Many new investors assume that spending more on high-quality, and therefore pricier equipment, is a waste of money because of higher depreciation costs per unit.
The common perception among them is that, as long as the production line produces a sellable product, the supplier and the quality don’t matter— it's all about getting the lowest price!
But is that really the case? In fact, several crucial factors should be considered:
- Product Waste: Waste generated by lower-quality production lines is often difficult to measure upfront. You may only realize the extent of the waste once it’s too late.
- Line Availability: A production line running at speed X and requiring 2 hours of maintenance per shift might produce 10 batches per shift. In contrast, higher-quality machines could produce 12 batches per shift. This means that depreciation per unit is not as straightforward as it seems.
- Line Efficiency: Claims made by providers of lower-quality equipment often do not match reality. The actual output of the line usually falls significantly short of what was promised.
- Product Quality: Lower-quality equipment often compromises the final product, adversely affecting the company’s reputation and brand image.
- Extra Operator Costs: To compensate for inefficiencies, factories usually add extra operators to the lines to fix recurring issues. That additional labor cost should be included in the total production cost per unit.
- Equipment Lifespan: Lower-quality equipment typically has a much shorter lifespan, which further impacts depreciation costs per unit.
Given these considerations, the assumption that cheaper is always better doesn’t always hold true.
Lower investment in cheaper production lines might be acceptable for a new venture with uncertain sales forecasts, where labor is inexpensive, and the market has lower quality demands.
However, for an established and fully operational business, investing in high-quality, high-performing, and durable equipment can significantly reduce the cost per unit of production.
Remember: “Cheap is not good. Good is not Cheap!”
