Outsourcing……..a way to stretch your capital dollars
By Scott Nixon

Plant owners strive to maximize their return on investment. Investing in production equipment is the priority; however, spending for buildings and ancillary systems becomes a "necessary evil." Buildings and ancillary systems only provide the support, the foundation, for production. Owners have to be knowledgeable about these non-production assets, but not become distracted by them.

Plant leasing allows the owner to utilize the building for a specified time period and eliminates the need to invest capital in bricks and mortar. So what is outsourcing as it relates to ancillary systems, and how can it help the plant owner?

Outsourcing allows the owner to buy "special" utilities without investing capital. Special utilities include chilled water, cold air, compressed air and any number of other ancillary systems. If critical processes exist, an outsourcing solution can include redundancy to provide those processes with a customized non-interruptible supply of special utilities.

Normally, an outsourcing agreement covers all costs associated with the installed systems. The cost of equipment, installation and maintenance all become a monthly operational expense. The agreement term for outsourcing typically coincides with the plant lease term, if the plant is leased.

Outsourcing is not a new concept. Business owners have been leasing buildings and copying machines for many years. Outsourcing or leasing of ancillary systems is relatively new and is being driven by tight capital budgets, tax laws and the need to do more with less. It's not best for one manufacturing segment over another, but is most attractive where an owner must invest heavily in ancillary systems to meet production needs.

Is outsourcing right for your business? A financial analysis that compares outsourcing to a capital spend should be completed. Every situation is different. Typically the best outsourcing solutions have terms that coincide with the equipment life. For example, a chilled water plant could have a life of 25+ years. During that period the initial cost of the equipment is dwarfed by the operational cost over 25 years. However, many owners buy chilled water plants based on first cost alone. The first cost of that plant could be less than 10 percent of the total cost of ownership. Many times energy efficiency and long-term maintenance and repair costs are not considered because of capital budget constraints. 

Outsourcing partners need to be financially secure and have the ability to provide local support for the term of the agreement. Once the capital investment is made, there will typically be a need to provide ongoing operations and maintenance. In reality, plant owners are buying the result - cold water/cold air/compressed air - so the stability and reputation of the supplier is an important consideration. Look at the track record. Can the supplier support the installation over the long term? Does his proposal include operation and maintenance? Does the proposal include all necessary operations and maintenance?  

Outsourcing is versatile and can be applied to:      
¨ New construction;
¨ Plant upgrades; and
¨ As a solution for plant systems which have become a burden to manage.

Covenant Hospital (Saginaw, MI) provides an example of what can be done with outsourcing. In 2000, Trane installed $3 million in systems improvements that provided the existing hospital with efficiency upgrades and constructed a new $12 million central plant. The central plant consists of 2,000 tons of chilled water and heating boilers. The plant provides state-of-the-art systems like non-peak ice making that lowers the owners' utility cost by storing cooling for use at peak utility periods. All systems were designed and selected based on lowest life cycle cost. Covenant Hospital chose not to invest capital in its physical plant because such an investment provided no return. The hospital determined its capital was better utilized to provide patient services.

Scott Nixon is sales team leader at Trane and can be reached at (843) 834-4272 or ssnixon@trane.com .