October 17, 2017

# Repair or replace equipment: Case study

On our repair or replace page, we lay out a framework for calculating whether it’s better to repair or replace a piece of equipment. Here, we put that framework to the test on a calculation for a 10-year-old plastic re-grinder with a book value of \$26,000 and a remaining service life of 80 months.

### Repair calculation

• Cost per breakdown
• Direct cost of each repair (removal of damaged parts, disposal, replacement and installation cost): \$4,533
• Cost of lost production: 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.
• One-time costs
• Cost of inventorying spares related to the repair: The company needed to keep one backup 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.
• Ongoing costs
• The repair would provide 24 months of reliable, trouble-free operation until the next failure but only if production capacity was reduced by 1%.

In the end, the total cost of continuing to repair the equipment over its service life was a staggering \$127,000, with the majority of that coming from lost production.

### Replace calculation

Let’s compare that to the replacement cost.

• Disposal cost of retired equipment:
• Decommissioning and disposal cost: The old broken grinder cost \$1,190 to decommission and had a salvage value of \$12,000.
• Salvage value
• Equipment write-off cost (non-cash)
• Cost of purchasing and installing a replacement unit: A replacement grinder cost \$59,800 (including spares) and needed to be leased at a rate of 0.4%/month.
• Researching, installing and certifying the replacement grinder and training the staff how to use it cost \$12,300
• Lost production during installation and commissioning: Total downtime for installation was 12 days
• The replacement unit’s impact on product quality, equipment availability, production capacity, equipment operating costs, and labour costs: 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.
• Out-of-warranty costs: 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.

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