Federal Equipment Company

Depreciation

Equipment

Maintenance Costs

Q2 2020

Software

Used Equipment

<h3><span style="color: #5bafc0;">There are many factors to consider when tasked with acquiring the equipment needed to run a pharmaceutical facility. Being aware of every upfront costs is a must when determining optimal equipment ownership. A crucial concern when operating any business, and a driver behind purchase decisions, is minimizing overhead to increase profit margins. All variables, including the cost of training staff, maintenance and upkeep costs, the likelihood of each piece of equipment’s depreciation, issues with software licensing, and the overall production process, need to be considered before any purchase. At Federal Equipment Company, we offer state-of-the-art used equipment, which can be a great strategy for cost savings for businesses.</span></h3>
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<h4><span style="color: #2e608c;">Evaluating Maintenance Costs </span></h4>
<p>Keeping equipment functional can be costly regardless of whether the item is new or used. Evaluation of new equipment upkeep requirements and estimated costs must be completed before purchase to prevent acquiring a machine that will wind up costing more than expected over the long term. The price associated with keeping equipment in good operational standing is referred to as the “maintenance cost.” Oftentimes, this spend includes routine or preventative maintenance as well as upgrades to software and controls when necessary.</p>
<p>Maintenance costs are typically incurred after the initial purchase of the equipment. These costs generally include a combination of spare parts, the technician&#8217;s and mechanic’s time, and consumable-type materials. Both new and used equipment require maintenance, although the amount of maintenance differs. Used equipment may need to be rebuilt, refurbished, reconditioned, repaired, or simply cleaned up in order to be put back into operation. However, since the equipment is being purchased used, these repairs and upgrades should be grouped in with the purchase and start-up costs and not necessarily considered a maintenance cost for keeping the equipment in good operational repair over the life of the machine.</p>
<h4><span style="color: #2e608c;">The Risk Associated with New Equipment </span></h4>
<p>Any piece of equipment that is new to the facility, whether it is purchased used or new, requires first-time training. The majority of new equipment training is dedicated to teaching equipment operators; while these operators must be taught to use the equipment safely and effectively, the training required for in-house technicians and mechanics is often overlooked to a fault. If technicians and mechanics receive no training, then even the most minute equipment issue will require outside intervention and further troubleshooting. This will increase both the costs associated with equipment downtime while the machine is out of commission and the overall maintenance costs.</p>
<p>New equipment (that is also purchased new) shouldn’t be expected to run seamlessly from the outset. These machines can arrive with “bugs” or various operating issues, including issues identified during Factory Acceptance Tests (FATs), often called “punch-list” items. Before purchasing a machine, anticipate that the greater the level of customization, the longer the amount of time that will be required for troubleshooting and adjustments after start-up, continuing through its subsequent operation.</p>
<p>Every original equipment manufacturer (OEM) has a unique process for building equipment, which is why requesting that the manufacturer deviate too greatly from their normal process can create an opportunity for issues. This applies to customization within construction, operational components, setup, and electronics and control configurations. Extreme customization may result in “Serial #1” equipment builds that are completely specialized, even though the product may have a series or model number associated with the OEM’s standard portfolio of equipment. Unique equipment is expensive to maintain because there is a greater likelihood that individual parts must be custom made and therefore unavailable; it is also likely that personnel adequately equipped to service the unit are limited.</p>
<h4><span style="color: #2e608c;">Factoring in the Depreciation Cost of New Equipment </span></h4>
<p>New equipment depreciation is determined by several factors. First, consider the level of investment that the OEM put into the design, development, and production of the equipment. After sizing up the value of the machine to the OEM, determine if the purchase terms reflect their investment in the product.</p>
<p>Purchase terms usually include warranties, performance guarantees, and coverage for product liability issues, including defective design, specification, construction, and even workmanship. The OEM must be able to recover these costs through the price of the equipment, while most of the value, particularly from the warranties and guarantees, is only gained by the original purchaser. Once the original warranty expires, which generally happens within the first year or two after delivery, the value of those terms applied to the equipment is gone. Because of this, the equipment’s fair market value depreciates rather rapidly in its first year after delivery.</p>
<p>Next, consider whether there is a demand for the equipment. Can the equipment be used across the buyer’s industry and other industries? The more businesses that can use the equipment, the more likely the equipment will retain its original purchase value — unless it is highly customized.&nbsp;</p>
<p>The third factor when estimating value is, again, if the equipment has been customized or if it fits within the OEM’s original standards. Highly customized equipment has limited usage in other applications or facilities, which decreases its value to third parties. Standard equipment with desirable options is more likely to be repurposed and will have a greater market for resale.</p>
<p>The fourth major consideration is the scope of the global equipment marketplace. The opportunity to resell equipment is largely dependent on the existing market supply and current demand. If there are many pieces of equipment that are essentially identical and all are readily available to the market, prices will be driven down. The question then becomes, why are there so many of the same pieces of equipment available at the same time? Is the equipment obsolete? Or, is the OEM no longer supporting that model with parts and service?</p>
<h4><span style="color: #2e608c;">Issues With Relying on OEMs for Equipment Support </span></h4>
<p>Operating complex equipment requires a range of skill sets. Understanding of the interaction between the mechanisms and the electronic controls and knowledge of the software require highly specific expertise. In order to maintain and troubleshoot such complex equipment, the owner will either need to hire that skill set, train technicians, or contract for it, usually from the OEM. The solution is usually some combination of these available options for service. During the purchase evaluation, the OEM’s ability to support the equipment with a robust parts inventory that can be delivered quickly, and by an appropriate number of qualified support technicians, is key. In the pharmaceutical industry, we are seeing OEMs making technological advances to support equipment remotely through online channels, including virtual reality. These programs are very impressive but also very complex.</p>
<p>There are also cases in which an OEM will no longer support a piece of equipment, which is why depending too heavily on the OEM can create problems over time — OEMs may choose not to store parts for older units or to educate technicians on older machinery to make room for parts and services to support new models. Additionally, as operating systems advance and software continues to update, keeping the components available to support older systems may no longer be possible. OEMs tend to focus on the newest machinery and train technicians to mostly support newer equipment.</p>
<h4><span style="color: #2e608c;">Reconciling Equipment Software and Physical Mechanisms </span></h4>
<p>Equipment that runs on an operating system and has a significant amount of controls integrated into its physical mechanisms will always require routine software maintenance, which can lead to common software challenges involving access and skill. The question then becomes, who has access to that software for troubleshooting, maintenance, and repair issues? Once access is established, who has the skills to evaluate where a problem exists? There is an ongoing debate regarding “ownership,” or what is actually being purchased if the hardware bought is useless without a license for the software required to operate it.</p>
<p>The protocol to transfer a software license is usually within the software license agreement. These license terms are rarely negotiated within the larger context of the equipment purchase. The software is generally supplied via license, and the equipment cannot function without the software. Further complicating things, the original owner of the software generally retains ownership of the software itself, which can mean limiting the current owner’s, or even the OEM’s, ability to make changes, repairs, and so on. It is common for the license to include a restriction of transfer without the software developer’s consent.</p>
<p>Acquiring the right to use the software has become a significant part of buying equipment. The quickest path to acquire a license to the software is by acquiring equipment built by established, quality OEMs that have properly acquired licenses for reputable software and the rights to transfer those licenses, along with robust service programs to support that equipment. And, when buying second-hand or used, it is key to acquire equipment made by those OEMs who will continue to provide that top-notch service and parts support.</p>
<h4><span style="color: #2e608c;">An Equipment Balancing Act </span></h4>
<p>The equipment selected for use in pharmaceutical projects is chosen based on process requirements, cost, and need. Each capital process or equipment acquisition requires a balancing act. There are the usual project considerations, including the budget, timelines, and payback, as well as the process parameters and product requirements the equipment must meet. For example, developing a historically older drug product may require older machinery. In this case, there may not be enough of a profit margin to support transferring that process to newer equipment.</p>
<p>Industry project managers must also evaluate whether the equipment will “fit” the facility and the personnel. In this context, fitness is determined by the ability of the mechanics and operators to work the machine, or if its operation will require an entirely new skill set. This also begs the question about whether a completely new storeroom will be needed to house the equipment parts and consumables. Most of these considerations are driven by the product and the production process, not necessarily by the equipment itself.</p>
<h4><span style="color: #2e608c;">Sourcing from Top OEMs and Recognizing Customer Need </span></h4>
<p>At Federal Equipment Company, we source equipment made and supported by established, reputable equipment manufacturers. These entities have robust support programs that can assist and provide input on issues requiring rebuilds, refurbishments, and upgrades. This includes upgrades for controls, software, and operating systems. Equipment can remain valuable well after it is determined to be “obsolete” by the OEM. If the equipment that needs support is a popular model, there may be third-party rebuilders who can manage these repairs or parts support well after the OEM designates that model as “obsolete” or “no longer supported.”</p>
<p>We recognize how valuable the OEM’s support is and we work directly with many of the top names in the equipment manufacturing industry to provide direct OEM support to our customers whenever possible. We also understand and appreciate that our customers will continue to buy new equipment when it is called for, but that new equipment is not needed for every project. There are certain processes where older technology is required or preferred, or where there is no budget for new equipment.</p>
<p>We have leveraged our knowledge of the marketplace and expertise in equipment appraisal to acquire a huge selection of valuable equipment. Even if the equipment we acquire is no longer supported by an OEM, it may be used as a replacement machine or further broken down for parts to support equipment that is still operating in the field. Additionally, equipment that may not fit into a pharmaceutical application because it is an older technology or no longer meets Good Manufacturing standards may still have value in other industries.</p>
<p>We understand that our customers may have limited budgets and timelines or an urgent need to replace an existing unit. Our company has thousands of machines available in stock and possesses the advanced technical knowledge to advise our customers on our inventory. We have over 60 years of experience in buying and selling machines and are the largest stocking dealer of used industrial equipment for the pharmaceutical industry. At Federal Equipment Company, we source the highest-quality machines and use our knowledge of the equipment market to offer the best machines available.</p>

Common Challenges and Solutions of Equipment Ownership and Use