Replacement Theory

Operations Research

Content

• Failure Mechanism• Replacement Models• Selecting Best Equipment• Recruitment and Promotion

When do we replace products or services?

Replacement Problem

• When should a product or service be replaced?– Economic/ Financial considerations (when cost of

maintenance becomes higher than cost of replacement)

– Other considerations• Replace on complete breakdown• Replace after n failures• Replace at periodic intervals• Etc.

A thought experiment• When a product or service deteriorates gradually, how to

decide when to replace?

• How to mitigate the risk of sudden failure? (Your car engine stalls)

• How to handle a scenario where people rather than products are involved? (When one of your best people’s performance goes down, what to do?)

• What to do if a product goes out of fashion/ obsolete compared to other new products? (When to replace your Sony Walkman?)

General approach to solve replacement problems

• Analyze the failure or performance reduction pattern over time

• Assess probability• Assess costs of replacement– Actual cost– Cost of replacement (labour etc.)– Cost of disruption (opportunity loss, lost

production, lost orders, learning curve)

Scenario 1: Maintenance cost increases over time

Purchasing Price

Maintenance Cost

Maintenance Cost

Maintenance Cost

Scrap Value

Point of Lowest Cost

Adjusting for time value of money

Sudden Failure Scenario

• We have to look at probabilities of failure and cost of failure

• Individual replacement– Replace on failure– Attrition of employees also falls under this

scenario• Group replacement– When one individual in a set of products fails,

replace the entire group