Auctions: Inner workings: Chapter 11
To buy or not to buy.Let's start out by saying that you have done your homework and know exactly what make and type of machine you want. You have also checked and know what a brand new unit will cost you. Obviously, all pay back periods, depreciation schedules and all other costs associated with this move have been analysed. If you haven't done all this, then you are simply not ready to buy a machine. You don't have enough information to make an intelligent decision. To make assurance doubly assured, let's go over these points in a little more detail.
What do you do before you buy a house? Ofcourse, buying a house is not the same as buying a machine. Even if the new machine costs 10 times more than your house, its still not the same thing. I am merely pointing out the obvious. Do your homework!
How to make the decision to buy a machine.
1) Decision to buy a machine has to be made by the owner...if its a small company. If it's a medium sized company and the owner is actively involved in the day to day operations, then the owner still has to make the decision. Bigger companies have managers that make these decisions. If you are a small or medium sized company, one of the biggest mistake you can make is to let a machine operator or some other member of your staff make this decision for you. We shall qualify this statement.
Let's say you have an old slitter rewinder. This antique has been in your plant since you started the company, a few years back. It's not a bad machine...why ? Because if you didn't have this slitter rewinder you wouldn't be where you are today. You know that this machine leaves a lot to be desired...since you actually ran it, or still run it from time to time. You have a list of things that you wish that you had on this machine. A better unwind system. A better tension control system. Oh, how you wish you had a shaftless unwind system. Perhaps a hydro-pneumatic rider roll system for better density control. And you absolutely detest the old knife holders..and so...the list goes on....
This unit generates say 10% of your total sales. It is your work horse. Without this machine your sales would suffer a big blow. You also hate this segment of your business because although it generates 10% by volume, of your total sales, it generates the least amount of profit...percentage-wise.
Your calculations indicate that if you could increase production by a mere 10 extra rolls per day, off this machine.....You would feel better...much much better...
Company mind set.
For the last 5 years you (the owner) ran this machine yourself. Noone can run this machine faster or produce more rolls per shift than you. You now have a couple of operators that run this machine for you. The only time you run it is when someone falls sick or a deadline has to be met. So you are an expert on this machine. Lets say this machine, on average produces a 100 rolls a day. If you were running it , you could produce 102 rolls.....but that runs you ragged.
You discover that a new slitter rewinder with the most basic features lists for $500,000. Every thing else is an option. If you add all the other options, the price jumps to $750,000. Based on the price you run a costing analysis....to try to figure out the payback period. Your calculations show that it would take 10 years to pay off this machine. The salesman ( the one who is trying to sell you this machine) will point out all the tax loop holes, the depreciation expense etc etc to try to soften the blow. You have worked like a dog, to get to where you are today. The thought that 10 years from now, the yoke of this debt will finally be lifted off your shoulders, leaves a bad taste in your mouth. It scares the hell out of you!! What if things slow down? What if the economy takes a dump? No matter what happens in the future, you know this debt will hang on your head. This single decision can either make you or break you. You cannot let a $10 dollar an hour worker make this decision!!
