A Standardized Approach to Equipment Replacement

When it comes to timing the replacement of worn-out equipment, using some intuition is fine, but you’ll get the best results if hard data is backing up your decisions

A Standardized Approach to Equipment Replacement

There are a few different ways to go about determining when a piece of equipment needs to be replaced. It doesn’t have to be rocket science, but it does have to be based on some hard data.

Mike Vorster, owner of C.E.M.P. Central Inc., says that once you understand which metrics you want to evaluate, there are some relatively simple tools that can guide the decision-making process. C.E.M.P. Central is a training and consulting organization that helps the construction, mining and quarrying industries advance the management of mobile equipment fleets.

Some people tend to rely on intuition. They “just have a feeling” that it’s time to replace a certain machine. Perhaps an untimely breakdown is etched into their memory. Perhaps they’ve heard about what could prove to be a better option, i.e. brand, model or equipment type. You should not ignore your intuition. You should just allow it to lead you to the numbers, because the numbers do not lie.

“Equipment managers can’t afford to make these ‘I think so’ decisions anymore,” Vorster says. “Yes, they need their eyes, ears and judgment. They also need one or more decision criteria, whether that’s age or hours or operating cost, for example. Just saying that a machine breaks down too often is not enough. Equipment managers need to define ‘too often’ with some kind of trigger value. Equipment managers must be in a position to defend their decisions when it comes to capital expenditures.”

Vorster says there are three common, straightforward approaches an equipment manager can use. Each can provide the metrics needed to make a compelling case for equipment replacement.

Age-Based Approaches

The age-based approach is about as straightforward as it gets. There are a couple common ways you can go about it.

Approach No. 1: Years. First, scrutinize the number of years a machine has been in service. Establish a trigger value where you’ll start to really examine if a machine should be retired. Perhaps that trigger value is 15 years.

When looking across your fleet of this particular type of machine, you want to avoid having too many units at or near 120% of trigger value; that means they are getting pretty old. We’ll call that the red zone. Conversely, the green zone is less than 80% of trigger value; that means the units are still relatively new. The yellow zone is in between. The goal is to have a mix of greens, yellows and reds — with an eye on replacing the reds.

Approach No. 2: Operating Hours. Another common age-based approach is to scrutinize operating hours. The trigger value will have to vary by machine type, operating conditions, and perhaps additional factors. Here is where you can rely on intuition to set some parameters.

Just like with a years-based age chart, 120% of trigger value is bad (red), while less than 80% is good (green). Again, aim for a mix of greens, yellows and reds, with a goal of replacing the reds.

Churn charts. When relying on age to analyze equipment life, it’s important to develop something called a churn chart. A churn chart helps you predict how quickly a piece of equipment will advance toward the trigger value, or red zone. It’s easy to predict when using years. With operating hours, however, you need to have a good grasp of how many hours a machine will typically rack up in a given year. Intuition can help, but hard numbers are better.

A churn chart will come in handy when making the pitch to management for a new machine.

“There are many millions of dollars of capital expenditure decisions made on nothing more complex than a churn chart,” Vorster says. “The equipment manager sits at the budget table and says, ‘I have three units in the red zone right now. We may be able to defer replacement, but we cannot deny replacement. We’ll be right back here next year, only those three units will probably be joined by a couple more.’”

Cost-Based Approach

Another straightforward replacement method looks at machine costs. There are two primary types of costs: owning costs and operating costs.

Owning costs go down over time because the residual value of a machine decreases as it gets older. Operating costs, on the other hand, increase over time as repair costs escalate.

You should look at both owning costs and operating costs by year over a sustained period of time. Add the two together, and then identify the year in which the combined cost is at its lowest point. This is known as the “sweet spot” of a machine’s equipment life.

Vorster says keep in mind that the sweet spot is not just a fleeting moment in time. A machine typically operates at or near its sweet spot for quite a while, perhaps several hundred hours or a couple of years.

“You don’t have to panic and demand that a crew park a machine the second it hits its sweet spot,” Vorster says.

At some point in time following the sweet spot, owning and operating costs will begin to climb back up. That’s when it’s time to start paying close attention. The further away from the sweet spot you get, the more costly a machine becomes.

There is one challenge with a cost-based approach. If the new machine you are looking to acquire is drastically different from the machine it will be replacing, it’s hard to compare owning/operating costs as apples to apples.

“You need to add some kind of value function into your analytics,” Vorster says.

In other words, you need to factor in the extra productivity and/or revenue the new machine is expected to bring to the table.

Multifactor Approach

Equipment replacement analysis can be based on more than just cost and age. There are several factors that can be scored individually and then combined into a composite score or ranking. Each factor can be weighted in a way the equipment manager deems fit.

Let’s use the example of a triaxle dump truck:

  • Year of manufacture — the newer the better — weighted 15%.
  • Miles traveled LTD (life to date) — the fewer the better (80,000 to 700,000) — weighted 15%.
  • Miles traveled last 12 months — the more the better, because that means the machine is being utilized (30,000 to 10,000) — weighted 30%.
  • Inspection score — well-conditioned parts get a high score, so the higher the better — weighted 10%.
  • Labor cost per mile past 12 months — the lower the better (8 cents to 30 cents) — weighted 15%.
  • Parts cost per mile past 12 months — the lower the better (25 cents to 40 cents) — weighted 15%.

With this analytical approach, you can take into consideration age, cost, utilization and condition. Each of these factors can influence the decision to replace a piece of equipment, and each is based on real data.

Other factors that you might take into consideration include availability, operating hours and owning/operating costs. These factors speak to the reliability of a machine, another important consideration in the replacement decision-making process.

At the end of the day, you have options. You have options as to how to go about assessing equipment, and you have options as to what to replace your equipment with (i.e. new, used).

“If you have a lot of machines in that dreaded red zone, think about the forecasted workload for the coming year,” Vorster says.

You should also think about the company’s financial position and its ability to make the necessary capital expenditures. You would love all new equipment every year, but that’s probably not a possibility, to say the least. You have to simply look at the data and make a case for equipment replacement when necessary.

“Let the numbers lie where they fall, and identify the candidates for replacement,” Vorster says. “Then you can develop a financing and acquisition strategy, and act on it.”

About the Author

AEM is the North American-based international trade group representing off-road equipment manufacturers and suppliers, with more than 950 companies and more than 200 product lines in the agriculture and construction-related sectors worldwide. AEM has an ownership stake in and manages several world-class exhibitions, including CONEXPO-CON/AGG.


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