Driving Down Cost of Test

Understanding the real cost of ownership of a test asset is essential to making smarter
decisions and maximizing its return on investment (ROI). Unfortunately, the cost of
acquiring and operating test assets can be difficult to accurately determine. This white
paper revisits a Total Cost of Ownership (TCO) model that can accurately calculate the
cost of key ownership factors over the entire life of a test asset. It also discusses the
impact of utilization and health monitoring on TCO, otherwise known as effective TCO
(eTCO). Real-time utilization and health data monitoring can be a critical enabler in
reducing TCO over an asset’s lifecycle beyond simply lowering acquisition and
anticipated operating costs.

Introduction
Test assets are a large portion of a company’s financial investment, which often proves
problematic for equipment owners constrained by ultra-tight budgets. In this environment,
understanding an asset’s real cost of ownership is essential to enabling companies to
make accurate buy versus lease, upgrade, sustainment, or disposition decisions.
Ultimately, companies must determine whether the value the asset provides is worth the
ongoing cost to keep it. Unfortunately, determining an asset’s true cost is no easy task.
Furthermore, discerning whether the asset is providing an ROI adequate enough to
support its ongoing expenses requires knowledge of its true utilization and health—until
now something not able to be monitored on a real-time basis.

This white paper revisits a TCO (Total Cost of Ownership) model developed by Keysight
Technologies, Inc., that can be used to accurately determine an asset’s real cost of test.
It also discusses asset utilization and health monitoring, and how it impacts TCO-based
decision making. Using real-time utilization and health data, test equipment owners can
make better, more informed purchasing and maintenance decisions and actively work to
drive down the real cost of ownership of test assets over their entire lifecycle.

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CoT Modeling Challenge
Typically, a Cost of Test (CoT) model is used to calculate an asset’s cost of ownership. Unfortunately,
most CoT models only calculate cost at a single point in time and therefore, can’t accurately account for an
asset’s true cost throughout its useful life. Asset depreciation, for example, can be spread out over three or
five years with either a flat or accelerated schedule. During the first years the risk of equipment failure is
low, but afterwards it rises considerably. That risk continues to grow as the equipment ages, and varies
dependent on its utilization, over its lifetime. As a result, the CoT model can produce very different results
depending on what point in time it’s used to calculate costs. In year one, the primary expense is acquisition
cost, while in year 10 it’s often maintenance and downtime factors. What year do you select?

The answer lies in using a different model, in this case, the TCO model. It averages the costs for a piece of
equipment over its expected useful life and takes into account the various expenses that may arise as the
equipment ages. But, how do you know the equipment is delivering the TCO profile you projected after it is
activated? How much the equipment is utilized, and in what environmental conditions, also drives TCO.

Equipment is acquired with the assumption that it will maintain an expected average utilization rate over its
lifetime. However, if an asset is underutilized, then its eTCO relative to its originally planned contribution to
productivity is higher. If it’s overutilized, it can drive early component failures, and require more frequent
calibration and maintenance—all of which also drive eTCO higher. Equipment across different programs
have varying utilization curves as they go through their respective product lifecycle; ramp, maturity and
then decline. The environmental condition an asset is used in can also cause it to have lower or higher
TCO. Over/under voltage or high operating temperatures can lead to premature failures and risk of poor
measurements. Thus, the average maintenance costs originally predicted are no longer valid, requiring re-
verification of the forward looking TCO of the instrument. Unless the true utilization and health of an asset
is tracked over time, it’s impossible to know whether the equipment is falling ahead of or behind the
originally calculated and forecasted TCO at time of acquisition.

A Better, More Accurate Model

Keysight’s TCO model accurately takes into account both the asset’s capital expenses (acquisition cost)
and operating expenses. The model also addresses the tradeoffs of buying the asset outright, renting or
leasing, with consideration for the options over the assets needed life. More details on this model is
available at: The Real “Total Cost of Ownership” of Your Test Equipment. The model is given by:

TCO = Ca + Cpm + Cr + Cdm + Ctr + Cte + Crv + Cf + Co

where the TCO cost components are defined as Ca = capital expenses, Cpm = preventive
maintenance, Cr = repair, Cdm = downtime mitigation, Ctr = technology refresh, Cte = training &
education, Crv = resale value or disposal cost, Cf = facilities, and Co = other.

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This TCO model demonstrates that the costs associated with owning and operating an asset over its
entire useful life can far outweigh its acquisition costs. Different direct cost drivers comprising the TCO
model can drastically change an asset’s overall cost of ownership. An increase or decrease in an asset’s
utilization rates, can likewise increase or decrease its TCO. Monitoring the true utilization and health
parameters of test assets and incorporating deviation effects into TCO drivers, can be particularly
effective in making better TCO-based decisions, both at the time of acquisition as well as when revisiting
those decisions over the lifecycle of the equipment.

Understanding the TCO Cost Components

In the Keysight TCO model, accounting for capital expenses (cost to acquire and install an asset) is a
fairly straightforward process with depreciation schedules being the principle area of variation. Accounting
for operating expenses is a bit more challenging, since there is greater latitude in terms of what is
included in the TCO model and how the cost components are represented.

Preventative Maintenance
Total equipment calibration cost includes the actualcalibration cost, calibration turnaround time (TAT),
logistical costs, and any “repair” costrequired to complete the instrument calibration. This overall cost is
typically the prime contributor to preventative maintenance. A key way to reduce this expense is by
changing the calibration cycle period. Monitoring the equipment’s true utilization can affect decisions on
how frequently a calibration is required and drive cost up or down. Likewise, monitoring health
parameters, such as attenuator cycles and operating temperatures, can affect how frequently repairs may
be needed compared to predicted failure rates at the time of acquisition. Other preventive maintenance
costs include periodically scheduled actions, such as proactive replacement of subassemblies exhibiting
wear-out phenomena.

Repair
While corrective maintenance/repair generally refers to unplanned downing events (e.g., equipment
failures), the Keysight TCO model defines it as the cost to perform a repair, re-calibrate the asset,
remove/ship/re-install (logistics) the asset, and verify its performance. The cost to perform the repair is
represented by either a contracted repair agreement or on a Per Incident (P.I.) basis, with the annual P.I.
repair expenses = (P.I. cost) x (probability of failure over a 1-year period). While a P.I. strategy may seem
like the lower cost option, a repair contract usually results in a lower repair TAT and therefore, lower
downtime. Downtime mitigation: When equipment is unavailable for use, a downtime cost penalty must be
applied to the TCO model. This is done by applying a cost driver variable, such as a weekly rental rate proxy
(typically around 2-5% of the equipment’s purchase price), to the cost equation such that the cost of
unavailability = (purchase price) x (rental rate proxy) x (repair TAT).

Another method to avoiding a downtime cost penalty is by monitoring equipment utilization, and using that
information to influence the decision to add specific instruments to the program. When utilization monitoring
is tracked over time, patterns emerge that can help more accurately predict the need to rent instruments
during capacity shortfalls, rather than purchasing spares and increasing long-term depreciation costs in the
TCO calculation. Also included in the downtime mitigation expense is the cost of catastrophic events, which
are difficult to quantify and for which an outcome is hard to predict. An example of a catastrophic event is a
test system that goes down in a volume manufacturing environment, potentially resulting in millions of dollars

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in lost sales and missed business opportunities. These “catastrophic” costs are addressed through cost
avoidance measures and strategies (downtime mitigation strategies), such as investment in high-reliability
equipment, lower repair TATs, and increased test capacity. Preventative maintenance managed using
equipment-specific health parameter monitoring capabilities can further reduce this cost by anticipating any
part replacements (e.g., attenuators) needed before equipment is placed into a high-utilization period of
operation.

Technology Refresh
Technology refresh (product migration) occurs when an equipment owner upgrades an asset to realize
increased levels of measurement capability or improved speed. The largest contributor to this expense is
typically the cost of ensuring the new equipment’s backward/forward compatibility with the existing test
process. Costs associated with developing/editing test code to ensure compatibility can be quite high. These
one-time expenses should be amortized over the installed base of equipment that derive the benefit. A
critical tool to use in deciding when to upgrade is utilization data, which accurately details the actual usage
rate of a test instrument. Suppose, for example, that an owner wanted to upgrade an instrument to one with
faster speed to overcome a bottleneck of a test system. If according to its utilization data, the original
instrument was still being utilized within the original test plan range, then its speed might not actually be the
cause of the bottleneck. If the owner still moved ahead with the upgrade, then it would essentially just be
excess capacity and not affect the test system throughput in a positive manner.

Facilities
Expenses related to facilities include electricity and floor space to operate and utilize equipment,
respectively.

Resale Value or Disposal

When equipment reaches the end of its useful life, it is sold, traded in for credit, or recycled. The first two
options create a negative cost in the TCO model, while the last is a strategic advantage for suppliers of
high-quality products. Other TCO costs: This expense includes costs not already covered, such as the
cost of consumable materials (e.g., connectors and cables).

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Monitoring Utilization and Health: A Solution for Better TCO-Based Decision Making
As with any model, the TCO is static and only as good as the assumptions that are used. As we
have discovered, many of the inputs to the model can drastically change the outcome depending on
these assumptions. The two largest factors are uptime (i.e., making measurements) and downtime
due to maintenance, calibration, and repair. Looking at these factors and other different cost
components comprising the Keysight TCO model, it’s clear that utilization and health monitoring
plays a critical role in reducing an asset’s TCO, not only in maintenance and operational costs,
but even in making original acquisition decisions to better manage operational cost of ownership
variables. Real-time health data on an asset starts to show signs of an impending breakdown or
the need for maintenance. Maintenance can be proactively scheduled to ensure the asset continues
to work at its optimal level and to avoid any potential costly downtime expense that might arise from
an asset failure. In addition, access to real-time equipment utilization data and trends allows
equipment owners to make decisions about how often equipment needs to be re-calibrated. If it’s
used heavily, then a shorter calibration cycle may be warranted.

If it is underutilized, the calibration cycle might be easily pushed out—a move that would significantly
reduce the cost of the asset’s preventative maintenance and in turn, its TCO. Decisions triggering
the acquisition or disposition of test equipment can be dramatically impacted by real-time monitoring
of true utilization of a test asset. True utilization takes into consideration when the instrument is truly
performing test measurements, not just if the asset is on or off. When test assets are under-utilized
relative to their original productivity plan, they can be repurposed to increase their utilization and
eTCO or disposed of, decreasing the overall TCO burden on the program. Either way, once an asset
is being measured with factual and real-time utilization data, making decisions on how to drive lower
eTCO across test assets can be made more effectively and pro-actively.

So, how does one garner true utilization and health data monitoring on test assets? One solution is
the PathWave Asset Advisor - Utilization and Health application, one of three applications in the
Test Asset Optimization Services portfolio. Its real-time data-driven utilization charts allow
equipment owners to visualize trends over time, and highlight opportunities for test-process
optimization, standardization, and increased asset sharing (Figure 1). Its real-time health parameter
monitoring identifies assets with abnormal maintenance requirements or those needing preventative
maintenance, enabling equipment owners to avoid unscheduled downtime (Figure 2). Specific
health parameters that can be monitored, depending on the asset type, include system cumulative
run time, cycle counts on key components, internal temperature, humidity, shock, and memory
usage.

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Figure 1- PathWave Asset Advisor - Utilization and Health application, equipment owners can
monitor asset true utilization seeing trends over time with real-time charting.

Figure 2- PathWave Asset Advisor - Utilization and Health application, equipment owners can
monitor various health parameters to identify needs for critical functional maintenance.

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Two other applications included in the Test Asset Optimization Services portfolio are the
PathWave Asset Advisor - Track and Control application, which Identifies an asset’s
“real” situation in terms of its location and user, and PathWave Asset Advisor - Loan Pool
application, which drives increased sharing of assets across organizations. Together, the
three applications form the foundation of the Test Asset Optimization Services portfolio.
They provide a data-driven program for optimizing an organization’s test assets
productivity over their entire lifespan, in turn, allowing equipment owners to maximize
their asset ROI. This implementation uses a database model instead of a polynomial
model. As we saw in the example in Figure 2, the polynomial model doesn’t work at
mmWave frequencies, so we need a different technique.

Conclusion
For most companies, test and measurement equipment is one of the largest capital
expenses they will incur. Despite that fact, few companies fully understand an asset’s
real cost of ownership drivers well enough to make informed program decisions. Even
fewer have attempted to monitor an asset’s utilization and health—something that can
significantly reduce or increase an asset’s TCO. Addressing these shortcomings starts by
using an accurate model to calculate the cost of key ownership factors over the
equipment’s entire life and subsequently, monitoring the equipment’s utilization and
health parameter trends in real time. Only then can you see the real impact of an asset’s
utilization and health on decreasing TCO and have the power to make the changes
necessary to reap the biggest return on your invested capital.

Learn more at: www.keysight.com

For more information on Keysight Technologies’ products, applications or services,
please contact your local Keysight office. The complete list is available at:
www.keysight.com/find/contactus

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This information is subject to change without notice. © Keysight Technologies, 2018, Published in USA, July 25, 2018, 5992-2692EN