Unit – 3

Day – 21
Topics to be covered: Introduction to replacement
YouTube Link: https://www.youtube.com/watch?v=bZ9Ck4zfc80
1. What is replacement theory?
Ans: The Replacement theory in Operations Research is used in the
decision making process of replacing a used equipment with a
substitute; mostly a new equipment of better usage. The replacement
might be necessary due to the deteriorating property or failure or
breakdown of particular equipment.
2. Why replacement problem does arise?
Ans: Following are the situations when the replacement of certain
item is to be done:
i. Old items have failed and do not work at all, or the old item is
expected to fail shortly.
ii. The old item has deteriorated and works badly or requires
expensive maintenance.
iii. A better design of equipment has been developed.
3. What is importance of replacement analysis?
Ans: Replacement problems involve items that degenerate with use
or with the passage of time and those that fail after a certain amount
of use or time. Items that deteriorate are likely to be large and costly
(e.g., machine tools, trucks, ships, and home appliances). The longer a
deteriorating item is operated the more maintenance it requires to
maintain efficiency. Furthermore, the longer such an item is kept the
less is its resale value and the more likely it is to be made obsolete by
new equipment. If the item is replaced frequently, however,
investment costs increase. Thus the problem is to determine when to
replace such items and how much maintenance (particularly
preventive) to perform so that the sum of the operating,
maintenance, and investment costs is minimized. Replacement
problems that involve minimizing the costs of items, failures, and the
replacement labour are solvable either by numerical analysis or
simulation.
4. Name the different failure mechanisms of items.
Ans: There are two different types of failure mechanisms of items.
They are: 1. Gradual failure
2. Sudden failure
5. Define Gradual failure.
Ans: Gradual failure meant to be slow or progressive failure as the life
of the item increases, its efficiency decreases resulting in decreased
productivity, increased operating cost and decrease in the value of the
item, e.g. machines/equipment etc.
6. What is sudden failure?
Ans: In this type of failure the items do not deteriorate markedly with
service but which ultimately fail after some period of usage, thus
precipitating cost of failure. Sometimes sudden failure of an item may
cause loss of production or may also account for damaged or faulty
products. The period between installation and failure is not constant
for any particular type of equipment but will follow some probability
distribution which may be progressive, retrogressive or random in
nature.
i. Progressive failure: Under this mechanism, the probability of
failure increases with the increase in the life of an item.
ii. Retrogressive failure: Certain items have more probability of
failure in the beginning of their life and as time passes, the
chances of failure become less. In other words, the ability of the
unit to survive the initial period of life increases its expected
life.
iii. Random failure: Under this mechanism, constant probability of
failure is associated with items that fail from random causes
such as physical shocks, not related to age.
7. What are the assumptions that are essentially required for
replacement decisions?
Ans: Following assumptions are essentially required for replacement
decisions:
i. The quality of the output remains constant.
ii. Replacement and maintenance costs remain constant.
iii. The operational efficiency of the equipment remains constant.
iv. There is no change in technology of the asset under
consideration.
8. What is the methodology for tackling replacement problem?
Ans: OR provides a methodology for tackling replacement problem
which is discussed below:
i. Identify the items to be replaced and also their failure
mechanism.
ii. Collect the data relating to the depreciation cost and the
maintenance cost for the items which follow gradual failure
mechanism. In case of sudden failure of items, collect the data
for replacement cost of the failed items.
iii. Select a suitable replacement model
Important and previous year questions:
1. A company runs a machine shop containing an expensive drill press
that must be replaced periodically as it wears out. The Vice-
President of the company has just authorized the installing of a
new model but has requested you to devise an optimal
replacement plan of next seven years, after which the drill press
will not needed. State what information you will need and how you
will use it. [6M]Mar 2011[Set 2]
2. Explain with examples for the failure mechanism of items. [6M]Mar
2011[Set 3]
3. What are the different types of failure of an item? [3M]NOV 2017
Day – 22
Topics to be covered: Replacement of items that deteriorate with
Time and money value is constant.
YouTube Link: https://www.youtube.com/watch?v=ofwJvX9j8QM
1. Describe replacement of Items that deteriorate with time.
Ans: There are certain items which deteriorate gradually with usage
and such items decline in efficiency over a period of time. Generally, the
maintenance cost of certain items always increase gradually with time
and a stage comes when the maintenance cost becomes so large that it
is better and economical to replace the item with a new one. There may
be number of alternatives and we may have a comparison between
various alternatives by considering the costs due to waste, scrap, loss of
output, damage to equipment and safety risks etc.
2. What are the costs that have to be considered while replacement
of items those deteriorate with time?
Ans: The following costs are considered:
C: Capital cost of a certain item say a machine.
S: The selling or scrap value of the item.
Rt: Operating (or maintenance) cost of the item at time t.
3. Explain the replacement policy for items whose maintenance cost
increases with time, and money value is constant.
Ans: The cost of maintenance of a machine is given as a function
increasing with time and its scrap value is constant.
a. If time is measured continuously, then the average annual cost will
be minimized by replacing the machine when the average cost to
date becomes equal to the current maintenance cost.
b. If time is measured in discrete units, then the average annual cost
will be minimized by replacing the machine when the next periods
maintenance cost becomes greater than the current average cost.
Class Work:
1. The cost of a machine is Rs. 6100 and its scrap value is only Rs. 100.
The maintenance costs are found from experience to be:
Year 1 2 3 4 5 6 7 8
Maintenance 100 250 400 600 900 125 1600 2000
cost in Rs. 0
 2. The following table gives the running costs per year and resale price
of certain equipment whose purchase price is 5000.
Year 1 2 3 4 5 6 7 8
Running 1500 1600 1800 2100 2500 2900 3400 4000
costs(Rs.)
Resale 3500 2500 1700 1200 800 500 500 500
value (Rs.)
i. At what year is the replacement due?
ii. If the resale value is zero, will there be any change in the
replacement policy?
Home Work:
1. A truck owner finds from his past records that the maintenance
costs per year of a truck, whose purchase price is Rs. 8000, are
given below:
Year 1 2 3 4 5 6 7 8
Maintenance 1000 1300 1700 2200 2900 3800 4800 6000
Cost (Rs)
Resale Price 4000 2000 1200 600 500 400 400 400
(Rs)
Determine at what time it is profitable to replace the truck.
2. A machine owner finds from his past records that the cost per year
of maintaining a machine whose purchase price is Rs. 6000 are as
given below:
Year 1 2 3 4 5 6 7 8
Maintenance 1000 1200 1400 1800 2300 2800 3400 4000
cost (Rs.)
Resale value 3000 1500 750 375 200 200 200 200
Important and previous year questions:
1. A truck owner from his past experience estimated that the
maintenance cost per year of a truck whose purchase price is Rs.
1,50,000 and the resale value of truck will be as given below :
Year 1 2 3 4 5 6 7 8
Maintenanc 10,000 50,000 20,000 25,000 30,000 40,000 45,000 50,000
e costs (Rs.):
Resale 1,30,000 1,20,000 1,15,000 1,05,000 90,000 75,000 60,000 50,000
value (Rs.):
1.Determine at which time it is profitable to replace the truck.
[10M]Mar 2011[Set 3]
2. Discuss in brief, replacement procedure for the items that
deteriorate with time. [6M] Apr 2017
3. Explain how the theory of replacement is used in following
problems i) Replacement of items when maintenance cost varies
with time
ii) Replacement of items that fail completely [8M] Nov 2017
Day – 23
Topics to be covered: Replacement of items that deteriorate with
Time and money value is not constant.
YouTube Link: https://www.youtube.com/watch?v=ofwJvX9j8QM
1. What is Money Value?
Ans: Since money has a value over time, therefore the explanation of
the statement: ‘Money is worth 10% per year’ can be given in two
ways:
a) In one way, spending Rs.100 today would be equivalent to spend
Rs.110 in year’s time. In other words if we plan to spend Rs.110
after a year from now, we could spend Rs.100 today and an
investment which would be worth Rs.110 next year.
b) Alternatively if we borrow Rs.100 at the interest of 10% per year
and spend Rs.100 today, we have to pay Rs.100 after one year
(next year).
Thus, we conclude that Rs.100 is equal to Rs.110 a year from now.
Consequently Rs. 1 from a year now is equal to (1+0.1)-1 rupee today.
2. What is Present worth factor?
Ans: As we have seen, a rupee a year from now will be equivalent to
(1+0.1)-1 rupee today at the discount rate of 10% per year. So, one
rupee in n years from now will be equal to (1+0.1)-n. Therefore, the
quantity (1+0.1)-n is called the Present worth Factor (PWF) or Present
Value (PV) of one rupee spent in n years from now. In general, if r is
the rate of interest, then (1+r)-n is called PWF or PV of one rupee spent
in n years from now onwards. The expression (1+r)-n is known as
compound amount factor of one rupee spent in n years.
3. Define discount rate.
Ans: Let r be the rate of interest. Therefore present worth factor of
unit amount to be spent after one year is . Then v is known as
the discount rate.
Class Work:
1. The cost pattern for two machines A and B, when money value is
not considered, is given in the table:
Year Cost at the beginning of year (in Rs.)
Machine A Machine B
1 900 1400
2 600 100
3 700 700
Find the cost pattern for each machine when money is worth 10% per
year, and hence find which machine is less costly.
2. Let the value of money be assumed to be 10% per year and
suppose that machine A is replaced after every 3 years whereas
machine B is replaced after every 3 years whereas machine B is
replaced after every six years. The yearly costs of both the
machines are given as under:

Year 1 2 3 4 5 6
Machine A 1000 200 400 1000 200 400
Machine B 1700 100 200 300 400 500
Determine which machine should be purchased.
Home Work:
1. If you wish to have a return of 10% per annum one year
investment, which of the following plan would you prefer?
 Plan A Plan B
First cost (Rs.) 2,00,000 2,50,000
Scrap value for 15 years 1,50,000 1,80,000
Excess of annual revenue 25,000 30,000
over annual disbursement
2. Assume that present value of one rupee to be spent in a year’s time
is Re. 0.90 and C = Rs.3,000 capital of equipment and the running
costs are given in the table below:
Year 1 2 3 4 5 6 7
Running Cost (Rs.) 500 600 800 1000 1300 1600 2000
When should the machine be replaced?
Important and previous year questions:
1. State the conditions under which the problem of processing of jobs
through three machines has been solved. Describe the
corresponding algorithm. Find the sequence that minimizes the
total time required to complete the following tasks:
Task A B C D E F G
Machine I 9 8 7 4 3 8 7
Machine II 1 3 2 5 4 4 3
Machine III 5 7 5 11 6 6 12 [15M]June 2015Set[4]
2. The cost of a machine is Rs.6100 and its scrap value is only Rs.100.
The maintenance costs are found from experience to be:
year 1 2 3 4 5 6 7 8
Maintenance 100 250 400 600 900 1250 1600 2000
cost in Rs.
When should machine be replaced? [10M] Apr 2017
Day – 24
Topics to be covered: Replacement of items that are failed
completely- Individual replacement policy
YouTube Link: https://www.youtube.com/watch?v=ofwJvX9j8QM
1. What are different types of replacement policies in replacement
of items that are failed completely?
Ans: There are two types of replacement policies. They are:
a) Individual replacement
b) Group replacement
2. Explain about Individual replacement policy.
Ans: Under this policy an item is immediately replaced as soon as it
fails. To determine the probability distribution of failure (or life span
of any item) its mortality tables are used. To discuss such type of
replacement policy, we consider the problem of human population.
No group of people ever existed under the conditions:
i. That all deaths are immediately replaced by births, and
ii. That there are no other entries or exits.
3. Define mortality theorem.
Ans: A large population is subjected to a given mortality law for a very
long period of time. All deaths are immediately replaced by births and
there are no other entries or exits. Show that the age distribution
ultimately becomes stable and that the number of deaths per unit
time becomes constant (which is equal to the size of the total
population divided by the mean age at death).
Class Work:
1. Following failure rates have been observed for a certain type of
light bulbs:
Week 1 2 3 4 5
Percent failing by the end of week 10 25 50 80 100
These are 1000 bulbs in use, and it costs Rs. 10 to replace an individual
bulb which has burn out. If all the bulbs were replaced simultaneously
it would cost Rs. 4 per bulb. It is proposed to replace all bulbs at fixed
intervals of time, whether or not they have burnt out, and to continue
replacing burnt out bulbs as and when they fail. At what intervals all
the bulbs should be replaced? At what group replacement price per
bulb would a policy of strictly individual replacement become
preferable to the adopted policy?
Home Work:
1. The following failure rates have been observed for a certain type of
light bulbs.
End of week 1 2 3 4 5 6 7 8
Prob. Of 0.05 0.13 0.25 0.43 0.68 0.88 0.96 1.00
failure to date
The cost of replacing an individual bulb is Rs. 2.25; the decision is
made to replace all bulbs simultaneously at fixed intervals, and also to
replace individual bulbs as they fail in service. If the cost of group
replacement is 60 paise per bulb and the total number of bulbs is
1000, what is the best interval between group replacements?
Important and previous year questions:
1. a) Briefly explain what you mean by “individual and group
replacement policy” in Replacement Analysis. [7]
b) There is a special light bulb that never lasts longer than 2 weeks.
There is a chance of 0.3that a bulb will fail at the end of first week.
There are 100 new bulbs initially. The cost for individual replacements
is Rs.1.25 and the cost per bulb for group replacement is Rs.0.50. Is it
cheaper to replace all the bulbs, (i) Individually (ii) every week (iii)
every second week? [8M]June 2015[Set 1]
2. a) Write a short note on group replacement and individual
replacement polices. [6M] Apr 2017, Apr 2018
Day – 25
Topics to be covered: Replacement of items that are failed
completely- group replacement policy.
YouTube Link: https://www.youtube.com/watch?v=ofwJvX9j8QM
1. Explain group replacement policy of items that fail completely?
Ans: Group replacement is concerned with those items that either
work or fail completely. It often happens that a system contains a
large number of identical low cost items that are increasingly liable to
failure with age. In such cases, there is a set-up cost for replacement
that is independent of the number of the number replaced and it may
be advantageous to replace all items at fixed intervals. Such policy is
called a group replacement policy and is particularly attractive when
the value of any individual item is so small that the cost of keeping
records of individual ages cannot be justified.
Theorem: (replacement policy):
a. One should group replace at the end of tth period if the cost of
individual replacements for the tth period is greater than the
average cost per period through the end of tth period.
b. One should not group replace at the end of tth period if the cost
of individual replacements at the end of (t-1)th period is less than
the average cost per period through the end of tth period.
Class Work:
1. A computer contains 10,000 resistors. When any one of the resistor
fails, it is replaced. The cost of replacing a single resistor is Rs. 10
only. If all the resistors are replaced at the same time, the cost per
resistor would be reduced to Rs.3.50. The percent surviving by the
end of month t is as follows:
Month (t) 0 1 2 3 4 5 6
% surviving by the 100 97 90 70 30 15 0
end of month
What is the optimum plan?
Home Work:
1. The probability pn of failure just before age n are shown below. If
individual replacement costs Rs. 1.25 and group replacement costs
Re. 0.50 per item, find the optimal group replacement policy.
n=1 2 3 4 5 6 7 8 9 10 11
pn = 1 .03 .05 .07 .10 .15 .20 .15 .11 .08 .05
Important and previous year questions:
1. The following failure rates have been observed for a certain type of
light bulbs:
End of week: 1 2 3 4 5 6 7 8
Probability of failure to date: 0.05 0.13 0.25 0.43 0.68 0.88 0.96 1.00
The cost of replacing an individual bulb is Rs1.25. The decision is made
to replace all bulbs simultaneously at fixed intervals and also to
replace individual bulbs as they fail in service. If the cost of group
replacement is 30 paise per bulb, what is the best interval between
group replacements? [15M]June 2015[Set 3]