Keep Capacity in Stock

Equipment has a finite life. At some stage either cost, reliability, productivity, or some combination of these factors leads to a situation where the machine is no longer as good as it used to be and needs to be replaced. Understanding the replacement process, planning and managing the various options available, and taking the necessary action is much easier if you imagine a machine to be a package of available hours that is worked down to zero as it ages. Buying a new dozer with an expected life of 12,000 hours adds a machine to your fleet, but more importantly, it adds 12,000 hours to your stock of available dozer hours.

Let's see how we can use this concept to plan replace, rebuild and renovate decisions for a fleet of similar machines.

The table shows a fleet of 12 dozers, each of which is expected to work 12,000 hours. At the end of 2006, units 1 and 2 will have no more hours in stock. In fact, unit 1 has overdelivered and is a candidate for some sort of action. The other dozers have varying numbers of hours remaining in stock, for a total of 59,500 hours. The average number of hours in stock is 4,958 hours per machine.

Things look good at this point in time. We have 12 dozers in our group, only two units are in the red zone, and the rest are fairly well spread out.

Let's assume that we do nothing and that each machine works 2,000 hours per year. This means that we will take 24,000 hours out of stock to reduce total hours in stock to 35,500 and average hours to 2,958. Six units (1, 2, 3, 4, 6 and 8) will be in the red zone, and although we will still have 12 units, we will not have the same capability as we had a year ago. Taking no action for a second year will decimate our fleet. Hours in stock will go down to 11,500, and average hours in stock will go down to less than 1,000.

Doing nothing is clearly not an option if we are going to stay in business for the long term (read "Buy What You Burn," October 2004). The challenge is to decide on what to do and when to do it so that we can maintain the productive capacity of our fleet and spend a relatively constant amount each year. Focusing on remaining work hours rather than on units enables us to define possible actions in terms of cost as well as the number of hours added to available stock. Assume we can i) replace a unit for a capital cost of $150,000 and add 12,000 hours (a new unit) to stock; or ii) rebuild a unit for a capitalized cost of $90,000 and extend its life (add to stock) by 8,000 hours; or iii) renovate a unit for $45,000 and add 3,000 hours to stock.

The combinations of what to do and when to do it are endless. A simple spreadsheet tool will help you do the calculations and test alternatives.

Refer again to the table, which shows one set of actions for 2007. Replace (R) unit 1 at a capital cost of $150,000. This adds 12,000 hours to stock and provides an "in stock" value of 11,000 hours at the end of the year, assuming that the new machine will work 1,000 hours during the year. Rebuild (B) unit 2 at a capitalized cost of $90,000. This adds 8,000 to its "stock," which ends the year at 6,000 hours (zero at the end of 2006 plus 8,000 added minus 2,000 worked). We also rebuild unit 3 to give it an end-of-year stock of 9,000 hours. We renovate (V) unit 6 at a cost of $45,000, adding 3,000 hours to stock. Our proposed actions will cost $375,000 ($150,000 for the replacement; $180,000 for the two rebuilds; and $45,000 for the expensed renovation), and total hours in stock increases from 59,500 to 67,500. It looks good as we have 12 units in the group, none more than 10,000 hours old. But there could be some challenges ahead as six units are either red or orange. We will have to look at what action needs to be taken in 2008.

If we continue the process to develop plans and budgets for the years ahead, we can produce a graph of annual spending and average hours in stock similar to that shown above. Our chosen strategy produces a fairly uniform spending profile with a maximum of $375,000 per year while improving our capacity in stock from a present low of 4,958 hours per unit to 6,500 hours per unit at the end of 2011.

This is the outcome of one set of decisions. Feel free to try your hand at producing a better solution. Remember the conflicting demands: Maintain or improve capacity in stock, keep annual spending as uniform and as low as possible, and make sure that no single unit becomes too old.