Pump Procurement: Lower Purchase Cost Doesn’t Mean More Savings

Pump Procurement: Lower Purchase Cost Doesn’t Mean More Savings

December 10, 2020 | Procurement Strategy Blogs

The pump is a critical component in the value chain of industries such as water and wastewater, CPG, chemicals, and oil and gas. In the process of moving fluids from one place to another, pumps incur various costs in their lifetime — right from the capital cost of the equipment to its operating costs.

Breaking Down Pump Cost From a Total Cost of Ownership (TCO) Perspective

Analyzing the total cost of ownership of a pump can be categorized into three segments — initial investment, including pump purchase, environment and installation cost; operating cost, including operations, maintenance, and downtime; and energy cost.

On average, a pump’s TCO comprises 30% on initial investment, 38% on operational cost and the remaining 32% — a substantial portion — on energy cost.

Categorization of Total Cost of Ownership (TCO) of a pump

Going by the books, it’s a straightforward decision to select pumps based on the most competitive purchase price. This begs the question: why do buyers face a dilemma while procuring pumps? Here’s the catch.

TCO Is Not What It Looks Like — Lower Capital Costs Might Lead To Loss in the Long-Term

TCO calculations are easy when comparing two pumps of similar configuration, but what about comparing an expensive, energy-efficient pump that is equipped with advanced technology vs a low-cost pump with low energy-efficiency and traditional technology? This is the exact point where pump buyer faces a challenge.

An expensive, high-efficiency pump (let’s call it pump A) has a purchase cost of $20,000; whereas a low-cost, low-efficiency pump (say, pump B) has a purchase cost of $15,000. Given that pump A is energy efficient, its annual electricity bill is around $7,500 and has a maintenance and downtime cost around $2,500. On the other hand, since pump B is less energy efficient, it annual electricity needs are north of pump A, worth around $9,000, in addition to frequent repairs and maintenance bills of $3,000.

If we put these calculations into a table with an approximate 10% year-on-year increase in operational costs for pump A and a 20% year-on-year increase for pump B — as it does not have the latest technology and components in manufacturing.

The calculations clearly show pump A starts becoming cost-effective after the third operational year. If the calculations are further extended, then what initially seemed to be the expensive pump would prove to be most-cost effective compared to what seemed to be a low-cost pump.

In fluid-heavy industries such as oil and gas, chemicals, water and wastewater, pumps used have an effective life spanning around 25 to 30 years. Hence, it becomes very important to consider and calculate the total cost of ownership for pump equipment to drive the right procurement decision rather than going by the initial purchase cost.

The Solution: Low-Cost Pumps for the Short-Term and High-Cost, Advanced Technology Pumps for the Long Run

Though low-cost pumps are cost effective in the short run, where they can be used for temporary sites and short-cycle projects, for the long-term high-efficiency, high-technology pumps are the ultimate winner.

Pump selection holds significance in optimizing operational costs for a company and understanding the right set of TCO parameters can result in incremental savings. Key parameters to be considered are its application, efficiency, maintenance, downtime, quality and the initial price.

What’s Your Plan for Procurement and Supply Chain?

As 2020 turns into the year of disruption, GEP’s unparalleled software and strategy solutions  featuring end-to-end digital transformation  ensure your procurement and supply chain organization stays resilient and effective. Find out how GEP can help  talk to us today.

Binayak Shrestha

Vice President, Consulting

With more than 18 years of experience, Binayak is a seasoned professional in supply chain and indirect spend management and is a recognized leader in procurement transformation, change management, and people development.

At GEP, Binayak is responsible for large-scale strategic engagements, delivering sustainable cost savings and process improvement across various industries.

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