UNIT III (C): REPLACEMENT MODEL/ THEORY

Introduction:

In fact, in any system the efficacy (efficiency) of an item deteriorates with time. In such cases,
either the old item should be replaced by a new item, or some kind of restorative action
(maintenance) is necessary to restore the efficiency of the whole system. The cost of
maintenance depends upon a number of factors, and a stage comes at which the maintenance cost
is so large that it is more profitable to replace the old item. Thus, there is a need to formulate the
most effective replacement policy.

Definition:

“Replacement theory deals with the analysis of assets/equipment which deteriorates with time
and fixes the optimal time of their replacement so that the total cost is the minimum.”

Replacement models are concerned with the problem of replacement of machines, individuals,
capital assets, etc. due to their deteriorating efficiency, failure, or breakdown.

It is evident that the study of replacement is a field of application rather than a method of
analysis. Actually, it is concerned with methods of comparing alternative replacement policies.

The various types of replacement problems can be broadly classified in following categories:

1. Replacement of items whose efficiency deteriorates with time, e.g., machine, tools, etc.

Items such as machines, vehicles, tyres, etc. whose efficiency deteriorates with age due to
constant use and which need increased operating and maintenance cost.

In such cases deterioration level is predicted and is represented by:

(a) Increased maintenance/operation cost.

(b) Decreasing salvage value i.e. its waste or scrap value and damage to them and safety risk.

Assumption: Increased age reduces efficiency

Generally, the criterion for measuring efficiency is the discounted value of all future costs
associated with each policy.

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2. Replacement of items that fail suddenly and completely like electric bulbs & tubes.

In some situations, failure of a certain item occurs all of a sudden, instead of gradual
deterioration (e.g., failure of light bulbs, tubes, etc.). The failure of the item may result in
complete breakdown of the system. The breakdown implies loss of production, idle inventory,
idle labour, etc. Therefore, an organization must prepare itself against these failures.

Thus, to avoid the possibility of a complete breakdown, it is desirable to formulate a suitable

replacement policy.

The following two courses can be followed in such situations.

 Individual replacement policy. Under this policy, an item may be replaced immediately
after its failure.
 Group replacement policy. Under this policy, the items are replaced in group after a
certain period, say t, irrespective of the fact that items have failed or not. If any item fails
before its preventive replacement is due, then individual replacement policy is used.

In situations where the items fail completely, the formulation of replacement policy depends
upon the probability of failure. Mortality tables or Life testing techniques may be used to obtain
a probability distribution of the failure of items in a system.

Types of Failure

There are two types of failure are discussed below;

Gradual Failure: It is a progressive in nature. That is, as the life of an item increases, its
operational efficiency also deteriorates resulting in

a. Increased the running cost.

b. Decreased in its productivity
c. Decreased in the resale or salvage value

Mechanical items like pistons, rings, bearing tyres etc. fall under this category.

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Sudden Failure: This type of failure occurs in terms after some period of giving desired service
rather than deterioration while in service. The period of giving desired services is not constant
but follows some frequency distribution which may be progressive, retrogressive or random in
nature.

3. Replacement of human beings in an organization or staffing problem.

Staffing Problem

In the previous sections, we discussed about replacement problems, which were not related to
human resources working in an organization. The replacement models can also be used to solve
the problems of staff replacement.

This section focuses on the problem of replacing staff in an organization. Staff replacement is
essential due to the following factors:

 Inefficiency
 Resignation
 Retirement
 Unexpected events (like accident, death,etc)

4. Replacement of items may be necessary due to new researches and methods; otherwise, the
system may become outdated.

Advantage of Replacement Theory:

1. It helps in decision making within an organization.

2. It deals with the analysis of men, machines, equipment, etc which deteriorates with time
and fix the optimal time to solve the issue.

3. By fixing the optimal time of the organization with the help of replacement, it reduces the
cost of maintenance and increased the production.

4. It helps management to taking decision when the old item has deteriorate and requires
expensive maintenance.

5. It helps the management to taking the decision whether to replace now the expensive item
which has deteriorate, or if not, when to reconsider replacement of the item in question.

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Limitation of Replacement Theory:

1. Future costs and resale prices of an equipment are predictable is quite Unrealistic.

2. Replacement theories in general are likely to be random variables calling for probabilistic
approach to the analysis.

3. The historical costs in respect of an equipment requiring replacement are appropriate

estimates of the costs for the equipment by which it is sought to be replaced may not hold.

4. Maintenance costs do not always follow a smooth pattern over a time. Very often, they are
incurred in discrete lumps caused by such things as, for example, installing a new gearbox
in van or reconditioning the body of the truck. In such cases, the best policy might be to be
deciding whether to scrap the vehicles (or other equipment) or undertake the major repairs
to work and use it further.

5. In respect of the group replacement decision in case of items that fail suddenly, a practical
objection is that all the items are replaced when group replacement take place whether they
are working or not even if they are the ones that were installed only recently the ones that
were.

6. The replacement could be carried out only at certain fixed time at the year ends or
weekends.

7. In reality, the replacement can be, and is, done at any point during a given time.