Three Steps to a Machine Replacement Decision | Construction Equipment

search
archCH local_library
cal libr ry
how_to_reg
w to r glabel_important
bel imp rtant
ant
nttOUT

HOME chevron_right
THREE STEPS TO A MACHINE REPLACEMENT DECISION

SHARE

EXECUTIVE INSTITUTE

Three Steps to a Machine Replacement Decision

We constantly wrestle with the replacement decision. Sometimes it is relatively easy, and we know we have made the right call.
Most days, however, we go home and wonder if it would not have been better to keep the old unit a little longer.

The replacement decision is complicated because there are many options. All require good information and a measure of
clairvoyance regarding both the nature and the volume of future work. It would be easy if we knew what we would be doing in
four years when the new crane we plan to purchase is in the prime of its life. Uncertainty is definitely part of the process, but
there is much we can do to understand options, manage risks, and improve deAllcisions.

We start by identifying candidates for replacement. All units in the fleet are, or will at some time in their life be, candidates for
replacement. It is important to develop and maintain a ranked list of units you think should be replaced, and to have a
defendable reason why some units rank higher than others. “Because I think so” may be a good reason, but there is invariably a
need to quantify the selection and ranking process by using metrics such as age, increasing cost, decreasing reliability, and lack
of utilization. Techniques that successfully identify candidates for replacement typically rely on more than one attribute and
combine age in years or hours with metrics for cost and reliability. Regardless, it is absolutely essential to maintain a list of

https://www.constructionequipment.com/three-steps-machine-replacement-decision[3/13/2020 8:35:17 AM]

candidates for replacement, to know why units are on the list, and to use the list to develop both a replacement strategy and a
competent capital budget.

The diagram shows six replacement options. Let’s start with the two on top: dispose and hold. Some units on the candidate list
will not be replaced, they will simply be retired on the basis that work loads or work patterns are shifting and there is no need
for similar units in the fleet. The age, cost, or utilization of the unit would have made it a candidate. The fact that utilization is
low and that there is no need for units of this nature makes it a candidate for disposal.

The hold option is similar but the outcome is different. The machine would have reached the end of its life or would have
finished the task for which it was originally purchased. We must decide whether to dispose of it or keep it as a strategic asset
pending future work. The hold decision should not be taken lightly. An excess of optimism regarding future work often results
in units standing for extended periods waiting for that one special job. Idle units cost more than nothing. Deterioration
continues and obsolescence can easily become a critical factor. You do not want money tied up in the bank of idle equipment.

The two options at the bottom—run and repair, and rebuild—are similar. For run-and-repair decisions, candidate machines
should be replaced, but concern about either capital expenditure or future work load makes investment in a replacement
machine or a rebuild difficult to justify. Instead, we decide to spend a little, extend life, and delay replacement to a more
opportune time. The rebuild decision takes the concept further. The candidate unit is inspected carefully, and we make a
planned, focused decision to invest in a rebuild, extend life, and delay replacement well into the future. The calculations
involved are complex and risky. There is a huge gray area between a run-and-repair decision used to bridge a short-term
problem and a rebuild decision used to extend life, improve performance, and lower cost.

True replacement decisions are shown in the center of the diagram. We again see two options: like-for-like replacement, where
it is possible to replace the candidate unit with an essentially similar unit; and improvement, where the candidate is replaced
with an improved and more productive version of the machine. In both cases, the capacity and capability of the fleet remains
essentially unchanged; and in both cases, the decision is based on the belief that the volume, nature, and characteristics of the
work will remain the same. This continuity of work means that the replacement decision is a matter of timing; it is not a matter
of if the candidate machine will be replaced, it is a matter of when this is best done. The continuity-of-work assumption also
means that you can reasonably expect the replacement machine to be used for its full economic life when it will, in turn,
become a candidate for replacement.

Glossary
Defender: The current machine under consideration for replacement

Challenger: The machine being considered as a desirable replacement for the defender

Defender’s marginal cost: The cost of owning and operating the defender for the next production period

Challenger’s minimum life cycle cost: The minimum life-to-date cost per production period that can be expected if
owned and operated through its full lifecycle.

Replacement point: When the defender’s marginal cost systematically exceeds the minimum lifecycle cost expected

https://www.constructionequipment.com/three-steps-machine-replacement-decision[3/13/2020 8:35:17 AM]

from an equivalent and desirable challenger.

Early authors who worked to define economic life and the replacement decision used two descriptive words for the situation.
The current machine—the machine under consideration for replacement—was called the defender, and the machine being
considered as a possible replacement was called the challenger. The defender keeps its position in the fleet until the challenger
is shown to be superior by achieving higher standards in safety, quality, and cost.

In order to be a candidate for replacement, the defender is likely to be close to, at, or beyond its economic life. This means that
the defender’s marginal cost—the cost of keeping it one more year—is higher than its average cost to date and that it has a
“positive inferiority gradient.” Things are only going to worsen as time progresses.

In order to mount a successful challenge, the challenger must have a minimum life cycle cost that beats or is less than the
defender’s marginal cost. This brings up the classic concept that replacement should occur when the defender’s marginal cost
exceeds the minimum lifecycle cost expected from an equivalent and desirable challenger.

This is a simple three-step process.

First, focus on the future. Past expenditures have no place in the replacement decision. The fact that you have recently replaced
the hydraulic pump should not influence a replacement decision based on a predicted engine failure.

Second, estimate what the defender’s marginal cost is likely to be looking into the future. Use your history, project out for a
year or two. Estimate when the next spurt in expenditure is likely to occur. Watch the trends.

Third, know and have on hand a reasonable estimate for the minimum lifecycle cost for an equivalent and desirable challenger.
Gather the information and know what a replacement is likely to cost.

Replace when the defender’s marginal cost—the value from step 2—systematically exceeds the minimum that can be expected
from an equivalent and desirable challenger—the value from step 3.

In a like-for-like situation, the defender and challenger will have the same minimum lifecycle cost and therefore the
replacement interval and the defender’s sweet spot life will be the same. This seldom occurs because most challengers exhibit
some form of improvement and are either more expensive or more productive or both. When this occurs, the defender’s sweet
spot life is no longer the optimum time to replace. If you look at cost only, you will have to delay replacement until the
defender’s marginal cost has grown to equal or exceed the minimum lifecycle cost for the challenger. If you wish to factor in
productivity improvements, then you can increase the defender’s marginal cost by a factor that reflects the fact that each hour
of defender time produces fewer units of work.

It is complex and requires you run the numbers. But two things are important. First, each and every replacement decision gives
an opportunity to change the size and configuration of the fleet. We work in a changing industry; use replacements as
opportunities to make adjustments to the size and composition of your fleet. Second, equipment is used up in the production of
completed construction. You may be able to defer replacement, but in the long run, you cannot deny replacement. It is called
the cycle of life.

https://www.constructionequipment.com/three-steps-machine-replacement-decision[3/13/2020 8:35:17 AM]