Decision Tools for Maintenance Management

7.1 Introduction By now you must be familiar with the various types of maintenance systems. This unit introduces to the decision tools required for maintenance management. In the present competitive world with continued technological developments, the replacement of machines or equipments has emerged as a continuous requirement to strengthen the competitive abilities of the organisation. The replacement and transformation of the installed capacity to the next stage assumes an important strategic role in the modern manufacturing management. To meet the challenges thrown by the advancement technologies, it may be necessary for organisations to replace the machinery irrespective of its age and their operating conditions. In other words, even if the equipment has its „physical value‟, that is, not worn out fully, it should be discarded if it has lost its „economic value‟. It is because the measure is for its competitive advantage. This in principle may not be always practical to discard the existing machine just because it has lost its economic value. This is due to the fact that the existing installed capacity always lags behind best machines coming with the latest technologies to the market. Therefore the replacement analysis does not strive to chase such running technologies by replacing equipments very frequently, but attempts should be made to keep the action in place where replacement is economically justifiable. A frequently encountered issue in maintenance is the equipment replacement and the managerial decision making. It also involves in deciding the appropriate timing of the equipment replacement. 7.2 Reasons for Equipment Replacement Let us start the unit by discussing the reasons for equipment replacement. There are many factors that necessitate the replacement of machines and equipment. They can be broadly classified into two, namely: · Technical factors. · Cost factors. Let us look into each of these factors in detail. 7.2.1 Technical factors Now that we are discussing about the reasons for equipment replacement, let us look into how technical factors contribute to the reasons for equipment replacement. Given below are some of the reasons. · Wear and tear of equipment. · Obsolescence caused by new invention and technologies in the field. · Unsuitability of existing equipment due to present requirements of changes that have warranted, namely: · The size of the work.

· Speed of operations. · Degree of accuracies required. · Higher rate of output. · Need for power conservations. · Automation combining two or more processes for higher productivity. · To eliminate the slack time of operations through line balancing process. · Improved safety requirement. · Additional operations that will be catered by the new machine. · Reduction or elimination of manual operations and the resultant hazards by the proposed new machine. · Easy, quick and convenient set up and operation of new machine. · Reliability of performance, which is, for ensuring higher productivity of the product with higher quality assured by the new machine. 7.2.2 Cost factors The previous section discussed us how technical factors contribute to the reasons for equipment replacement. We shall now discuss and understand how cost factors contribute to the reasons for equipment replacement. The reasons are as mentioned below. · High repair cost of existing machine. · Reduction in defective work by the new machine. · More output at faster rate by the new machine. · Combination of two or more existing operations into one by the new machine. · Reduction in labour cost as a result of few laborers and lower skills of the operators. · Improvement in the quality with the use of new machine. · Flexibility in the use of the new machine for other type of operations. · Probable economic life of the new machine. · Reduction in the cost of jigs, fixtures and tools by the use of new machine. · Size of the investment required by the new machine. 7.3 Advantages of a Sound Replacement Program Now that we have understood the reasons for equipment replacement, let us now discuss some of the advantages of adopting a sound replacement program. A sound equipment replacement program practiced will accrue many benefits and afford advantages as detailed below: · It reduces the cost and improves profitability. · The quality of the product is improved resulting in higher sales. · It results in increased production thus reducing the per unit absorption cost. · It ensures continued operations of the machines. · The equipment is replaced on a continuous basis rather than on emergency. · A good replacement policy emphasises the need for creation of depreciation reserves for replacements. This policy reduces the risk of using such funds for any other purposes. · The use of depreciation reserves for the replacement will yield a higher return to the company than other types of investments. Self Assessment Questions

1. To meet the challenges thrown by the advancement technologies, it may be necessary for organisations to discard the machinery if it has lost its „___________‟ even if it has „physical value‟, which is, not worn out fully. 2. A frequently encountered issue in maintenance in the equipment replacement is in deciding the appropriate ________ of the replacement. 3. Objective of Equipment replacement program are: a) Optimal Preventive Maintenance policy b) Group replacement policies c) ______________________________ d) Important decisions that manager to take based on: a) Optimal level of preventive maintenance b) Optimal replacement policy c) When to replace the equipment 4. There are many factors that necessitate the replacement of machines and equipment. They can be broadly classified into two, namely 1) Technical factors 2) _________________ Activity 1: Assume that you employed with an organisation named ABC. You are part of the HRM personnel and have been asked to give a talk on the advantages of designing a sound replacement program. [Hint: Refer to section 7.3] 7.4 Optimal Preventive Maintenance Policy The last two sections gave us an insight into the reasons for equipment replacement and the advantages of designing a sound replacement program. Here, we shall look into the optimal preventive maintenance policy. There may be various maintenance alternatives that are available for an organisation to consider and take decisions after careful analysis. In the process the maintenance manager will face the following three important issues: · What should be the optimal level of preventive maintenance for equipment? · Is there any optimal group replacement policy available for performing maintenance in an operations system? · When should the equipment be replaced and through which means? To answer the above decision points satisfactorily, certain models are developed to help the maintenance managers to decide upon. Let us consider the equipment, which has worked for its life limits and is undergoing preventive maintenance or breakdown maintenance, where in certain components are replaced, thus incurring maintenance cost. Here the frequency with which the preventive maintenance is carried out on the equipment is called „PM Cycle‟. That is, if PM cycle is indicated as three months, means the preventive maintenance is carried out in every three months. The maintenance manager is interested in knowing the optimal PM cycle and the total cost of maintenance (sum of the cost associated with preventive maintenance and breakdown maintenance).

Figure 7.1 given below, depicts the total cost when alternative PM cycle are used for equipment maintenance:

Figure 7.1: Cost of Maintenance Vs Level of PM Maintenance We use the following notations for the program: Cp = Average cost of preventive maintenance for one unit of the equipment. Cb = Average cost of a breakdown maintenance for one unit of equipment. M = Number of units of the equipment requiring maintenance. N = Number of periods in the planned horizon. Pn = Probability of breakdown in the nth period after preventive maintenance Bn = Number of breakdowns during a PM cycle of duration „n‟. The number of breakdowns already occurred before the next PM routine is given by:

The first equation corresponds to the number of „first time failures‟ from the population of M machines. Similarly second corresponds to the number of failures from just concluded PM cycle. This population of machines will fail with the probability of (pn). One can extend this logic to compute the number of breakdowns for any value (n) of the PM cycle as:

The total cost of PM cycle is the sum of the above two costs. By comparing alternative values of (n), one can identify the optimal PM cycle. We shall look at an illustrative example to understand the computation of the optimum PM cycle better. Example: A Textile mill has 300 weaving machines with high speed auto spindles working on three shifts a day for 300 days a year. These machines are very critical for producing clothes for different customers and being critical for production and hence appropriate maintenance program is evolved by the company. Based on the equipment history cards, the company has estimated the probabilities of failure of the spindles, following a preventive maintenance cycle, month wise as 1st = 0.1, 2nd = 0.15, 3rd = 0.3, 4th = 0.20, 5th = 0.15, and 6th = 0.1. The cost estimate made by the costing department, the cost of preventive maintenance per weaving machine is Rs.300. Also the cost of breakdown maintenance will be Rs.1000 per machine. What is the right PM cycle for the textile mill? Solution: a) No preventive maintenance: Cost implication of having no preventive maintenance will be different from the machine that had preventive maintenance and hence the expected failure rate is also different. This expected life is computed from the probability distribution, as follows: Month following PM (a) Probability of breakdown (b) (a) x (b) P1 0.1 0.1 P2 0.15 0.3 P3 0.3 0.9 P4 0.20 0.8 P5 0.15 0.75 P6 0.1 0.6 Sum 3.45 From the above table, The mean time between failures of one machine is 3.45 months. The number of breakdowns for one machine per months is [1/3.45]

For 300 machines it will be 87. The cost of breakdown for policy of no preventive maintenance = 87 x 1000 = Rs 87000. This cost will be compared alternative PM cycle given below to identify the best policy. b) Computing the number of breakdowns for alternative PM cycles For PM cycles range of one to six, the number of breakdowns can be computed under each PM cycle alternatives by using above given equations = 300 x 0.1 =30 = [300(0.1+0.15) + 30 (0.1)] = 78 Similarly we can calculate B3, B4, B5 and B6 and is indicated in Column 2 below. Total cost is converted to per month values as shown in other columns:

Total Cost of Maintenance E=C+D 120000 168000 267300 353430 452340 538030 PM Cycle A 1 2 3 4 5 6

Cost per Month of Cost per month of Total cost per month Previous Maintenance BD Maintenance H=F+G F=D/A G=C/A 90000 30000 120000 45000 39000 84000 30000 59100 89000 22500 65835 88335 18000 70468 88468 15000 74671 89671 BD Maintenance Costs (at Previous Maintenance No of BD‟s Rs.1000) Cost B C = B x 1000 D 30 30000 90000 78 78000 90000 177.3 177300 90000 263.43 263430 90000 352.34 352340 90000 448.03 448030 90000

Solution:

The behaviour of the two costs in the total cost is clear from the table. The optimum PM cycle for the company is two months, as the cost of maintenance increases after 2nd year, that is, third year onwards (see column 2). Also the cost of breakdown maintenance is higher than the optimum PM cycle, thus giving a decision point for the company that only breakdown policy is very unattractive. 7.5 Equipment Replacement Decisions Now that we have understood the optimal preventive maintenance policy, let us look into some of the equipment replacement decisions. A frequently encountered issue for maintenance department is Equipment replacement. The equipment life cycle and the bathtub curve phenomenon will be discussed in unit 12. Equipment replacement is inevitable decision and hence the maintenance manager often faces questions like – · When do I replace? · Do I wait for another six months or do I replace it right away? Answering this question depends on the cost of maintaining older equipment versus the cost of new equipment. Since this decision on alternatives can only be taken after the equipment has worked for certain specific timeframe, the issue pertains to the time value of money. This means the suitable timing of the equipment replacement and appropriate decision taken becomes the very important factor for the maintenance manager. Methods of replacement- analysis: The method of replacement and its analysis is similar to those adopted while procuring the equipments under original investment plans of the project, except for the following differences: · The original investment analysis was made from purely investment and returns basis, whereas in case of replacement the estimation will also consider the residual serviceable life the existing equipment. · In case of replacement analysis, the new machine being procured gives out certain standards for comparison with the existing machine being replaced. Organisations have alternative methods for analysis before any decision is taken for replacement. Some of these important methods of analysis for replacement are: · Decision Tree method. · Minimum Annual Cost method. · Barnes Formula method. · MAPI Method. We shall look into each of these in detail in the following sections: 7.5.1 Decision tree analysis method One of the methods of analyzing the equipment replacement decision is to make use of decision trees. We shall look into this through the illustration of the following example.

Example: Policy of the company: A production unit manufacturing vital components for a motor bike in their machine shop is using a vertical milling machine for special operations. This machine is used throughout the year and in all the three shifts because of the demand of the work load. The machine shop has a policy of either overhauling or replacing the machine once in two years. Hence this machine can be overhauled only twice and will be replaced in the next review. With this policy, no machine will be used beyond a maximum of six years. The running costs including maintenance costs will go up when the machine becomes old despite major overhauls. Therefore policy ensures replacing the machines based on the annual cost of running an overhauled machine in comparison with the cost benefits from a new machine. Options: Options available for operations manager and maintenance manager are from the following four alternatives: 1. Replace the machine once after two years and again after two years. 2. Overhaul the machine at the end of second year and replace at end of four years. 3. Replace the machine at the end of two years and overhaul at the end of four years. 4. Overhaul - two times, that is, at the end of two years and at the end of four years.

Figure 7.2 given, is a decision tree indicating the above four alternatives. The manager knows that the best alternative among the above four is dependent on the relative cost of replacement as well as the difference between the running costs of a new machine and the overhauled machine.

Figure 7.2: Decision Tree Diagram

Decision tree diagram: To illustrate this, let us consider the following: Data given: Suppose the new machine costs Rs.2400000 to purchase for production whose annual operating costs including maintenance of the new for the first and the second years are Rs.450000 and Rs.500000 respectively, examine the decision points, where maintenance manager may consider in the process. The annual operating costs for the two year period for an over- hauled machine are Rs.550000 and Rs.700000, if it is first and Rs.650000 and Rs.900000 for the second overhaul. Decision points from the above alternatives:

Therefore, for a total of two overhauls the cost of overhauls comes to Rs1550000 and on a two year PM cycle the utilisation of the machine will be for six years after two overhauls. It can be seen from the above values, the overhauling cost of the second phase is almost more by 20% and hence the decision points are to replace the machine after two phases, that is, at the end of 6th year of the useful life. Here the depreciated value of the machine and the book value to be seen before investing on the new machine. Using the above information the maintenance manager could plan the equipment replacement decision for the next six years. 7.5.2 Minimum annual cost method To continue operating the equipment or to replace it with the new one has to be decided based on the lowest annual operating and capital costs. The annual capital costs consist of two ingredients, that is, the depreciation and interest charges. The annual operating cost includes wages to operator, power consumption, repair and maintenance and material losses. This method is illustrated in the example given below: Example: Five year old equipment having a books value of Rs.20000 is being considered for replacement. It is estimated that the machine has serviceable life of 4 years and will return Rs.20000 when sold as an old machine. A new machine considered for replacement will also cost Rs.20000 and has an estimated service life of 10 years. The decision on new machine is taken as it can be operated with lower skilled operator and can perform the identical operations and the quality of the production will be superior. It is assumed that the new machine will have no scrap value at the end of its life. The company expects 12% rate of return on investment. Evaluate whether the replacement is desirable, with details of the annual costs given below? Old machine (Rs) Rs.100 3500 400 New machine (Rs) Rs.50 1500 60

Power consumption Annual maintenance Losses due set up

Annual maintenance

120

25

Solution: Old machine (Rs) Investment value (A) a) Annual capital cost (I) b) Depreciation (20000 / 4 years) (D) c) Average interest cost at [12% x (I - D)] Annual operating cost (B) a) Power b) Operator‟s wages c) Annual maintenance d) Losses due to set up Total annual cost (A+B) 20000 5000 1800 100 3500 120 400 5920 New Machine (Rs) 20000 5000 1800 50 1500 25 60 3435

The comparison indicates that the annual cost of the new machine is Rs.3435 while that of the old machine is Rs.5920. so on the basis of “minimum annual cost method”, the installation of new machine is desirable. 7.5.3 Barnes method Prof. R.M. Barnes developed a formula for equipment replacement. The formula is suitable for the old and new machines having shorter life. Here the replacement is not allowed unless the savings due to the use of new equipment will pay not only for the new equipment but also for any amortized value of the old equipment with the given number of years. This time, that is, the number of years in which equipment will pay for itself is calculated by using the Barnes equation given below: X=[ Where, X = Number of years in which the equipment will pay for itself. A = Cost of the new equipment including installation charges B = Depreciated value of the old equipment at the time of replacement as reduced by any realized value of scrap C = Interest charge for the new equipment D = Number of units produced per day by new equipment E = Labour cost per unit with new equipment F = Estimated cost per unit with new equipment G = Estimated number of working days per year for new equipment H = Savings or losses in fixed charges per year other than interest charges. 7.5.4 MAPI method The Machinery and Allied Products Institution (MAPI) have developed a method for evaluating the replacement of machinery. MAPI analyzes and compares the rate of returns of the proposed new

machine and returns without the implementing the proposed replacement in the immediate next year. It emphasis on the immediate returns, as any distant forecasts for few years ahead may not be reliable when the decision is taken for heavy capital investments. The basic elements are: · Net investment: is the cost of the proposed new machine including installation charges, less any investments eliminated by its implementation · What are the next year advantages from the new machine: · Operating advantages because of new machine replacement (sum of the possible increase or decrease in revenues plus change in the operating costs) · Non operating advantages (the fall in the salvage value for holding the existing asset for one more year plus and the fall in the value of the new machine for the next year) · Tax advantage, if any by discarding or holding the asset for one more year: it is calculated on the basis of the next year‟s operating plus non operating advantages less tax · MAPI urgency index: the urgency of implementation or otherwise of the new machine. It is calculated on the % basis as under. Here higher the %, the greater the urgency of the replacement process.

Self Assessment Questions 5. Frequency with which the preventive maintenance is carried out on the equipment is called „________________.‟ 6. Organizations have alternative methods for analysis before any decision is taken for replacement. Some of these important methods of analysis for replacement are: a) Decision tree method b) Minimum Annual Cost method c) ____________________ d) MAPI Methods 7. To continue operating the equipment or to replace it with the new one has to be decided based on the lowest annual operating and capital costs. The annual capital costs consist of two ingredients, that is, the ___________ and Interest charges. Activity 2:

Assume that you are working as the maintenance manager for an organisation XYZ. Briefly explain some of the methods adopted by your team when making equipment replacement decisions. [Hint: Refer to section 7.5] 7.6 Systematic Equipment Replacement Program We are now familiar with the different equipment replacement decisions that have been discussed in the previous section. Let us now look into how to design a systematic equipment replacement program. The equipment replacement involves certain financial commitments. In the process there may be monetary benefits too. Therefore establishing sound replacement policies is the responsibility of the top management. This systematic approach involves: · Emergence of equipment replacement: here recommendations of both the machine operators and the concerned supervisors are considered by the top management to decide upon the replacement, as those who recommend, knows the operating efficiency of the equipment better. · Classification of equipment replacement: · Cost reduction. · Increased production. · Better quality. · New products. · Improvement in profits. · Safety. · Assignment of responsibility: recommendations from the operators and the supervisor are scrutinised by a committee consisting experienced personnel from production shop, maintenance department and finance to decide upon. · Selection of the equipment: when it is decided for replacement of the equipment with a new one, a committee will go through the selection and purchase processes and will be held responsible to get the new machine based on the techno-economic studies made earlier and approved by the management. · Follow up reports: are made to the top management and to the chief of production about the status of purchase of the new equipment and commissioned for production and its full conformances to the production requirements. 7.7 Group Replacement Policies The logic developed in the analysis discussed earlier are for determination of an optimum PM cycle that can be directly applied and used in the maintenance department as a norm for future. Maintenance planners may pose trade off theory involving replacement of just the failed item (as other items are working satisfactorily) rather than take action to replace the old equipment. When such replacements are made of those identified critical parts, the decision is taken to replace that particular item on all machines in the shop, with which that part or assembly exists. This is group replacement policy. Normally this is adopted where the parts which are functional on the machines are standardised in nature.

Example: In a factory, replacing bulbs in the lighting arrangement mounted at the high rise ceiling of the production hanger could be made en-mass by making use of the special gadgets available to reach such a high position. It is found worthwhile to consider and replace all the bulbs at a planned interval rather than going high up and replacing frequently one or two bulbs at a time. This phenomenon may happen in a fleet of machines having common parts like oil seals, bearings, lubricating oil replacement and replenishment, which all can be executed en-mass on all the equipments at planned intervals. In several such situations, this type of group replacement policy is found cost effective. Self Assessment Questions 8. The systematic approach to equipment replacement program involves the following: a) Emergence of equipment replacement b) Classification c) Assigning responsibility for actions d) ____________________________ e) Follow up and commissioning and evaluate results. 9. The equipment replacement does not involve any financial commitments. (True/False)? 10. Recommendations from the operators and the supervisor are scrutinised by a committee consisting in-experienced personnel from production shop, maintenance department and finance to decide upon. (True/False)? 11. Follow up reports are made to the top management and to the chief of production about the status of purchase of the new equipment and commissioned for production and its full conformances to the production requirements. (True/False)? 12. Maintenance planners may pose trade off theory involving replacement of just the failed item (as other items are working satisfactorily) rather than take action to replace the old equipment. (True/False)? Activity 3: Assume that you have been asked to design a systematic equipment replacement program. Briefly explain some of the points that will consider. [Hint: Refer to section 7.6] 7.8 Summary

In the competitive world of continued technological developments, the replacement of machines has been considered as a vital requirement for strengthening the competitive abilities of the organization. Certain times it may be necessary for organizations to replace the machinery irrespective of its age and or their operating conditions. Therefore the managerial decision making involves the appropriate timing of the equipment replacement. There are many factors that necessitate the replacement of machines and equipment. A replacement policy after considering these factors will help the organization to accrue many benefits of reducing the cost of production, improve in profitability and updating the technology. There may be various maintenance alternatives that are available for an organization to consider and take decisions after careful analysis. Equipment replacement, being an inevitable decision, depends on the cost of maintaining older equipment versus cost of new equipment. Organizations have alternative methods for analysis before any decision is taken for replacement. These methods and applications are discussed above. The equipment replacement involves certain financial commitments and in the process they achieve certain monetary benefits too. Therefore establishing sound replacement policies is the responsibility of the top management. Maintenance planners may plan trade off theory involving the replacement of just the failed item (as other items are working satisfactorily) rather than take action to replace the old equipment. Such replacements of those identified critical parts are made and the decision is taken to replace is under the company‟s group replacement policy. 7.9 Glossary Term Line balancing process Description This is a method by which the tasks are combined without violating precedence constraints and workstations are designed to complete the tasks

Equipment life cycle Bath tub curve represents the life cycle of the equipment through its three and the bathtub curve phases of infant mortality, useful life phase and wear out phase. Decision tree is a diagram used to structure and analyze a decision problem by Decision tree analysis laying out decision points, alternatives and chance events.

7.10 Terminal Questions 1. Replacement of the old equipment with a new one is practiced as a policy to meet competition. Explain why this issue of replacement is inevitable. 2. What are the objectives served by adopting a sound equipment replacement policy by an organisation? 3. What advantages that may accrue to an organization if they practice a sound equipment replacement program? 4. What is meant by optimal maintenance replacement program? What issue are to be answered by the maintenance manager?

5. Why detail analysis and use of different methods are essential requirements for taking suitable decisions on the equipment replacements? Explain briefly these methodologies used. 6. What are the factors that are required to be considered in a systematic approach to equipment replacement programs? 7. Under what situations group replacement policy is adopted? Give an example. 7.11 Answers Self Assessment Questions: 1. Economic value 2. Timing 3. Equipment replacement decisions 4. Cost factors 5. PM cycles 6. Barnes formula 7. Depreciation 8. Selection of Replacement equipment 9. False 10. False 11. True 12. True Terminal Questions: 1. Refer to section 7.1 Introduction 2. Refer to section 7.1 Introduction 3. Refer to section 7.3 Advantages of a Sound Replacement Program 4. Refer to section 7.4 Optimal Preventive Maintenance Policy 5. Refer to section 7.5 Equipment Replacement Decisions 6. Refer to section 7.6 Systematic Equipment Replacement Program 7. Refer to section 7.7 Group Replacement Policies

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