Knowing when to repair or replace equipment
A computerized maintenance management system (CMMS) can help you weigh the cost of maintenance against the estimated replacement value of equipment, and help determine whether you should repair or replace equipment that is breaking down and disrupting production.
During my time in the plastics industry, the decision to repair was often made reactively following an unscheduled or emergency breakdown. In the panic that ensued, we were emotionally inclined to repair equipment when we should have replaced it. That decision should have been based on numbers, and those numbers largely come from your CMMS—if you’re using it properly.
What to factor into the repair or replace calculation
The decision to repair or replace equipment should be based on minimizing the total cost of the equipment to the business over its remaining lifetime. Things that factor into the calculation include:
- Maintenance costs over the remaining service life
- Impact of the repair on productivity
- Impact of the repair on product quality
- Cost of unscheduled downtime
- Collateral costs of a breakdown (health, safety, environmental, etc.)
- Equipment decommissioning cost
- Equipment disposal cost and/or salvage value
- The cost associated with researching and purchasing a replacement
- The capital cost of the replacement equipment, including the cost of money
- The installation and certification cost of the replacement equipment
- Training cost on the replacement equipment
- Productivity gain or loss of the replacement equipment
- Ongoing costs to service the replacement equipment (both in and out of warranty)
After objectively analyzing this data, you’ll have a clear understanding of whether you should continue to repair that older piece of equipment, or just buy a more reliable replacement. Do the math, and you may be in for a surprise.
Cost to repair
We broke down the cost of repairing an existing piece of equipment into three categories:
- Cost per breakdown
- Direct cost of repair: Cost of removing the broken part, disposing of it, replacement part cost, and cost of installation and testing.
- Cost of Lost Production: Lost profits from lost production, cost of scrap materials, and miscellaneous costs.
- Collateral Cost: Environmental clean-up, occupational health and safety costs, legal costs.
- One-time cost
- Cost of inventorying spares related to the repair.
- Ongoing costs
- Reliability of repair: Impact of repair on product quality and production capacity.
Cost to replace
We then compared that to the cost of buying a replacement unit, which included:
- Disposal cost of retired equipment:
- Decommissioning and disposal cost
- Salvage value
- Equipment write-off cost (non-cash)
- Cost of purchasing and installing a replacement unit:
- Research time; capital equipment cost and spare parts inventory cost, cost of tying up working capital
- Installation cost including miscellaneous parts and supplies, inspection and certification costs.
- Training & safety meetings prior to deployment
- Lost production during installation and commissioning
- The replacement unit’s impact on product quality, equipment availability, production capacity, equipment operating costs, and labor costs.
- Out-of-warranty costs: Cost of repairs, lost production, collateral costs, one-time costs, impact on product quality, and production capacity.
For a look at how these calculations work, we ran a repair or replace calculation for a 10-year-old plastic re-grinder with a book value of $26,000 and a remaining service life of 80 months.
The direct cost of each repair (removal of damaged parts, disposal, replacement and installation cost) was $4,533. Each time the equipment went down it took two days to get it running, and the resulting net lost profits to the business were $8,200 including scrap and clean-up costs. The company needed to keep one back-up grinder blade (cost $3,240) in stock to ensure the repair could get done within the two day time frame, as agreed to in the maintenance department’s service level agreement with production. The repair would provide 24 months of reliable, trouble-free operation until the next failure but only if production capacity was reduced by 1%.
Crunching the numbers, the total cost of continuing to repair the equipment over its service life was a staggering $127,000 – with most of that coming from lost production!
Let’s compare that to the replacement cost.
A replacement grinder cost $59,800 (including spares) and needed to be leased at a rate of 0.4%/month. The old broken grinder cost $1,190 to decommission and had a salvage value of $12,000.
Researching, installing and certifying the replacement grinder and training the staff how to use it cost $12,300 and the total downtime for all this was 12 days. A benefit of the replacement unit was a boost in production capacity of 2%. The unit also ran more efficiently, which saved the company $150/month in utilities and $1,350/month on improved quality and fewer returns. Reliability was also improved by 15%. The new unit needed 0.5 fewer people to run it. During the 36-month manufacturer’s warranty, any breakdowns were handled by the manufacturer including a credit for lost production during downtime, but did not include the cost of scrap, provided that preventive maintenance procedures were followed and could be verified in the CMMS. After the warranty, we estimated the same ongoing repair costs as the old grinder for simplicity but with a longer time to failure due to a 15% improvement in reliability of the replacement unit.
When everything was factored in, and the salvage value of the old equipment was realized, the cash cost to the company to replace the old grinder netted out at only $41,500.
The numbers show that, in this case, the company could save more than $85,000 over the remaining predicted lifetime of the old broken grinder (80 months) by replacing it with a new one.
What’s important to note is that the biggest contributing cost factor in this example is lost production–something many managers don’t adequately factor into the decision to repair or replace. That said, if you have excess equipment availability and can repair the machine with no impact to product delivery, then the decision may actually favour repairing the broken unit. In any case, doing the math is the way to arrive at the best decision for your facility.
Where does the CMMS data come in?
Well, that depends on what information you’re capturing. With Maintenance Assistant’s CMMS, you can capture equipment cost, warranty information, cost of repair, cost of parts, estimated time to failure, time to repair, miscellaneous costs associated with the breakdown (like scrap and compliance fines) and even the impact on production capacity if you tie the CMMS into the equipment meter readings via the API.
In brief, the CMMS can provide you with the all the data you need to estimate the repair costs over the remaining life of the equipment.
You’ll still need to price out a replacement unit and input the manufacturer’s warranty, reliability, and productivity enhancement data–but that’s a simple task and the information can be pulled from the technical specifications. One of the benefits of using our cloud-based multi-tenant maintenance and asset management software is that even data and pricing on replacement equipment is available right in the CMMS, via a built-in marketplace called MA Source™. This resource has millions of parts, supplies and equipment with technical specs, pricing, how-to videos, white papers, manuals and tools for maintenance professionals.
Author: Marc Castel, CEO of Maintenance Assistant