REPLACEMENT

The replacement might be necessary due to the

deteriorating property or failure or breakdown of
particular equipment. The ‘Replacement Theory’ is
used in the cases like; existing items have out-lived,
or it may not be economical anymore to continue
with them, or the items might have been destroyed
either by accident or otherwise.
1. Items that deteriorate with time e.g. machine
tools, vehicles, equipment buildings etc,
2. Items becoming out-of-date due to new
developments like ordinary weaving looms by
automatic, manual accounting by tally etc.
3. Items which do not deteriorate but fail
completely after certain amount of use like
electronic parts, street lights etc (Group
Replacement) and
4. The existing working staff in an organization
gradually diminishing due to death, retirement,
retrenchment & otherwise (Staff Replacement).
Replacement Policy for Equipments
which Deteriorate Gradually
Motor Vehicle; the pattern of failure here is
progressive in nature i.e. as the life of vehicle
increases; its efficiency decreases. This results in
additional expenditure in running or maintaining this
vehicle and at the same time its resale value (also
called as scrap value) also keeps on decreasing.
The above case makes this situation a typical case
for applying ‘Replacement Theory’.
 Replacement Models
1. Replacement of Items that deteriotes with time i.e maintenance increases.
2. Replacement of items that fails suddenly.

Ex.1 The maintainance cost and resale value per year of a machine whose purchase
Price is Rs 7000 is given below.

Year 1 2 3 4 5 6 7 8

Maint. Cost 900 1200 1600 2100 2800 3700 4700 5900

Resale value 4000 2000 1200 600 500 400 400 400

When this machine should be replaced ?

Years of Resale Value Purchase Annual Cumulative Total cost Average annual
Service Value - Resale Maint. Cost Maint. Cost Cost
(1) (2) (3) (4) (5) (6) (7)
(7000-(2)) ∑ (4) (3) + (5) (6)/(1)

1 4000 3000 900 900 3900 3900

2 2000 5000 1200 2100 7100 3550
3 1200 5800 1600 3700 9500 3166.67
4 600 6400 2100 5800 12200 3050
5 500 6500 2800 8600 15100 3020
6 400 6600 3700 12300 18900 3150
7 400 6600 4700 17000 23600 3371.43
8 400 6600 5900 22900 29500 3687.50
 Items that fails Suddenly
Individual replacement policy / Group replacement policy

Ex. The following mortality rates have been observed for a certain type of light bulbs
End of week 1 2 3 4 5 6

Probability .09 .25 .49 .85 .97 1

of failure

There are 1000 numbers of bulbs which are to be kept in working order. If a bulb fails in
service it cost Rs. 3 to replace but if all the bulbs are replaced at a time it cost Rs. 0.7
Per bulb. It is proposed to replace all the bulbs at fixed interval, whether or not they
have burnt out and to continue replacing burnt out as they fail.
1. What is the best interval between group replacement
2. At what group replacement price per bulb , would a policy of strictly individual
replacement became preferable to group replacement.
 Soln. Let there are 1000 no.s of bulbs n use and
p(i) be Probability a new bulb fails during every week
End of week 1 2 3 4 5 6
Probability .09 .25 .49 .85 .97 1
of failure
p(i) .09 .16 .24 .36 .12 .03
p1 p2 p3 p4 p5 p6

Let Ni represent no. of replacement end of ith week.

N0 = 1000
N1 = N0 * p1 = 1000*0 .09 = 90
N2 = N0 * p2 + N1 * p1 = 1000* 0.16 + 90 * 0.09 = 168
N3 = N0 * p3 + N1 * p2 + N2 * p1 = 1000* 0.24 + 90 * 0.16 = 269
+ 168*0.09
N4 = N0 * p4 + N1 * p3 + N2 * p2 + N3*p1 = 1000* 0.36 = 432
+ 90 * 0.24 + 168*0.16 + 269*0.09
N5 = N0 * p5 + N1 * p4 + N2 * p3 + N3*p2 + N4* p1 = 1000* 0.12 = 274
+ 90 * 0.36 + 168*0.24 + 269*0.16 + 432*0.09
N6 = N0 *p6 + N1 * p5 + N2 * p4 + N3*p3 + N4* p2 + N5*p1 = 260
= 1000* 0.03 + 90 * 0.12 + 168*0.36 + 269*0.24 + 432*0.16 + 274*0.09
N7 = N0 *p7 + N1 * p6 + N2 * p5+ N3*p4 + N4* p3 + N5*p2 + N6*p1
= 1000* 0 + 90 * 0..03 + 168*0.12 + 269*0.36 + 432*0.24 = 291
+ 274*0.16+260*0.09
Avg total cost individual + group replacement of bulbs if done at end of week 1 2 3 etc

End of week Total cost Avg . cost per week

group + individal

1 1000*0.7 + 90*3 = 970 970

2 1000*0.7 + (90+168)*3 =1474 737

3 1000*0.7 + (90+168+269)*3 =2281 760

Avg minimum cost is in 2nd week it is optimal to have group replacement

every 2nd week
Staff replacement