What it means
Many organisations buy equipment on the basis of the purchase price alone. Terotechnology challenges that habit by pointing out that running, repair and disposal costs often exceed the price paid on day one.
The word comes from the Greek for "caring" and was used in the United Kingdom to describe a discipline that links design, installation, maintenance and replacement. It sits close to what is now called asset management or life-cycle costing.
In practice, a business following this approach estimates all the costs of an asset for its working life. This includes the purchase price, installation, energy, spare parts, labour for maintenance, downtime and the cost or income from disposal.
Different options are then compared on total cost, not just price. A cheaper machine that breaks down often can be a worse choice than a dearer one that is reliable, and the numbers make that visible.
Good records are essential. Without data on repair history and running costs, estimates are guesses, so many firms use maintenance software to capture costs against each asset.
The approach is especially useful for capital-intensive industries such as manufacturing, transport, utilities and property. It also helps finance teams plan replacement budgets and avoid sudden spikes in spending.
In practice
Real-world examples.
Example
A logistics firm chooses between two delivery vans. The cheaper van uses more fuel and needs more servicing. When the fleet manager adds up five years of costs, the dearer van comes out well ahead. He presents the figures to the board as a total cost per kilometre.
Example
A hospital considers replacing its air-conditioning plant. The facilities team models energy use, maintenance contracts and expected breakdowns for each option. They select the efficient system, which pays back its higher price within four years. Finance also records the expected energy savings in the budget.
Example
A local council compares two designs for a new bridge. One has a lower construction cost but needs repainting every ten years. The life-cycle analysis shows that the higher initial spend gives lower costs over the bridge's life. The council uses the analysis in its funding application.
Formula
Calculation
Life-cycle cost = purchase price + running costs + maintenance costs + disposal costs - resale value
A company compares two machines over 5 years.
Machine A costs $200,000, running costs are $30,000 a year, maintenance is $10,000 a year, disposal costs $5,000 and resale value is $20,000.
Life-cycle cost A = 200,000 + (30,000 x 5) + (10,000 x 5) + 5,000 - 20,000 = 200,000 + 150,000 + 50,000 + 5,000 - 20,000 = $385,000
Machine B costs $250,000, running costs are $20,000 a year, maintenance is $6,000 a year, disposal costs $5,000 and resale value is $30,000.
Life-cycle cost B = 250,000 + 100,000 + 30,000 + 5,000 - 30,000 = $355,000
Machine B is $30,000 cheaper over its life, even though it costs $50,000 more to buy.Case study
Seen in the real world.
Dunmore Bakeries is an illustrative, fictional producer that needed a new industrial oven. The cheapest quote was $150,000, while a more efficient model was priced at $190,000.
The finance manager asked the engineers for energy and maintenance estimates over eight years. The cheaper oven would cost $26,000 a year to run and maintain, while the efficient one would cost $17,000.
Over eight years the cheaper oven cost 150,000 + 208,000 = $358,000, against 190,000 + 136,000 = $326,000 for the efficient model. Dunmore bought the more expensive oven, and the illustrative lesson is that price on day one is only part of the story. The finance manager later reviewed actual running costs each year against the estimates, and the data improved the accuracy of the next purchase decision. Over the following two years the actual running costs came in within 5% of the estimate, which gave the board confidence to use the same method for the next three equipment purchases.
Watch out
Common mistakes.
- Choosing an asset on purchase price alone and ignoring running and disposal costs. Cheap assets that break down, use extra energy or wear out early can end up costing the most over their lives.
- Using costs from different years without adjusting for the time value of money. Without discounting, a dollar of future cost looks the same as a dollar today, which can distort the comparison. Discounting uses an interest rate to convert later payments into today's money.
- Failing to collect maintenance data, so that estimates are not based on evidence. Maintenance records, energy bills and downtime logs are all useful sources for the estimates.
Questions
People also ask.
Is terotechnology the same as asset management?
They overlap closely, and terotechnology is an older name for the idea of managing assets across their whole life. Many firms now describe the same practice as life-cycle costing or total cost of ownership analysis.
Should future costs be discounted?
Yes, for a precise comparison, future costs should be discounted to present value so that money spent in different years can be compared fairly. A typical choice is the company's cost of capital, adjusted for the risk of the asset.
Who should be involved?
Engineers, finance staff and operations managers all contribute, because each knows part of the cost picture.
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