A strategy for optimal equipment replacement

Abstract

Plant and equipment generally represent the highest allocation of resources in the production process. Incorrect decisions regarding equipment replacement can often cost far more than all the savings and cost reductions achieved in all other areas of production and planning. With age, both the failure rate and the corresponding maintenance cost increase considerably as deterioration due to wear and ageing of components sets in. When there is failure, a decision has to be made, whether to continue to repair at ever increasing maintenance costs and risk of failure, or to replace the item. This has created unique problems for production management. Should replacement occur at fixed time intervals? What are the consequences of a delay beyond the fixed time interval? Does a valid optimal fixed time interval exist for each replacement? Is an optimal fixed time something inherent to an equipment or do factors like depreciation rate, discount factor and net present value influence it greatly? This study examines these issues and creates a rational basis for arriving at optimal decisions. These decisions in turn would go a long way in maintaining an efficient and competitive manufacturing system.