry to seriously study TCO and make a thorough analysis of these costs in all areas. We approached our customers with this knowledge and soon realized that they are organized differently. For example, we have purchasing with its own rules, the supply chain department with its specific regulations and marketing which pursues its own objectives. Especially when it comes to deciding whether to invest or not, these departments are often very scarcely networked and their actions aren’t coordinated. Purchasing sees the costs as a movement of capital which are very precisely specified and budgeted for. It doesn’t see the ongoing costs incurred for the purchase of bottles and cans, etc. However, TCO means really looking at all the costs incurred by a system – from purchasing through initial installation and commissioning to production, maintenance and material supply, even as far as dismantling and disposing of the machines.
“Our study of TCO is based on the fact that we began thinking hard about sustainability very early on.”
TCO even includes costs for disassembly and disposal?
In principle, yes – although in our TCO study we’ve not included dismantling and disposal. This is for a very simple reason: our machines are so robust and have such a long service life that they’re not scrapped. I’ve personally seen filters made by us in 1930 which are still fully functional and still in use. Even after 20 or 30 years they’re still sought as used machines on the market and quickly resold. We should really even include a value for the resale of our systems in our TCO analysis but this is difficult to specify.
What’s caused KHS to strategically focus on TCO and deal with the questions this poses so intensively?
Our study of TCO is based on the fact that we began thinking hard about sustainability and the environment – or our CO2 footprint, as it’s now called – very early on. As far back as in the 1980s and 1990s KHS consciously stopped pursuing certain types of packaging but instead concentrated on sustainability. We analyzed how KHS could contribute towards making our environment greener and more sustainable. To this end we embraced two avenues: one of these was to further develop our plant engineering as machine manufacturers so that it needed fewer wear parts and less energy.
The other prompted us as a technological company to ask how beverages can be produced in an eco-friendly manner. This quickly leads us to the packaging options. The first plastic bottles were made in the 1980s by KHS Corpoplast, whose Bottles & Shapes™ program is a great success story. We’ve since learned how to drastically reduce the weight of these bottles yet keep them stable. Each milligram less of bottle weight means fewer raw materials and less energy needed to heat the plastic during the process and for the blowing pressure which gives the bottle its final shape. Let me give you an example here. For a PET bottle weighing 25 grams we need two to three kilowatt hours per 1,000 bottles just to heat up the preforms; our light, modern bottles need less than one kilowatt hour. With this we influence our industry’s carbon footprint and give consumers the chance to do something for the environment.
How can KHS influence other areas of the TCO calculation with its lines and machines?
Let me come back to the cost of investment itself for a moment. We’re of course active here, too. Thanks to automation, microchips and robot technology, all those things which used to demand a huge amount of materials and manpower are now light, effective, fast and operator friendly. This all starts with the tons of steel we save through the lower weight of our machines. The price slump in the electronics industry is also a boon for us. We pass these benefits on to our customers. The gap between what a bottle cost ten years ago and what it costs today is huge. We have to make this development – and our part in this – clearer to our customers.
With our sustainably trouble-free machines and their great levels of efficiency we also help our customers to reduce their personnel costs. Unlike in the past, when each machine needed one or more operators, in our industry it’s now common for one person to operate several machines. We play a major role here as we’ve drastically increased what’s known as the mean time between failures (MTBF), i.e. the time from one manual intervention by the machine operator due to a disruption to the next.
What services do you offer besides optimized hardware to support your customers regarding TCO?
Regarding line IT we’ve just introduced a new digital line control system called DuoControl which greatly boosts machine availability and line efficiency. We tested this system for three years and are very surprised with the results ourselves; with it we can save energy, reduce the wear on the machine and use lighter materials. The savings are so complex and far reaching that we haven’t yet finished our research into their full extent. We keep discovering new things. What’s clear is that we can make production much better, much more effective and much more efficient and thus give ourselves and our customers a dramatic competitive advantage.
We’ve also developed a number of business solutions – which we’re first using for ourselves. Using a special program we can record a variety of customer-specific figures and parameters and talk to our customers about their production scenario. The result is a graphic which shows all areas of cost and quickly and clearly illustrates – for each individual offer – how much the inline packaging of a product costs the customer, holistically speaking. This specific TCO analysis enables the customer to lower the cost of production wherever possible.
Timo Jakob: We can also optimize other factors using our tools. We haven’t yet talked about availability and the degree of line utilization. Let me explain this using a car as an example. If you buy a car for €20,000 to then only drive it 200 kilometers a year, based on your investment each kilometer costs you €100. If you drive it 200,000 kilometers, this is reduced to €0.10. You can work just as effectively or ineffectively with your production line. Here, we talk about the degree of line utilization or the overall equipment efficiency or OEE for short. Scenarios such as the filling order and changeover, cleaning and repair times play a role here. Let me put this more simply. If your line has an OEE of 40%, then you only make a profit using 40% of your investment. Spending the remaining 60% wasn’t necessary, as this 60% doesn’t make you any money.
How has the average OEE developed over the past 20 years?
Timo Jakob: Negatively, I have to say. For example, where beer was only available in the euro bottle up into the 1980s, today every brewery wants to distinguish itself on the market by using a different bottle shape; the bottle volume varies and the design is individual. This not only runs up huge costs but also makes sorting returnable bottles more difficult. And this of course reduces the effectiveness of the line – as do the changeover times caused by the increasing number of production changeovers necessitated by larger and larger product portfolios.
How does the OES tool developed by KHS work and what results does it give your customers?
Timo Jakob: Imagine that you plan your production weeks or months in advance. Suddenly, one of your customers wants to have 50,000 bottles of beverage A immediately. You then ask yourself, “What do I do? How do I do it? What price do I have to charge?” Our system balances the expenditure and production programs of one or more lines, analyzes the cleaning and changeover times and recommends that you specifically start this order on line 5 at 4.20 pm on Tuesday and run it for the next two hours. The system computes what this would cost and suggests a price.
Are there similar programs or services by KHS in conjunction with maintenance?
Jaroslaw Niebisch: In the past many customers used their own maintenance systems. However, the trend is moving back towards manufacturer services. We’re the people who know the machines best; we know what the machines need in order to work effectively. Besides actual maintenance we also perform audits and study the customer’s means of organization. How does the customer treat the machines, for instance? Where do the raw materials needed for production come from? How are these transported? How and how often are the machines serviced and how well is this organized? We analyze the technical condition of the line and recommend upgrades which bring the machines up to date technologically. With this, customers can keep their line efficiency at a top level. This process also yields savings in electricity and steam, for example, extends the mean time between failures and cuts down on personnel. We do a lot for our customers here – and thus generate real added value in the long term.
One good example of how this can be translated into concrete figures is our can filler. It only needs one service a year and this takes one or two days less than the maintenance of other machines common to the market. This may sound banal – but isn’t. Assuming we have a standard line with an output of 120,000 cans per hour, with 24 hours of additional production time we’re talking about producing almost three million cans more. If you convert this into money, even with an unrealistically low profit margin of around €0.01 per can we have an additional profit of around €30,000. And if you consider that some manufacturers need several maintenance runs a year, this amount adds up. This clearly illustrates that availability and OEE are inextricably linked to our technical development at KHS. I can justly claim that we think TCO and we do TCO. And we’ll continue to lay down convincing arguments for our customers in this respect.
As a champion of TCO don’t you sometimes feel like a lone voice in the wilderness?
D’you know, sometimes I feel like Galileo Galilei whom nobody wanted to believe when he claimed that the earth moved round the sun in the 16th century. This fact was only validated centuries later. We’ve also been discussing TCO with our colleagues and customers for many years. Unlike Galilei, however, we feel that for some time now the interest in our knowledge of this subject has been increasing.
Many thanks for this interview.