LIFE CYCLE LIFE CYCLE COSTINGCOSTING

Harrisburg10/1/08

AgendaAgenda Welcome / Introductions Tom

Kirchhoff Cleveland Brothers Jack Pajan What is Life Cycle Costing? Jack Pajan Custom Support Agreements Daren

Ashurst LCC Example Bill Hitchcock LCC Calculator Bill Hitchcock Lunch

Landscape Contracting Company Founded in 1937 by Bob and Roy Cleveland

Established Caterpillar Dealership in Central Pennsylvania in 1948

Acquired HO Penn in 1965 Companies split in 1968,

Roy’s family became sole owners of Cleveland Brothers

1980 – Jay Cleveland Sr. and Bill Kirchhoff assume control

2001 – Jay Jr. and Tom Kirchhoff assume control

Acquired Beckwith Machinery and One Call Rentals in 2005

Company HistoryCompany History

Cleveland Brothers operates its business through four primary divisions:

Construction Equipment – large construction, general construction, mining, industrial equipment, and product support

One Call Rentals – compact construction and other smaller equipment

Power Systems – truck engines, generator sets, chillers and other power systems equipment and industrial engines

CB Con Agg – crushing and screening products for the aggregate and construction industries

OperationsOperations

Branch Locations/TerritoryBranch Locations/Territory

Total CapabilitiesTotal CapabilitiesCleveland BrothersCleveland Brothers

Total Employees ………1292Total Employees ………1292 14401440 Servicemen …………… 586Servicemen …………… 586 707 707

Service Trucks ………… 184Service Trucks ………… 184 242 242 Total Number of Facilities Total Number of Facilities 27 27

Since October 7, 2005Since October 7, 2005 August 2008August 2008

LIFE CYCLE LIFE CYCLE COSTINGCOSTING

Harrisburg10/01/08

What Is COSTARS?What Is COSTARS? COSTARS is a new approach to the

State Cooperative Purchasing Program COSTARS encourages a partnership

between Local Public Procurement Units and The Commonwealth

DGS/COSTARSDGS/COSTARS DGS requires Local Public Procurement

Units to register as COSTAR members. The CONTRACTOR agrees to sell items

under this contract to DGS-registered COSTAR members.

The CONTRACTOR is not permitted to use the contract to sell to non-COSTAR members.

Cleveland Brothers Equipment Company is Proud to be a COSTARS Supplier

STATE/PIGGYBACK CONTRACTSSTATE/PIGGYBACK CONTRACTS 2420-02 DGS All CAT equipment 2540-04 PennDot Graders/Wheel

Loaders and BHL 2540-06 PennDot Asphalt Rollers_____________________________________

NATIONAL NJPA National Joint Purchasing

Alliance

Government Buying Government Buying Challenges:Challenges:

Meet Community/State/Federal needs and Government rules

Make the best use of taxpayer dollars

Maximize Value to your Community

Governmental Acquisition Governmental Acquisition MethodsMethods State Contract / Piggybacking RFP/RFQ Criteria Based Bid Leasing Rental / Purchase Low Bid Meeting Specification

Low Bid ShortcomingsLow Bid Shortcomings Promotes creative SPEC writing Decision based on only 20% of Total

Cost Award based on text, not iron Taxpayer’s $$ invested in low VALUE Unfair to both Taxpayer & Suppliers

Consumable Goods v. Consumable Goods v. Capital GoodsCapital Goods Consumable: Something used up in

the production process Capital: Not used up (durable); used

to make other things that are of value

Here’s the Point:Here’s the Point:

You CANNOT determine the VALUEVALUE of Capital Goods by using the PRICEPRICE!

The The VALUEVALUE of Capital of Capital GoodsGoodsTotal Cost Over the Productive Life

(Life Cycle Cost)

There’s a better way to get the There’s a better way to get the most reliable equipment at the most reliable equipment at the lowest total cost!lowest total cost!

LIFE CYCLE COSTING

Life Cycle Costing is not NewLife Cycle Costing is not New Endorsed by several governmental

associations:– NIGP – National Institute of Governmental

Purchasing.– NASPO – National Association of State

Procurement Officials.– NAFA – National Association of Fleet

Administrators.– ABA – American Bar Association (Model

Procurement Code).

“Life Cycle Costing is a form of Value Analysis that establishes the best value

over the life cycle”.NIGP Specification Writing, 2nd Ed

What is Life Cycle Costing?

“Life Cycle Costing is a type of price/performance evaluation. It involves a broad-based evaluation of operating, maintenance, financing, other ownership and usage costs, and resale or residual value in addition to acquisition price in making a contract award”. NASPO, State & Local Gov’t Purchasing Principles & Practices, 2001

““Life Cycle Costing is a Life Cycle Costing is a mathematical model to assist mathematical model to assist fleet managers in making fleet managers in making financial decisions by financial decisions by considering considering ALLALL vehicle or vehicle or activity costs over the course activity costs over the course of its life.”of its life.”

Christopher D. Amos, CAFMCommissioner of Equipment, City of St. LouisNAFA Senior Vice President

Life Cycle CostLife Cycle CostSelling PriceSelling Price- Trade In Value- Trade In Value- Buyback - Buyback

+ Extended Warranty+ Extended Warranty+ Fuel+ Fuel+ Sched. + Sched.

MaintenanceMaintenance+ Repairs+ Repairs= Life Cycle Cost= Life Cycle Cost

+Total +Total Maintenance & Maintenance & Repairs (TM&R)Repairs (TM&R)

NINE MAJOR BENEFITSNINE MAJOR BENEFITS1. Measuring machine quality2. More accurate budgeting3. Insurance policy4. Protects against rapid depreciation or low

resale value5. Guarantees the cost of routine maintenance6. Assures dealer commitment to availability

of parts and service7. Helps agencies buy best machine for the job8. Protects taxpayer dollars by ensuring true

lowest cost

Who uses it?Who uses it? 44 of 50 (88%) US states specifically

allow awards based on Life Cycle Costing

Other 6 don’t specify but some known to practice it: Alabama, Michigan. Missouri, South Dakota, West Virginia, Wyoming

AdvantagesAdvantages Eliminates most risks of machine ownership Eliminates the hassle of unexpected repairs

or unforseen downtime. Easier to Budget Protection against a dealer who doesn’t

stand behind what they sell Gets the most value for the money for your

taxpayers

AdvantagesAdvantages Better purchases, better equipment,

more productivity Peace of mind knowing that you’ve

utilized your budget wisely and have made the best equipment choice at the lowest total cost

You control the Process:You control the Process: You establish the performance

requirements You finalize machine/attachment

needs You determine your maintenance role You control options/specs

Life Cycle Costing clarifies the Life Cycle Costing clarifies the process:process:

Designed to attract qualified suppliers Gives all suppliers and equal opportunity May eliminate those lacking confidence Enables you to accomplish more with less

Potential Bonus!Potential Bonus! You know the minimum repurchase

value You have a floor with a guaranteed

buyback price You can sell at a higher price Your budget benefits from any higher

differential

Questions?Questions?

Customer Support Customer Support AgreementsAgreements

What are CSAs?What are CSAs?

Customer Support Agreements: A CSA is any agreement between a Dealer & Customer, for the Dealer to meet some or all of the Customer’s Equipment Management needs.

Agreements

Powertrain

TM&R, Total Maintenance & Repair covers the majority of the machine for contract service.

PCRP, Powertrain Component Repair Program covers the major PT components “only” for “out of chassis, major failures”.

PCLP, Powertrain Component Life Program provides for replacement PT components at a prorated price based on an established life cycle.

IOP, Inspection Only Program provides comprehensive machine condition monitoring / reporting on a scheduled basis.

PM (TLC or Monitor Service), Preventative Maintenance provides scheduled machine fluid & filter replacements at CAT recommended intervals.

All CSA program terms and conditions are flexible to meet any customer’s needs. Billing arrangements are generally “cost per hour” based on individual machine operation.

TM&R – Breakdown of ExpenseTM&R – Breakdown of Expense

What does a Total Maintenance & Repair (TMR) contract provide for:

All in-chassis or out of chassis repairs to the machine (i.e.; turbo charger, final drive, water pump, transmission, drive shaft, hydraulic cylinder, etc.)

All associated travel time & mileage charges (to and from your site) All contract hauling charges (if an engine needs repaired in our facility) All inspection & adjustments to the powertrain to stay in compliance with

Caterpillar Warranty Requirements, (i.e.; engine valve lash or unit injector adjustments)

All S.O.S. (Scheduled Oil Sample) analysis and follow up (24/7) All report writing, record keeping and distribution to your contacts

CSA CSA CoordinatorCoordinator

Assigned to your specific machineAssigned to your specific machine

Machine Machine Condition Condition

ReportReport

Field ServiceField ServiceTechnicianTechnician

Dispatched for CSA machine service & repairsDispatched for CSA machine service & repairs

Diagnostic Diagnostic Inspection Inspection

ReportReportPage OnePage One

Field ServiceField ServiceTechnicianTechnician

Dispatched for CSA machine service & repairsDispatched for CSA machine service & repairs

Diagnostic Diagnostic Inspection Inspection

ReportReportPage TwoPage Two

PM (TLC)PM (TLC)TechnicianTechnician

Expert in your machine’s PM needsExpert in your machine’s PM needs

Preventative Preventative MaintenanceMaintenance

ReportReport

CSAs In Other IndustriesCSAs In Other Industries Xerox

CSAs In Other IndustriesCSAs In Other Industries IBM

CSAs In Other IndustriesCSAs In Other Industries Airbus

CSAs – Value Added Service CSAs – Value Added Service SolutionsSolutions Caterpillar

CSAs – Measured growth in CSAs – Measured growth in contracts in past 18 to 24 contracts in past 18 to 24 months:months:

Number of CSA contracts in 2006 equaled 718 Number of CSA contracts through 2008 equals 814

Our industry, and current customers are affirming that CSAs and “fixing costs” make good business sense!

13% Growth!

Using Life Cycle Using Life Cycle CostingCostingBill Hitchcock

2.5

1.7

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Productivity

Availability

Operating Costs

Utilization

Resale Value

Interest Rate

Selling Price

Percent Change

The Seven Factors AffectingThe Seven Factors Affecting Bottom LineBottom Line

2.5

1.7

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Productivity

Availability

Operating Costs

Utilization

Resale Value

Interest Rate

Selling Price

Percent Change

The Seven Factors AffectingThe Seven Factors Affecting Bottom Line Cost/HrBottom Line Cost/Hr

2.5

1.7

1.5

1.5

0.8

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0.5

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Productivity

Availability

Operating Costs

Utilization

Resale Value

Interest Rate

Selling Price

Percent Change

The Seven Factors AffectingThe Seven Factors Affecting Bottom Line ROIBottom Line ROI

2.5

1.7

1.5

1.5

0.8

0.7

0.5

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Productivity

Availability

Operating Costs

Utilization

Resale Value

Interest Rate

Selling Price

Percent Change

The Seven Factors AffectingThe Seven Factors Affecting Bottom Line CostBottom Line Cost

Life Cycle Costing Life Cycle Costing ExampleExample

Life Cycle CostLife Cycle CostSelling PriceSelling Price- Trade In Value- Trade In Value- Buyback- Buyback- Extended Warranty- Extended Warranty+ Fuel+ Fuel+ Sched. + Sched.

MaintenanceMaintenance+ Repairs+ Repairs= Life Cycle Cost= Life Cycle Cost

+Total +Total Maintenance & Maintenance & Repairs (TM&R)Repairs (TM&R)

Caterpillar Caterpillar 120M AWD120M AWDMotor Motor GraderGrader

LCC AssumptionsLCC Assumptions 5 Years 500 hrs per year utilization 5 Year Warranty Trade Buyback Diesel Fuel @ $5.00 per gallon

Purchase Purchase PricePrice

Trade In Trade In AllowanceAllowance

Cleveland Brothers Equipment Co., Inc.

1979 Caterpillar 120G Equipped: Cab ; heat; 12' blade; front balderson coupler; hydraulics to front; front scarifier; 2

front & 1 rear light; Beacon; turn signals; Suspension seat; front & rear wipers; 6 forward adn 6 reverse speeds; All 2-piece rims; Left side outside mirror; float on blade

Selling Price: $32,000 Hours: 3,500 Serial Number 087V04846 Bill Hitchcock Phone: (570) 822-8141 Mobile: (570) 407-9594 Email: bhitchcock@clevelandbrothers.com

When you buy from Cleveland Brothers, you buy more than just iron.

Cleveland Brothers Equipment Co., Inc. 5300 Paxton Street, Harrisburg, PA 17111

(717) 635-7409 (866) 532-9023 Fax (717) 564-3964 www.clevelandbrothers.com

BuybackBuyback

Extended Extended Warranty Warranty CoverageCoverage

Fuel Fuel ConsumptioConsumptionn

Scheduled Scheduled MaintenanMaintenance & ce & Repair Repair ExpenseExpense(TM&R)(TM&R)

Life Cycle CostLife Cycle CostSelling PriceSelling Price- Trade In Value- Trade In Value- Buyback- Buyback+Extended +Extended

WarrantyWarranty+ Fuel+ FuelSched. MaintenanceSched. Maintenance+ Repairs (TM&R)+ Repairs (TM&R)= Life Cycle CostLife Cycle Cost

$215,900$215,900(32,000)(32,000)

(107,500)(107,500)7,1507,15041,25041,250

21,08021,080$145,880$145,880

Example:Example: PricingPricing

Initial Initial Purchase Purchase PricePrice

BuybackBuybackNet PriceNet Price

$170,000

(105,000)

$65,000

Dealer Dealer AA

Dealer Dealer BB

Dealer Dealer CC

$125,000

(70,000)$55,000

$130,000

(80,000)$50,000

High Buyback values are a result of Superior Resale value in the market & is a direct return on investment to your agency

Example:Example: Add Fuel CostAdd Fuel Cost

Net PriceNet PriceFuel CostFuel CostTotalTotal

$65,00023,150$88,150

Dealer Dealer AA

Dealer Dealer BB

Dealer Dealer CC

$55,00039,400$94,400

$50,00036,250$86,250

Superior Fuel Economy offsets Superior Fuel Economy offsets substantial price differentialssubstantial price differentials

Example:Example: Add MaintenanceAdd Maintenance

Net PriceNet PriceMaintenanceMaintenanceTotalTotal

$88,15020,250$108,40

0

Dealer Dealer AA

Dealer Dealer BB

Dealer Dealer CC

$94,40024,300$118,70

0

$86,25023,000$109,25

0

Example:Example: Add RepairsAdd Repairs

Net PriceNet PriceRepairsRepairsLife Cycle Life Cycle

CostCost

$108,400

7,400$115,80

0

Dealer Dealer AA

Dealer Dealer BB

Dealer Dealer CC

$118,700

10,200$128,90

0

$109,250

8,500$117,75

0

Factors contributing to lower Factors contributing to lower Maintenance Costs:Maintenance Costs: Superior Designs Technological Advancements Longer Service Intervals

– Lowering cost of fluid, filters & associated labor

State of the art manufacturing & best practices built into every machine – Increase durability– Improve reliability

Factors contributing to lower Factors contributing to lower Repair CostsRepair Costs Premium Products backed by Superior

Service– Requires fewer repairs over the life of the

machine– Superior Service Locations & Capabilities– Superior Parts Availability

Location LOCATION Location LOCATION LOCATIONLOCATION

External Clients Utilizing CAT LogisticsExternal Clients Utilizing CAT Logistics®®

IndustrialAerospace &

Defense Technology

Automotive

Consumer Retail

LCC Calculator from Cleveland Brothers

Where can I get more Where can I get more information?information?

SummarySummary Adds a new dimension to purchase evaluation Strengthens competitive low cost philosophy Removes Guesswork from Budgeting Establishes all major costs in advance Creates standards for quality evaluation Saves worry about downtime costs and lack of

availability Ensures that suppliers stand behind products SAVES TAX DOLLARS!SAVES TAX DOLLARS!

QUESTIONS?QUESTIONS?

THANK THANK YOU!YOU!