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The decision to replace production equipment before it is exhausted is both economic and performance-driven.
The decision to replace production equipment before it is exhausted is both economic and performance-driven.

Making the right equipment replacement decisions

Is it time to replace your plant and equipment? Paul D Tomlingson discusses how the economics of replacement must be balanced against the potential performance benefits of new equipment.

The decision to replace production equipment as it nears the end of its life cycle is both an economic and a performance decision. Economics are involved in the identification and procurement of the best equipment for the capital outlay constraints involved. Performance considerations are important in selecting the best equipment for the job.

The policies of the production strategy may have to be adjusted with the introduction of new equipment if it is used in a different operating mode. In turn, departments may have to alter or update programs and procedures. If so, more management policies may be needed to guide these changes.

Typically, the replacement of major production equipment is preceded by a full justification of the need for the new equipment based on an analysis of the alternatives and their potential benefits – in terms of performance, maintainability and profitability. Should new operating circumstances emerge from equipment replacement, policies will guide changes in company programs.

The act of equipment replacement should not be the unilateral effort of accounting personnel with input from the plant manager. Equipment replacement must be a team effort with field personnel playing a prominent role, along with managers and financial personnel. A total picture of requirements, capabilities, limitations and needs must all be considered. When field personnel are included they will bring practical considerations into play that better assure the productive future utilisation of the equipment.

When replacing equipment, accounting considerations must be balanced against performance needs.

Economic considerations

Table 1. Equipment replacement recommendations.
Table 1. Equipment replacement recommendations.

Personnel familiar with production needs should be involved. New equipment might be obtained at a competitive price but once in operation if it proves difficult to operate and maintain, the savings at purchase are quickly cancelled.

Operating cost

This is the total cost of operating the unit of equipment. Mobile equipment operating costs would include consumables like fuel, oil, lubricants, tyres, etc, plus the wages and benefits of operators. Fixed equipment operating costs include pro-rata power consumption and modifications required to meet safety and environmental standards or to improve performance.

Maintenance cost

This is the total cost of labour and materials, including consumables plus the use of support equipment and technical support to keep equipment in a safe, effective operating condition.

Depreciation

The loss in value of the equipment over time.

Cost of obsolescence

The reduced market value of the equipment (to a possible buyer) as the unit becomes older in terms of wear, dependability, inadequate productive capacity, less desirable features like controls, ease of operation, etc.

Acquisition cost

The current cost to obtain a suitable replacement unit. The cost of travel to view, examine and test prospective equipment should be included.

Replacement cost

The overall cost of replacement, including removal of the old equipment or the commissioning of new equipment in a ready to operate condition.

Impact of inflation

Labour to operate and maintain the equipment as well as repair parts, fuel or power will all be more expensive due to inflation when the new equipment is made operational as compared with current costs.

Cash discounting

The equipment seller or the organisation buying the old equipment may find that a lesser amount paid at purchase or at sale is more desirable than the agreed upon amount paid later or over time. Thus, an immediate payment could result in a cash discount.

Finance

The cost of borrowing the money to make the capital outlay for new equipment is critical. While banks are a primary source, often equipment manufacturers can discount financing costs because of considerations like warranties, involvement in installation or commissioning equipment and even third party arrangements with selected banks.

Tax

Plant expansion that brings new jobs to a region or local tax rebates to locate a plant or operation in a certain place could reduce state or local taxes to a plant or operation. Often, early compliance with environmental standards may allow a rebate of federal taxes.

Table 2A. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.
Table 2A. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.

Resale or trade-in value

This is the market value of the old equipment as determined by the perception of the prospective new user.

Overhaul versus replacement

Considering that the production equipment of the new century will have greater productive capacity and inherent reliability built into it, more than likely it will be more complex.

Maintenance people might be in for some real surprises in terms of skills required, new techniques to be learned or the need to acquire special tools before they could expect to maintain the equipment properly.

On the other hand, critical components might have easier access, be simpler to exchange or designed to last longer. Those maintenance people who do the actual repair should be asked to help evaluate the equipment under consideration. If the general utilisation of the equipment will not be changed and the current features are considered adequate, can a few more years of utilisation be secured by overhauling the existing unit rather than replacing it?

In this instance, the estimated cost of the overhaul must be carefully weighed against the general performance of the unit in terms of satisfactory productive capacity, reasonable repair and cost history. Quality maintenance information must exist to be able to consider the overhaul versus replacement option.

Table 2B. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.
Table 2B. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.

Status of replacement parts

The equipment that represents the recent massive capital outlay is a total loss if it is not producing because replacement parts are not available or require an unreasonable amount of delivery time. Therefore, every guarantee that this will not happen should be raised as the negotiations surrounding the new acquisition are carried out.

Among the points to be considered is standardisation of parts, local duplication or remanufacture. If in a remote location, consignment stock considerations, guaranteed delivery in hours or days or instruction manuals on parts installation are important.

Maintenance facilities

Will new or bigger maintenance facilities be required to maintain the newly acquired mobile equipment? Is the lifting capacity of overhead cranes in the plant sufficient to move materials or replacement components to serve and maintain the new equipment? Operating and maintenance personnel must carefully advise on the capacities of facilities that will be required when the new equipment is placed in operation.

Performance considerations

Performance considerations take into account the need to replace equipment because the older equipment can no longer meet production requirements. Newer equipment may have a greater productive capacity and be much easier to maintain.

Utilisation of equipment

This is consideration of how the new equipment versus the old equipment will be utilised. Older equipment may have been used in a different operating mode than that which may be phased out.

For example, haul roads in an open pit mine have become steeper as the ore body is mined. Thus, the new haul trucks must be assisted with an electric-poweredtrolley to compensate for the additional fuel consumption of the steeper haul roads. The new trucks will require reconfiguration for the trolley assist.

Table 2C. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.
Table 2C. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.

Table 2E. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.
Table 2E. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.

Ease of operation

Field personnel should be able to test drive the new equipment being considered and talk with operators already using the equipment. Often, some quirks could prove difficult in the retraining of operators or the use of the equipment. On the other hand, they could be enthusiastic about the new equipment in every respect and eagerly endorse the new equipment over its predecessors.

Safety needs

Operators, maintenance personnel and trained safety specialists should examine the equipment for possible safety hazards that could occur in the workplace if the new equipment were to be selected.

Environmental considerations

Will the new equipment comply with environmental standards being imposed (eg Tier 4 Final standards)? Will the equipment need extensive modification in the near future to meet standards (eg from Tier 3 to Tier 4 Final)?

Technical support

New equipment always brings new problems and questions. Thus, technical support capability must be considered. In addition, the availability of field technical personnel in the case of especially complex or dramatically different equipment is important.

Productive capacity

Acquiring greater productive capacity with new equipment in a plant or operation may determine the future profitability of a company. Thus, the needed capacity for now as well as in the future must be carefully identified as potential equipment is being identified.

Operator training

How much of a retraining program will be required for operators to be able to operate the new equipment safely and effectively? Is the new equipment operation so different that new skill levels must be established and new labour agreements negotiated once the equipment is in operation?

Maintenance training

“I understand the new hydraulic excavator has an on-board computer,” the maintenance supervisor once announced to his crew. Considering that the same supervisor has been on record as saying that he would only ever use a computer “over my dead body”, a maintenance organisation like this could present a real “cultural” problem to equipment replacement decision-makers.

However, while extreme, this example is often the reality. If a trend toward using “parts changers” rather than professional diagnosticians has developed in any industry, the need for basic skill training may preclude acquiring new equipment altogether.

From a professional view, modern equipment will require the application of advanced condition monitoring, the use of the latest technical procedures and the development and use of quality information.

The decision-makers involved in acquiring new equipment should look carefully at the current capability of maintenance personnel and their potential to adapt and improve.

New tools and procedures

Maintenance personnel may require the use of new tools that translates into more training and an additional capital outlay to acquire them. Some of these may be more sophisticated diagnostic or condition monitoring tools (eg KOMTRAX, Product Link, Hi-Mate RMS, etc). Some may be the upgrading of the information system to be able to download and analyse the data generated by the diagnostic computer applications. Some maintenance organisations may even have been operating without a modern work order system. Thus, changes and needs are even more complex as new equipment is acquired.

Personnel input

Quarry operahtions should solicit recommendations from their divisions or personnel to ensure their concerns are included in choosing the best replacement equipment to satisfy their needs (Table 1).

Cost factors

Tables 2A to 2F illustrate the cost analysis of replacing a $USD400,000 unit of equipment considering the cost per hour factors over a five-year period. Depreciation costs (2A), investment costs (2B), maintenance costs (2C), downtime costs (2D) and the cost of obsolescence (2E) are brought together to yield a summary of cumulative costs per hour (2F) to be used as the basis for determining the best time to replace the unit.

Based on the summary of cumulative costs per hour, the unit should be replaced between the second and third years since the total costs per hour start to go down on the second year and continue down but from the third but are projected to rise sharply and continue to rise in the fourth year.

Table 2F. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.
Table 2F. Cost per hour factors (in $USD) over five years for replacement of a $USD400,000 unit.

Treading carefully

Competition among industries has become globally orientated. Thus, every industry will be examining how they can become more profitable. Increasing the productivity of equipment will be among the logical steps. In turn, older, less productive equipment will be replaced. Modern production equipment will be expensive as well as more complex. Thus, as new capital outlays are considered, there must be more careful consideration than ever before.

The singular economic approach to replacing equipment involving primarily accounting personnel must give way to a company team approach. To assure that the best equipment for the job at the best price is purchased, economic as well as performance considerations must be weighed.

Maintenance is especially sensitive to this requirement since the new equipment is likely to have many new technological advances that will make it more difficult to maintain. Thus, new maintenance techniques must be introduced and maintenance personnel must be properly trained in applying these techniques. Therefore, plant managers should provide policies that ensure each department recommends features of the new equipment that impact performance and maintenance.

Although decisions must embrace performance and maintenance, acquisition cost and long-term capital expenses remain an important ingredient. Then, as team decisions are made, there will be better assurance that the right choices are made and that the equipment will effectively support the productivity and profitability requirements of the future.











ABOUT THE AUTHOR
Paul D Tomlingson

Paul D Tomlingson is a retired maintenance consultant and an author. A copy of his e-book, Maintenance in transition – The journey to world class maintenance, is available on order through PayPal.
Email: pdtmtc@msn.com









Saturday, 20 October, 2018 07:43pm
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