Repair or replace? It’s an age-old question for manufacturing leaders. Even seasoned industry veterans can struggle with equipment replacement decisions.
On the one hand, even the costliest repairs might pale in comparison to the costs connected to a new asset and your teams familiarity with the current machinery makes repairs an attractive option. On the other hand, a new asset’s long-term benefits could mean it costs you less overall when compared to the breakdowns, inefficiencies, and other higher costs of ownership directly related to your current machinery.
How to make a equipment replacement decision?
The pros and cons are numerous, especially when you consider the entire field of options. A replacement doesn’t have to be a brand new piece of equipment, for example. New machinery may offer top-of-the-line performance, energy efficiency, better safety features, and a host of other benefits—but typically not without high initial costs and a long learning curve. With used replacements, you could get recent technology at a bargain price, but with the downsides of a shorter lifespan, expired warranties, and little or no financing.
Routine repairs aren’t the only way to leverage your existing equipment. A rebuild or overhaul, while more costly and time-consuming, might all but eliminate your pain points with an asset, delivering a like-new condition for a much lower cost. Still, manufacturer-recommended repairs are typically the fastest, cheapest route to maintaining or regaining runtime, albeit with many of the same problems as before.
Considering the right factors will give you more clarity into whether to repair or replace your equipment. From current and historical asset performance to ownership costs to tax strategies, these metrics paint a clear picture of the bottom-line benefits of each option. Here are the most important considerations.
Repair or replace equipment analysis
Managers often operate under the assumption that older machinery exhibits higher failure rates, but this assumption has been proven wrong in a variety of scenarios. In fact, it turns out to hold true for only 11 percent of failure modes for a large group of assets.
That doesn’t necessarily mean older equipment performs better. Growing evidence suggests the majority of failures are more closely related to the way a machine is treated over its lifespan rather than its age in years. Simply put, an old but well-maintained asset may perform as well or better than a younger, poorly treated one. This is a particularly important consideration for stakeholders eyeing used replacements.
Ultimately, your asset’s current performance and track record will probably be more informative to your decision than its age. For instance:
- What is the asset’s overall equipment effectiveness?
- What is its failure rate?
- What is the mean time to repair?
- Is it still delivering a high return on investment?
While repair costs, new opportunities, and tax concerns may play a greater role in your final decision, it’s important to keep accurate performance data at the forefront of your analysis.
Total cost of ownership (TCO)
Perhaps just as important as performance is the total cost of ownership, or TCO. A machine’s TCO takes into account not only its purchase price, but all of the costs related to operations, downtime and maintenance. Every seasoned manufacturer knows all too well the pain of buying a “bargain,” only to realize far higher-than-expected costs in the form of repairs and downtime. At the same time, a seemingly high-priced piece might result in significant savings due to fewer repairs, greater energy efficiency, and higher uptime.
In general, calculating TCO comes down to two chief considerations: operations and maintenance. Operating costs include fuel, labor and other routine costs, while maintenance includes replacement parts and repairs. Over time, the TCO of older equipment may actually rise due to the need for out-of-production replacement parts, as well as specialized contracting for maintenance and repairs. As you decide whether to repair or replace old equipment, you’ll want to consider how TCO might change over the next few years, as new models replace the ones you’re operating now.
Total cost of ownership isn’t the only metric you’ll need to determine the cost-effectiveness of an asset. No two pieces are used the exact same way, after all, and asset utilization will help you determine which of your machines are more cost-effective than others.
Asset utilization is a machine’s cost per hour—the TCO divided by the total run time. One machine might have a far higher TCO than another, but if it’s used more frequently — and if its use generates more revenue—it could be more valuable.
For example, consider a machine with a TCO of $100,000, which has been used for 2,000 hours in the past year. Its cost per hour would be $50. On the other hand, a vehicle with the same TCO that clocked 100,000 miles in the last year would have a cost per hour of just one dollar.
A stationary piece of equipment and a vehicle are hardly comparable, but what if you considered the average utilization for similar items? Using the above example, perhaps $1 per hour is your average vehicle utilization, but you find a few of your trucks costing closer to $2 per hour. Further investigation might uncover a costly problem that warrants replacing those vehicles. On the other hand, you might find that those costs have been caused by a faulty, recalled part—one the manufacturer will replace at no cost. This is just one of the myriad examples of how an in-depth utilization analysis can direct you toward a financially sound decision to repair or replace equipment.
Even a high-performing asset with a low TCO poses severe risks if it’s unsafe. The Occupational Safety and Health Act of 1970 states all employees have the right to a safe workplace, and legal risks abound if your old, broken, or unsafe equipment poses a danger to your employees.
In addition to legal risks, unsafe equipment is a hindrance to your bottom line. OSHA reports that US employers paid more than $1 billion per week for direct workers’ compensation costs in 2015, for example, and that work-related deaths and injuries cost the nation a collective $151 billion in the following year.
Not every outdated asset is dangerous, but in cases where employee safety is on the line, you may need to veer towards safer, more ergonomic replacements, or look to specific repairs and overhauls that provide for both safety and efficiency.
Precision equipment replacement strategy
Even TCO, utilization, and other key metrics can’t account for every aspect of a replacement strategy that is unique to your company’s situation. Your goals, growth rate, cash flow and a variety of other factors will influence your bottom line and, ultimately, your decision to repair or replace equipment.
Are you trying to take advantage of extra tax deductions to improve your cash flow? If so, you may benefit from more frequent replacements. You may also be considering depreciation, section 179 deductions, or the tax benefits associated with property improvements.
With so many factors affecting your bottom line, you need accurate, real-time data on equipment performance, maintenance, and costs. ManagerPlus brings all this information into one place where it’s accessible at your fingertips.
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About the author
Jason is a storyteller at heart with a career spanning everything from film and TV to iPhones. Just don't expect much before his first cup of coffee.