REPLACEMENT AND MAINTAINANCE MODEL

A policy is required in order to determine an age at which the replacement of job performing units such as men, machine, equipment ,etc. Usually replaced such a units are replaced with new ones when these become less effective or useless due to either sudden or gradual failure

When do we replace products or services?

Products Stop working Become less efficient Start failing more often Obsolete/ Out of fashion Services Quality goes down Higher cost/ lower value compared to competition Inability to adapt to changing needs

Replacement Problem
When should a product or service be replaced?
Economic/ Financial considerations (when cost of maintenance becomes higher than cost of replacement) Other considerations
Replace on complete breakdown Replace after n failures Replace at periodic intervals Etc.

Gradual failure:

Types of Failure

Increase in running cost, Decrease in productivity, Decrease in salvage

Sudden failure:
Progressive Failure, Retrogressive failure Sudden Failure

Types of Failure
Failure

Gradual

Sudden

Random

Retrogressive

Progressive

Gradual Failure
Gradual failure is progressive in nature. That is, as the life of an item increases, its operational efficiency also deteriorates resulting in Increased running (maintenance and operating) costs. Decrease in its productivity. Decrease in the resale or salvage value. Mechanical items like pistons, rings, bearings, etc. and automobile tyres fall under this category.

Sudden Failure
This type of failure occurs in items after some period of giving desired service rather than deterioration while in service. The period of giving desired service is not constant but follows some frequency distribution which may be progressive, retrogressive or random in nature.

Progressive failure: If the probability of failure of an item increases with the increase in its life, then such failure is called progressive failure. For example, light bulbs and tubes fail progressively.

Retrogressive failure: If the probability of failure in the beginning of the life of an item is more but as time passes the chances of its failure become less, then such failure is said to be retrogressive.

Random failure: In this type of failure, the constant probability of failure is associated with items that fail from random causes such as physical shocks, not related to age. For example, vacuum tubes in air-born equipment have been found to fail at a rate independent of the age of the tubes.

A thought experiment
When a product or service deteriorates gradually, how to decide when to replace? How to mitigate the risk of sudden failure?

How to handle a scenario where people rather than products are involved? (When one of your best peoples performance goes down, what to do?)
What to do if a product goes out of fashion/ obsolete compared to other new products? (When to replace your Sony Walkman?)

General approach to solve replacement problems

Analyze the failure or performance reduction pattern over time Assess probability Assess costs of replacement
Actual cost Cost of replacement (labour etc.) Cost of disruption (opportunity loss, lost production, lost orders, learning curve)

Maintenance
The objective of maintenance is to maintain the capability of the system while controlling costs

Maintenance is all activities involved in keeping a systems equipment in working order or operating condition Maintenance is concerned with avoiding or minimizing downtime or to avoid undesirable results due to system failure.

Maintenance cost increases over time

Purchasing Price

Maintenance cost increases over time

Purchasing Price
Maintenance Cost

Maintenance cost increases over time

Purchasing Price
Maintenance Cost Maintenance Cost

Maintenance cost increases over time

Purchasing Price
Maintenance Cost Maintenance Cost Maintenance Cost

Scenario 1: Maintenance cost increases over time

Purchasing Price
Maintenance Cost Maintenance Cost Maintenance Cost

Scrap Value

Scenario 1: Maintenance cost increases over time

Purchasing Price
Maintenance Cost Maintenance Cost Maintenance Cost

Scrap Value

Total cost after n years Average Annual Cost

Replacement of the items whose efficiency deteriorates with time Replacement policy for items whose running cost increases with time and value of money remain constant during a period

EX. A FIRM IS CONSIDERING THE REPLACEMENT OF MACHINE WHOSE COST PRICE IS RS. 12200 AND ITS SCRAPE VALUE IS RS. 200. FROM THE EXPERIENCE THE RUNNING (MAINTENANCE AND OPERATING) COST ARE FOUND TO BE AS FOLLOWS.

Year Running cost

1 200

2 500

3 800

4 1200

5 1800

6 2500

7 3200

8 4000

When should the machine be replaced?

Year of service n 1 2 3

Running cost R(n)

Cumulative Running cost R(n)

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

4
5 6 7 8

Year of service n 1 2 3 4 5 6 7 8

Running cost R(n) 200 500 800 1200 1800 2500 3200 4000

Cumulative Running cost R(n)

Depreciation cost C-S

Total cost TC

Average cost ATC(n)

Year of service n 1 2 3

Running cost R(n) 200 500 800

Cumulative Running cost R(n) 200

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

4
5 6 7 8

1200
1800 2500 3200 4000

Year of service n 1 2 3

Running cost R(n) 200 500 800

Cumulative Running cost R(n) 200 700

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

4
5 6 7 8

1200
1800 2500 3200 4000

Year of service n 1 2 3

Running cost R(n) 200 500 800

Cumulative Running cost R(n) 200 700 1500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

4
5 6 7 8

1200
1800 2500 3200 4000

Year of service n 1

Running cost R(n) 200

Cumulative Running cost R(n) 200

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

2
3 4 5

500
800 1200 1800

700
1500 2700 4500

6
7 8

2500
3200 4000

7000
10200 14200

Year of service n 1

Running cost R(n) 200

Cumulative Running cost R(n) 200

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000

2
3 4 5

500
800 1200 1800

700
1500 2700 4500

12000
12000 12000 12000

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

Year of service n 1

Running cost R(n) 200

Cumulative Running cost R(n) 200

Depreciation cost C-S 12000

Total cost
TC=R(n)+C-S

Average cost ATC(n)

12200

2
3 4 5

500
800 1200 1800

700
1500 2700 4500

12000
12000 12000 12000

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

Total cost
Year of service n Running cost R(n) Cumulative Running cost R(n) Depreciation TC=R(n)+C-S cost Average cost C-S ATC(n)

1
2 3 4

200
500 800 1200

200
700 1500 2700

12000
12000 12000 12000

12200
12700 13500

5
6 7 8

1800
2500 3200 4000

4500
7000 10200 14200

12000
12000 12000 12000

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000 6350

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000 6350 4500

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000 6350 4500 3675

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000 6350 4500 3675 3300

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

3167
3171 3275

Year of service n 1 2 3 4 5

Running cost R(n) 200 500 800 1200 1800

Cumulative Running cost R(n) 200 700 1500 2700 4500

Total cost Depreciation TC=R(n)+C-S Average cost cost C-S ATC(n)

12000 12000 12000 12000 12000 12200 12700 13500 14700 16500 12000 6350 4500 3675 3300

6
7 8

2500
3200 4000

7000
10200 14200

12000
12000 12000

19000
22200 26200

3167
3171 3275

Average total cost is minimum in the sixth year =(Rs.3167) Hence the machine should be replaced after every sixth year

Exercise
The data on the running cost per year and resale price of equipment a, whose purchase price is Rs. 200000 are as follows:
Year Running cost Resale value 1 30000 100000 2 38000 50000 3 46000 25000 4 58000 12000 5 72000 8000 6 90000 8000 7 110000 8000

What is the optimum period of replacement?