Equipment

Replacement
Dedy Suryadi
[email protected]
3/2021

For educational purpose only.

1
Source: Wayne Winston, Operations Research Applications and Algorithms 4th. Edition, 2003
Introduction
• Determining how long a machine should be utilized before it should
be traded in for a new one.

2
Example 7: Equipment Replacement

3
Stage, Decision
• Stage: time t (t = 0, 1, 2, …, 5)

• Possible Decisions (at the beginning of time t):

• Keep
• Trade

but we need information to make a reasonable decision

e.g., if a machine has been used for 3 years, can we keep it for another year?

4
Stage, State, Decision, Recursion
• Stage: time t (t = 1, 2, …, 5)

• Possible Decisions (at the beginning of time t; t < 5):

• Keep
• Trade

• State: the age of the machine at the beginning of time t

the information to make a reasonable decision

• Recursion: minimize net costs during the next 5 years

5
Stage 5
• Time 5 is the end of this problem, so the only possible decision is to
sell the machine.

• The revenue from selling the machine at time 5

if the machine’s age is 1 year old:
f5(1) = -800
if the machine’s age is 2 years old:
f5(2) = -600
if the machine’s age is 3 years old:
f5(3) = -500

6
Stage 4
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3

0 is impossible, we can’t suddenly have a new machine (unless at Time 0)

4 is impossible, after 3 years of usage we must trade the machine with a new machine

7
Stage 4 (All States)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1
We may either Keep (for another year) or Trade.

• If the age of the machine at the beginning of time 4 = 2

We may either Keep (for another year) or Trade.

• If the age of the machine at the beginning of time 4 = 3

We must Trade with a new machine.
8
Stage 4 (All States)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

• If the age of the machine at the beginning of time 4 = 2

We may either Keep (for another year) or Trade.

• If the age of the machine at the beginning of time 4 = 3

We must Trade with a new machine.
9
Stage 4
(State = 1, Explained)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

Revenue from Cost from Maintenance Cost from the

selling a 1-year- purchasing cost of a later stages
old machine a New machine (from t+1 until T)
machine during its
first year

10
Stage 4
(State = 1, Explained)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

Maintenance Cost from the

cost of a later stages
machine (from t+1 until T)
during its
second year

11
Stage 4 (All States)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

• If the age of the machine at the beginning of time 4 = 2

• If the age of the machine at the beginning of time 4 = 3

We must Trade with a new machine.
12
Stage 4
(State = 2, Explained)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3

• If the age of the machine at the beginning of time 4 = 2

Revenue from Cost from Maintenance Cost from the

selling a 2-year- purchasing cost of a later stages
old machine a New machine (from t+1 until T)
machine during its
13
first year
Stage 4
(State = 2, Explained)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3

• If the age of the machine at the beginning of time 4 = 2

Maintenance Cost from the

cost of a later stages
machine (from t+1 until T)
during its
14
third year
Stage 4 (All States)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

• If the age of the machine at the beginning of time 4 = 2

• If the age of the machine at the beginning of time 4 = 3

15
Stage 4 (All States)
• What are the possible ages of the machine at the beginning of time 4?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 4 = 1

• If the age of the machine at the beginning of time 4 = 2

• If the age of the machine at the beginning of time 4 = 3

16
Stage 3 (All States)
• What are the possible ages of the machine at the beginning of time 3?
Answer: 1 (has been used for a year), 2, 3
• If the age of the machine at the beginning of time 3 = 1

• If the age of the machine at the beginning of time 3 = 2

• If the age of the machine at the beginning of time 3 = 3

17
Stage 2 (All States)
• What are the possible ages of the machine at the beginning of time 2?
Answer: 1 (has been used for a year), 2
• If the age of the machine at the beginning of time 2 = 1

• If the age of the machine at the beginning of time 2 = 2

18
Stage 1 (All States)
• What are the possible ages of the machine at the beginning of time 1?
Answer: 1 (has been used for a year)
• If the age of the machine at the beginning of time 1 = 1

19
Stage 0
• What are the possible ages of the machine at the beginning of time 0?
Answer: 0 (New)
• The age of the machine at the beginning of time 0 = 0

20
 Equipment
Replacement
Dedy Suryadi
[email protected]
3/2021

For educational purpose only.

21
Source: Wayne Winston, Operations Research Applications and Algorithms 4th. Edition, 2003