How Are You Investing Your Equipment?
By now most people know of Warren Buffet, the self-made billionaire that once held the crown as the wealthiest man in the world. He started his own business as an adolescent selling candy & soda and bought his first stock at the age of 11. It was this interest in the stock market that would later propel his status as an investment guru using the “buy and hold disciple”. The buy and hold investment strategy is considered to be one of the most successful investing principles that has ever been introduced. Under this principle the investor buys an asset and then holds this investment for a long period of time while it builds value and matures. While this strategy has made billions for people like Warren Buffet, it does not work for every asset or investment, especially manufacturing equipment and automobiles. So, how are you investing your equipment?
Unlike a stock or bond, equipment is a depreciating asset, meaning that it will most likely never be worth more than the day you purchased it. This is due to the fact that equipment has a specified economic life where it is no longer financially sound to keep it in production after a certain period of time. Most equipment needs constant maintenance and repairs and over time it may become so costly that it is actually cheaper to buy and run a new machine. Unfortunately when working in the field, fleet managers, see far too many companies using the buy and hold strategy for their equipment fleet. This is probably attributed to the fact that most buyers are unaware of their current maintenance costs and are timid about purchasing equipment with a high sticker price.
So if every piece of equipment has an economic life, then what is the economic life of something such as a forklift? Unfortunately there is not a magic number to that question, but some experts would argue that 12,000-15,000 total accumulated meter hours is the tipping point on average. Companies tend to make the mistake of focusing on how long a forklift remains useful rather than focusing on its effective economic life. Some forklifts may remain useful for 10 years or more, however, these forklifts may no longer operate economically. The optimal time to replace your forklift is dependent on a number of factors which include:
- The type of forklift (age, make, & ITA Class)
- The severity of the application
- The number of hours it operates
- The type and frequency of maintenance it receives
In summary, your material handling equipment can be a very large investment cost to your company. It is important that you work with experienced professionals such as a fleet manager to determine your investment’s economic life. Unlike financial investing, equipment fleets need to be actively managed and monitored in order to get the most out of your investment. When it comes to forklifts, the buy and hold disciple can cost you far more in the long run than replacing equipment proactively and in a timely manner.