Module 6. Replacement theory

Lesson 12

INTRODUCTION AND ELEMENTARY CONCEPTS

12.1  Introduction

The replacement problems are concerned with the situations that arise when some items such as machines, men, electric appliance etc. need replacement due to their decreased efficiency, failure or breakdown. The deteriorating efficiency or complete breakdown may be either gradual or all of a sudden. A replacement is called for whenever new equipment offers more efficient or economical service than the existing one. The problem in such situation is to determine the best policy to be adopted with respect to replacement of the equipment. In case of items whose efficiency go on decreasing according to their age, we have to spend more and more money on account of increased operating cost, increased repair cost, increased scrap, etc. In such cases the replacement of an old item with a new one is the only alternative to prevent such increased expenses. Thus, it becomes necessary to determine the age at which replacement is more economical rather than continuing with the same.

12.2  Types of Replacement Situations

The replacement situations may be classified into four categories:

a) Replacement of items that become worse with time e.g. milk plant machinery, tools, vehicles, equipment etc.

b) Replacement of items which do not deteriorate with time but break down completely after certain usage e.g. electric tubes, machinery parts etc.

c) Replacement of items that becomes obsolete due to new developments.

d) The existing working staff in an organization gradually reduces due to death, retirement and other reasons.

The problem is to decide the best policy to adopt with regard to replacement. The need for replacement arises in a number of different situations so that different types of decisions may have to be taken. For example:

a) It may be necessary to decide whether to wait for certain items to fail, which might cause some loss, or to replace the same in advance, even at a higher cost.

b) An item can be considered individually to decide whether or not to replace immediately.

c) It is necessary to decide whether to replace by the same item or by an improved type of item.

12.3  Types of Failure

There are two types of failure: i) Gradual failure ii) Sudden failure

12.3.1  Gradual failure

It means slow or progressive failure as the life of the item increases, its efficiency decreases resulting in decreased productivity, increased operating cost and decrease in the value of the item, e.g. machines/equipment etc.

12.3.2  Sudden failure

In this type of failure the items do not deteriorate markedly with service but which ultimately fail after some period of usage, thus precipitating cost of failure. Sometimes sudden failure of an item may cause loss of production or may also account for damaged or faulty products. The period between installation and failure is not constant for any particular type of equipment but will follow some probability distribution which may be progressive, retrogressive or random in nature.

12.3.2.1  Progressive failure

Under this mechanism, the probability of failure increases with the increase in the life of an item.

12.3.2.2  Retrogressive failure

Certain items have more probability of failure in the beginning of their life and as time passes, the chances of failure become less. In other words, the ability of the unit to survive the initial period of life increases its expected life.

12.3.2.3  Random failure

Under this mechanism, constant probability of failure is associated with items that fail from random causes such as physical shocks, not related to age.

12.4  Assumptions

Following assumptions are essentially required for replacement decisions:

i) The quality of the output remains constant.

ii) Replacement and maintenance costs remain constant.

iii) The operational efficiency of the equipment remains constant.

iv) There is no change in technology of the asset under consideration.

12.5  OR Methodology of Solving Replacement Problem

OR provides a methodology for tackling replacement problem which is discussed below:

i) Identify the items to be replaced and also their failure mechanism.

ii) Collect the data relating to the depreciation cost and the maintenance cost for the items which follow gradual failure mechanism. In case of sudden failure of items, collect the data for replacement cost of the failed items.

iii) Select a suitable replacement model as discussed in Lesson 13.