Reasons for Replacement of Equipment’s:
Equipment are generally considered for replacement for the following reasons:
It is the decline in performance due to wear and tear or misalignment indicated by;
(i) Increase in maintenance costs.
(ii) Reduction in product quality and rate of production.
(iii) Increase in labour costs, and
(iv) Loss of operating time due to breakdowns.
Technology is progressing fast, newer and better equipment are being developed and produced every year.
The equipment gets obsolete due to advancement in technology and the unwarranted manufacturing costs arising from such obsolete equipment will:
(i) Reduce profits.
(ii) Impair competition.
(iii) Cause loss in value of machinery.
When the existing equipment becomes inadequate to meet the demand or it is not able to increase the production rate to desired level, the question of replacement arises.
(iv) Working Conditions:
It may be thought of replacing the old equipment and machinery which creates unpleasantness i.e. give rise to unsafe conditions for workers and leads to accidents, making the environment noisy and smoky etc.
The existing units/equipment have outlived their effective life and it is not economical to continue with them.
Factors Necessary for Replacement of Equipment:
The factors which necessitate the replacement of machinery and equipment can be classified as:
(i) Technical Factors.
(ii) Financial or Cost Factors.
(iii) Tangible Factors.
(i) Technical Factors:
They tend to consider:
(i) Whether the present equipment has become obsolete due to technological developments,
(ii) If the present equipment is inadequate in meeting increased product demand.
(iii) Whether the present equipment has deteriorated due to wear and tear. It may be indicated by increase in maintenance costs, reduction in product quality, rate of output, and increase in labour cost and down time etc.
(iv) Reduced safety as compared to new machine available/developed.
(v) Can the present equipment provide desired surface finish?
(vi) If the present equipment is polluting or spoiling working condition of the industry.
(vii) Possibility of performing additional operations by new machine.
(viii) Does the present equipment make noise and vibrations and thus causing diversion of the workers.
(ix) How often the present equipment requires maintenance and repairs.
(ii) Financial/Cost Factors:
(i) High repair and maintenance cost of the existing equipment/machinery).
(ii) Possibility of combining some operations and resulting increase in productivity by challenger (new machine).
(iii) The initial cost of challenger.
(iv) Salvage value of existing equipment and challenger at the end of its useful life.
(v) Improvement in productivity and quality by use of challenger.
(vi) Saving in space by use of new machine.
(vii) Reduction in scrap and waste by use of new machine.
(viii) Down time cost of present machine.
(ix) Reduction in cost of jigs and fixtures by using challenger.
(x) Effect on consumption of power by replacing the existing machine by new machine.
(iii) Tangible Factors:
These factors involve sociological and humanitarian considerations with far reaching effects:
(i) Like replacing the existing machine which causes unpleasantness (may be noise and smoke pollution) and unsafe working conditions leading to accidents.
(ii) Replacement may cause displacement of workers.
At the time of replacement a well-designed replacement policy should be adopted, rather than considering only the factors pertaining to the particular equipment involved, should compare thoroughly all the existing equipment with its possible replacement.
For the purpose of sound economic comparison all factors should be converted into cost and possible increase in revenue. Break even analysis can be utilized for the purpose of taking replacement decision or selection of investment alternatives.