Avoid the Trap of Delayed Equipment Replacement

These three lessons will keep you from falling prey to the notion that delaying machine replacement comes without risks and cost

May 1, 2008

By Mike Vorster, Contributing Editor, Construction Equipment

When work volumes fall, asset managers may try to save cost and reduce risk by delaying replacement and extending the life of their existing fleet. This reduces capital expenditure, lowers fixed owning costs, and provides flexibility in case the market changes even more. Yet you must compensate with resources needed to manage a fleet that is more expensive, less productive, and less reliable.

Delaying replacement and extending life is a short-term fix to a long-term commitment. Equipment has a finite life that may be extended through rebuilds or continuing repairs, but in the final analysis, it has to be replaced at some stage. Funds captured from the depreciation component of your rate must be reinvested in your fleet, or you will create serious future problems.

The accompanying table shows an example fleet of 12 mid-size dozers. We'll use it to help us understand the implications of delaying replacement by three years.

The second column shows hours each dozer had worked at the end of 2007. Fleet age is well spread with an average machine age of 7,125 hours. Two units are over the expected maximum life of 10,000 hours; four are between 8,000 and 10,000 hours; and three units are between 6,000 and 8,000 hours.

Over time, the units will age and more will go into the red and orange zones. Although some of the older units can be rebuilt or undergo extensive repairs, we will have a fleet that is almost entirely in the red zone by 2010. We will need a capital expenditure binge to reinstate a fleet average age of about 7,000 hours.

Critical lesson No. 1: You cannot deny the inevitable need to replace equipment.

Now, notice how fleet availability drops with age. The forecasts for 2008, 2009 and 2010 show that the fleet is expected to work fewer hours each year. This is based on the assumption that availability will drop 5 percent each year or 100 hours for each 1,000 hours of age over 6,000.

This is a reasonable assumption, but it quickly adds up. Average availability drops from close to 90 percent in 2008 to less than 77 percent estimated for 2010. The reduction in hours available per year represents a loss of about 14 percent in productive capacity across the fleet and is more than could be replaced from the full-time addition of another machine.

Critical lesson No. 2: Delaying replacement and increasing average age reduces overall fleet availability and significantly impacts ability to do work.

Hourly cost of repair parts and labor increases as a machine ages. Understanding this and factoring it into your analysis is critical to quantifying the impact of delayed replacement. If you do not, then it is difficult to prepare repair parts and labor budgets for an aging fleet. It cannot be done by using experience based on a younger average age, and it is extremely dangerous to assume that the future will look much like the past.

The budget numbers in our example are based on the actual growth in hourly cost for a fleet of well-run and well-maintained mid-sized dozers. Unit 1 has a 2008 budget of a little less than $33,000, which drops to $30,600 in 2010. Changes in availability tend to mask the problem. In 2008, we expect 1,300 hours for the $33,000 budget, or a rate close to $25.40 per hour. In 2010, we want 1,053 hours for a budgeted cost of $30,600, a rate more than $29 per hour. Units 11 and 12 are clear; availability stays at 2,000 hours per year, and it is obvious that both total and hourly costs are expected to increase as the units age.

The impact on the fleet overall is alarming. The hourly repair parts and labor cost increase by more than $5 per hour, from $15.75 in 2008 to $20.78 in 2010. Had we kept the age and thus the hourly repair parts and labor cost at 2008 levels, we would have been able to deliver the hours planned for 2010 at a cost of approximately $92,000 less than the budgeted cost for the aging fleet.

Critical lesson No. 3: Pay now in terms of a new machine, or pay later in terms of increased repair parts and labor cost.

The accompanying chart plots the availability and repair cost per hour values from the table and extends the aging process out to 2011. The situation continues to deteriorate with projected availability falling below 70 percent and repair costs increasing to more than $23 per hour.

The need to delay replacement for solid business, financial and strategic reasons is often difficult to challenge. Capital expenditure needs to be reduced from time to time.

The equipment manager must demonstrate the three lessons learned. First, know how your fleet age is distributed across units and be able to show that delaying replacement does not eliminate the need for capital investment. Second, know how availability and reliability decline with age, and be able to quantify that an old fleet is not as capable of producing completed construction as a well-balanced fleet. Third, and probably most important, have the data to determine how hourly cost of repair parts and labor increases with age. Otherwise, the temptation to delay capital expenditure will be overwhelming.

As machines perform work over the three years in our example, they age. By the end of 2010, none of the machines is able to perform at 100 percent availability, and average age has climbed to 12,106 hours.

Left unchecked, a strategy of delayed replacement will cause availability and repair costs to deteriorate.