Presented By-

Name : Vilas Bhagwan Adole.

Roll No.: MMS B-01
Specialization: Operations Management.
 Meaning

Equipments and machines used in industries and in

military deteriorate with time, as a result of which their
efficiency decreases and in turn increases their
maintenance cost.

Hence, there arises a need to formulate a

replacement policy which would enable us in deciding
the age at which the replacement of the old equipment
by new one is most economical than continuation of
old equipment at an increased maintenance cost.
 Need for Replacement Theory

 The item that has become inefficient with passage

of Time.

The item requires more cost for its maintenance as

age increases.

The item doesn't deteriorate with time but suddenly

fails.

A better/ more efficient design of machine/

equipment has become available in the market.
O.R. Methodology of solving replacement problems:

 Identify the items to be replaced & their failure

mechanism
Mechanism

Gradual Sudden
Failure Failure
 On the basis of Data

Cost

Depreciation Maintenance
Companies Using Replacement theory:-

 Manufacturing – Machine tools, Automotive.

 Construction – Renovation.

 Electronic – Electric parts.

 Service Industries – Retrenchment.

Optimum period for Replacement :-
 Example

The running costs per year and resale values of a

certain equipment whose purchase price is Rs. 6500/-
At what year is the replacement due optimally?

Year 1 2 3 4 5 6 7 8
Running 140 1500 1700 2000 2400 2800 3300 3900
cost 0
Resale 400 300 220 1700 1300 1000 1000 1000
cost 0 0 0
Solution
 Notations used

C – (Capital) Cost of Equipment.

S(t) – Scrap (or Resale) Value.

R(t) – Running (or Maintenance) Cost.

∑R(t) – Cumulative Running Cost.

T – Total Cost.

TA – Average Total Cost

 Rules of Problem

The Optimum Replacement is calculated according to the

following rules:-

I. If the scrap value of equipment is zero i.e. The

depreciation cost is not given, then replace the
equipment when the maintenance cost become greater
then the current average cost.

II. If you are given the resale value/depreciation cost, the

maintenance cost & the cost of equipment, then the
optimum replacement period is determined by the
minimum value of the average cost to date.