W16 Vorster Equipment Replacement Decisions

Equipment
Replacement
Decisions.
Session #W16
Wednesday, March 8.
9:30am – 10:30am.
Mike Vorster.
C.E.M.P.Central Inc.
www.cempcentral.com
Equipment
Replacement
Decisions.
Session #W16
Wednesday, March 8. 9:30am – 10:30am.
Mike Vorster.
www.conexpoconagg.com
Equipment
Replacement
Decisions.
Mike Vorster.
www.cempcentral.com
M. Vorster C.E.M.P.Central Inc
Equipment Replacement
Decisions.
SESSION OUTLINE.
“Equipment replacement decisions present asset managers with on going
challenges. The “sweet spot” model is one of several tools that can be used
to rank units for replacement. Other metrics such as reliability, availability
and utilization should also play a role in replacement decisions. ”
• Define the replacement process.
• Understand metrics that can be used.
• Develop simple tools that can be used to assist.
Decisions.
Reference material.
Go to: http://www.constructionequipment.com/construction‐equipment‐executive‐institute
For more material and information.
Two articles are included with hand out
Ranking for Replacement. May 2016
The three Rs of Equipment Management. January 2017
4
Decisions.
1. Some definitions.
2. Understand the alternatives.
3. Cost based approaches.
4. Age based approaches.
5. Multi factor tools.
What I want you to take home
1. Maintain.
An action taken before failure to prevent failure.
2. Repair.
An action taken after failure. Put it back to work without major
expenditure.
3. Rebuild.
Before or after failure. A significant investment in the future of the
machine with the expectation of a long and improved future.
4. Replace.
Retire the machine and bring in a new unit that is equivalent to or
nearly equivalent to the existing unit.
5. Retire.
Retire the machine, reshape the fleet and/or do something
different.
We will look at the REPLACEMENT decision.
Replace with Used.
Rebuilt unit. (probably our own*)
New**.
*This is the rebuild decision – very, very complex.
** The existing machine is the “defender” – the new machine is the “challenger”
Decisions.
It is a four step process
1. Identify candidates for replacement.
2. Do the numbers.
• Analyze repair, rebuild, replace – looking forward.
3. Identify and select chosen alternative.
4. Develop your plan.
• Look at work load into the future.
• Develop your acquisition/financing plan.

Identify candidates for replacement.
I will replace these six trucks because:
1. I have looked them over and think so.
2. They are getting too expensive.
3. There is a better challenger out there.
4. They are all older than 2005.
5. They have all got over 16,000 hours on them.
6. Lots of factors – cost, reliability, utilization – combine to
indicate it is the right thing to do.
10
Identify candidates for replacement.
So, what do we need:
1. My eyes and ears and my judgement.
2. One or more decision criteria.
(cost, age, reliability, availability, utilization.)
3. A trigger value.
(what is a good value, what is a bad value.)
4. A progress rate. (burn rate)
(how fast do I progress towards my trigger value.)
11

Base your ranking and your decisions on:
1. Intuition and judgement.
2. Minimum cost for the defender or the challenger.
3. Age in either years of ownership or hours worked.
4. A combination of many factors including age, cost,
reliability and utilization.
All are valid, all work but remember, we are talking about a lot of
money and the majority of the left hand side of the balance sheet.
You must be in a position to defend your position.
“I think so” no longer cuts it.
Cost per hour - Life to Date
$70.00
$60.00
$50.00
$40.00
Cost per hour
Total
Intuition Analysis $30.00
$20.00
Operating
Repairs
Owning
$10.00
$0.00
2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Hours Worked
12
Decisions.
13

Hourly owning cost goes down with Hourly operating cost goes up with
age. age.
It depends on the rate at which residual It depends on the rate at which expenditure
market value decreases, annual utilization on repair parts and labor increases as the
and the total number of hours LTD. machine ages.
O&O Cost per hour LTD
$60
$50
Cost per hour LTD
$40
$30 Owning
Operating
$20 O&O Cost
C*
$10
L*
$‐
0 4 8 12 16 20 24
Hours Worked LTD
14
A Formal Definition of Economic Life
Many texts define economic life as

“That period that ends when the average hourly cost to date reaches a minimum.”
200 That period that ends when the average

hourly cost reaches a minimum
150
The terms used in the formal description
Costt
are shown in the diagram on the left. Minimum hourly
100
cost to date
50
0
0 1 2 3 4 5 6 7 8
Hourly Owning Hourly Operating Hourly O&O
We use the term “sweet spot” to avoid 200

the quantitative precision and Timing of the sweet spot
narrowness of definition implied in the
term “economic life.” There is much
150
Costt
more to the concept of an economic Magnitude of the
ownership period than is captured in the 100 sweet spot
formal definition.
As can be seen from the diagram on the
P 110
50
right there is very little difference.

Sweet spot is a broader, softer, more 0
easily understood and accepted term. 0 1 2 3 4 5 6 7 8
Hourly Owning Hourly Operating Hourly O&O
15

It is not an exact science
Cost per hour - Life-to-Date

$70.00
$60.00
$50.00
$40.00 Total
Cost per hour
Operating
$30.00
Repairs
$20.00 Owning
$10.00
$0.00
2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Hours Worked
Each year that a machine spends in the orange or red zone is more expensive than all the prior years
16
Life and Cost w/BEI
$300.00
$250.00
$200.00
493
448
$150.00 475
493 Repair
448 Repair
475 Repair
$100.00
$50.00
$‐
‐ 2,000 4,000 6,000 8,000 10,000 12,000
17
18
5. The magnitude and timing calculation
Life and Cost w BEI
$300.00
$280.00
$260.00
$240.00
$220.00
$200.00
$180.00
525
$160.00 525 Repair
543
$140.00 543 Repair
551
$120.00 Series6
$100.00
$80.00
$60.00
$40.00
$20.00
$‐
‐ 2,000 4,000 6,000 8,000 10,000 12,000 14,000
18
Hours
Purchase Repair Cost RMV Own per hour Opp per hour Own + Opp Per
Unit
price
worked
LTD %
Owning cost
LTD LTD Hr LTD
RMV % A8
LTD 100% $160
$ 344,875 2496 $ 113,510 63% $ 126,582 $ 50.71 $ 45.48 $ 96
6499 $ 316,509 39% $ 209,593 $ 32.25 $ 48.70 $ 81 $140
80%
A6
8014 $ 468,174 35% $ 223,050 $ 27.83 $ 58.42 $ 86 $120
O&O Cost
8783 $ 553,687 34% $ 228,505 $ 26.02 $ 63.04 $ 89 60%
per hour $100
RMV %
$ 342,968 1050 $ 41,435 75% $ 85,742 $ 81.66 $ 39.46 $ 121 LTD
$80
40%
2589 $ 127,002 62% $ 129,796 $ 50.14 $ 49.06 $ 99
A8 $60
3372 $ 283,779 54% $ 156,183 $ 46.32 $ 84.17 $ 130 20%
4170 $ 363,765 49% $ 175,006 $ 41.97 $ 87.24 $ 129 $40
$ 342,100 1130 $ 68,756 75% $ 85,525 $ 75.69 $ 60.85 $ 137 0% $20
3268 $ 198,995 55% $ 152,860 $ 46.77 $ 60.89 $ 108 0 2000 4000 6000 8000 10000 0 2000 4000 6000
A9 Hours worked LTD
4490 $ 372,665 47% $ 180,649 $ 40.24 $ 83.00 $ 123 Hours worked LTD
5115 $ 517,133 44% $ 190,834 $ 37.31 $ 101.11 $ 138
$ 401,785 742 $ 39,308 75% $ 100,446 $ 135.37 $ 52.98 $ 188
C8
1432 $ 99,683 75% $ 100,446 $ 70.17 $ 69.64 $ 140 A6 A9
2355 $ 220,959 65% $ 139,940 $ 59.44 $ 93.85 $ 153 $160
$160
3099 $ 309,592 57% $ 173,550 $ 56.00 $ 99.90 $ 156
$140 $140
$ 395,904 494 $ 30,201 75% $ 98,976 $ 200.36 $ 61.14 $ 261
914 $ 62,842 75% $ 98,976 $ 108.35 $ 68.79 $ 177 $120 $120
C11 O&O Cost O&O Cost
1342 $ 123,258 75% $ 98,976 $ 73.78 $ 91.88 $ 166 per hour $100 per hour $100
1919 $ 196,084 72% $ 110,110 $ 57.38 $ 102.18 $ 160 LTD LTD
$80 $80
$ 390,987 756 $ 44,362 75% $ 97,747 $ 129.29 $ 58.68 $ 188
$60 $60
1028 $ 79,095 75% $ 97,747 $ 95.13 $ 76.98 $ 172
C12 $40 $40
1956 $ 215,494 71% $ 111,443 $ 56.97 $ 110.16 $ 167
2713 $ 326,591 61% $ 153,600 $ 56.62 $ 120.39 $ 177 $20 $20
$ 432,340 892 $ 49,822 75% $ 108,085 $ 121.17 $ 55.85 $ 177 0 2000 4000 6000 8000 10000 0 2000 4000 6000
1593 $ 117,064 79% $ 89,795 $ 56.37 $ 73.49 $ 130 Hours worked LTD Hours worked LTD
C14
2006 $ 156,794 71% $ 127,087 $ 63.35 $ 78.16 $ 142
2605 $ 210,928 62% $ 164,472 $ 63.14 $ 80.97 $ 144
$ 367,880 260 $ 25,686 75% $ 91,970 $ 354.41 $ 98.98 $ 453
562 $ 61,694 75% $ 91,970 $ 163.79 $ 109.87 $ 274
C15
1243 $ 189,902 75% $ 91,970 $ 74.02 $ 152.84 $ 227
1544 $ 261,261 80% $ 71,818 $ 46.51 $ 169.21 $ 216
$ 363,354 621 $ 59,834 75% $ 90,839 $ 146.28 $ 96.35 $ 243
888 $ 105,441 75% $ 90,839 $ 102.35 $ 118.81 $ 221
C16
1325 $ 139,788 75% $ 90,839 $ 68.56 $ 105.50 $ 174
1735 $ 181,894 76% $ 87,499 $ 50.43 $ 104.84 $ 155
19

Critical.
The past is behind.
Ave cost per hour going forward
$200.00
$180.00
$160.00
$140.00
$120.00
Cost per hour $100.00 Repair

Rebuild
$80.00
Replace
$60.00
$40.00
$20.00
$‐
0 4 8 12 16 20 24 28 32
Hours going forward, in thousands
20
You can only do a defender challenger cost analysis if
the two are essentially the same.
If they are not, you have to include “revenue” and
base your analysis on revenue minus cost.
Ave cost per hour going forward
$200.00
$180.00
$160.00
$140.00
$120.00
Cost per hour $100.00 Repair

Rebuild
$80.00
Replace
$60.00
$40.00
$20.00
$‐
0 4 8 12 16 20 24 28 32
Hours going forward, in thousands
21
Decisions.
22
2. Age in years of ownership.
Lets look at a group of trailers.
Rate Class zz xx c
Decision
Trigger Value Burn rate Good Bad
Criteria
Age in years 15 years 1 year per year 60% to 80% of TP > 120% of TP
23

Churn Chart – Age in years.
Churn Chart by individual unit

Candidates for
Green Orange Red
replacement
Vibro Rollers
0.6 to 0.8 Trigger point 0.8 - 1.2 Trigger point More than 1.2 Trigger point
are likely to be
Expected hours in the given number of years ahead here.
Unit # Equipment Description Type Year Trigger point Burn Rate Hours now 1 2 3 4 5
45061 1996 Beuthlng B100 Roller RLR‐S‐49 1996 15 1 21 22 23 24 25 26

42253 1998 Dynapac CC501 Roller RLR‐S‐80 1998 15 1 19 20 21 22 23 24
42729 2000 Sakai SW800 Roller RLR‐S‐69 1998 15 1 19 20 21 22 23 24
45316 2003 IR SD122DX Roller RLR‐G‐80 1998 15 1 19 20 21 22 23 24
45317 2004 Cat CB224E Roller RLR‐S‐49 2000 15 1 17 18 19 20 21 22
45312 2004 Cat CB334D Roller RLR‐S‐59 2001 15 1 16 17 18 19 20 21
45319 2004 I/R DD118HF Roller RLR‐S‐79 2004 15 1 13 14 15 16 17 18
45325 2005 Cat CB‐224E Roller RLR‐S‐49 2005 15 1 12 13 14 15 16 17
45321 2005 Beuthling B105 Rollr RLR‐S‐49 2005 15 1 12 13 14 15 16 17
45330 2006 Beuthling Vib Roller RLR‐S‐49 2006 15 1 11 12 13 14 15 16
45343 2007 I/R DD‐70HF Roller RLR‐S‐59 2007 15 1 10 11 12 13 14 15
45374 2008 Dynapac CC424HF Rlr RLR‐S‐69 2008 15 1 9 10 11 12 13 14
45360 2011 DynaPacCC524H Rolle RLR‐S‐79 2011 15 1 6 7 8 9 10 11
45371 2013 HammHD12VV Roller RLR‐S‐49 2013 15 1 4 5 6 7 8 9
24
2. Age in hours worked.
Lets look at a group of pavers.
Rate Class aa bb d
Decision
Trigger Value Burn rate Good Bad
Criteria
Age in hours Varies Use data 60% to 80% of TP > 120% of TP
Cost per hour - Life-to-Date

$70.00
$60.00
$50.00
$40.00 Total
Cost per hour
Operating
$30.00
Repairs
$20.00 Owning
$10.00
$0.00
2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Hours Worked
25

Churn Chart – Age in hours.
Churn Chart by individual unit

Candidates for
Green Orange Red replacement
PAVERS Class aa bb d
0.6 to 0.8 Trigger point 0.8 - 1.2 Trigger point More than 1.2 Trigger point are likely to be
Expected hours in the given number of years ahead here.
Unit # Make Model Trigger point Burn Rate Hours now 1 2 3 4 5
Hrs Hrs/yr
1 Caterpillar AP1055D 4,500 700 5,115 5,815 6,515 7,215 7,915 8,615
2 Blaw Knox PF5510 4,000 700 4,170 4,870 5,570 6,270 6,970 7,670
3 Caterpillar AP1055B 4,500 700 4,783 5,483 6,183 6,883 7,583 8,283
4 Volvo 6110B 4,500 700 4,544 5,244 5,944 6,644 7,344 8,044
5 Caterpillar AP1055D 4,500 700 3,099 3,799 4,499 5,199 5,899 6,599
6 Caterpillar AP1055D 4,000 600 1,919 2,519 3,119 3,719 4,319 4,919
7 Caterpillar AP1055D 4,000 600 1,722 2,322 2,922 3,522 4,122 4,722
8 Caterpillar AP1055E 4,000 600 1,735 2,335 2,935 3,535 4,135 4,735
9 Caterpillar AP1055D 4,000 500 2,605 3,105 3,605 4,105 4,605 5,105
10 Caterpillar AP1055E 4,000 500 1,550 2,050 2,550 3,050 3,550 4,050
11 Caterpillar AP1055E 4,000 500 837 1,337 1,837 2,337 2,837 3,337
12 Caterpillar AP1055E 4,000 500 504 1,004 1,504 2,004 2,504 3,004
13 Caterpillar AP1055F 4,000 500 354 854 1,354 1,854 2,354 2,854
26
Decisions.
27

There is more to it than just cost and age.
Can you base your ranking and your decisions on several
factors that can be combined into a single score.
Rate Class TT OH 5
Good Bad
Decision Criteria Weighting
10 points Zero points
Year of Manufacture 2013 1994 15%
Age
Miles travelled LTD 80,000 700,000 15%
Miles travelled, last 12 months 30000 10000 30% Utilization
Inspection score 8 3 10% Condition
Labor cost per mile, last 12 months $ 0.08 $ 0.30 15%
Cost
Parts cost per mile, last 12 months $ 0.25 $ 0.40 15%
Ingredients must be in the pantry. What is “good”? What is “bad”? What “counts’?
28
TRI AXLES Rate Class TT OH 5

Good Bad
Decision Criteria Weighting
Year of Manufacture > 2013 <1994 15%
Age
Miles travelled LTD < 80,000 > 700,000 15%
Miles travelled, last 12 months > 30,000 < 10,000 30% Utilization
Inspection score >8 <3 10% Condition
Labor cost per mile, last 12 months < $ 0.08 > $0.3 15%
Cost
Parts cost per mile, last 12 months < $0.25 > $0.4 15%
29

Points based on Year of Manufacture Points based on labor cost per mile
12 12
10 10
8 8
Points 6 Points 6
4 4
2 2
0 0
1990 1995 2000 2005 2010 2015 $0.00 $0.10 $0.20 $0.30 $0.40
Year of Manufacture Labor cost per mile, last 12 months
30
A B C D E F G H I J K
1 Group Tri Axles Analysis date 12/22/2015
Year of Miles Cost, last 12 months Inspection Cost per mile last 12 mo
2 Unit Number
manufacture To date Last 12 mo Labor Parts score Labor Parts FINAL
SCORE
3 Good, 10 points 2013 80,000 30,000 8 $0.08 $0.25
4 Bad, 0 points 1994 700,000 10,000 3 $0.30 $0.40 Candidates
5 Weighting 15% 15% 30% 10% 15% 15% for
replacement
6 BA Tri 28 2010 226,685 47,800 $5,509 $15,312 7 $0.12 $0.32 8.3
7 BA Tri 62 2015 37,226 37,226 $3,210 $6,541 9 $0.09 $0.18 10.0
8 BA Tri 54 2012 93,768 30,125 $5,487 $5,310 6 $0.18 $0.18 8.8
9 BA Tri 46 1995 712,677 11,579 $4,457 $7,690 2 $0.38 $0.66 0.3
10 BB Tri 22 2009 91,944 14,971 $3,671 $5,478 6 $0.25 $0.37 4.7
11 BB Tri 35 2013 73,578 37,500 $4,476 $6,732 9 $0.12 $0.18 9.7
12 BB Tri 19 1994 709,678 34,219 $7,431 $10,987 4 $0.22 $0.32 4.6
13 BC Tri 27 2010 114,820 23,706 $5,790 $7,726 8 $0.24 $0.33 6.9
14 BC Tri 15 2007 627,808 14,826 $5,732 $5,981 4 $0.39 $0.40 2.1
15 BC Tri 19 2009 270,126 16,900 $5,221 $7,568 3 $0.31 $0.45 3.3
31

DOZERS Rate Class HD 2 16

Good Bad
Decision Criteria Weight
Year of Manufacture > 2013 <1994 10%
Age
Hours worked LTD < 4,000 > 14,000 15%
Hours worked, last 12 months > 1,800 < 700 25% Utilization
Availability > 90% < 65% 10% Availability/
R.E.D events per 1,000 hrs, last 12 mos <1 >5 15% reliability
Own & Opp Cost per hour, LTD < 1.1 x min LTD > 1.3 x min LTD 10%
Cost
Own & Opp cost, last 12 months < $ 60 >$75 15%
32
1 Class HD 2 Dozers Analysis date 12/19/2016
Hours worked R.E.D. O&O cost per hour

Year of
2 Unit Number Availability Events per
manufacture FINAL
To date Last 12 mo 1,000 hr LTD Trend Last 12mo
SCORE Candidates for
3 Good, 10 points 2013 4,000 1,800 90% 1 1.1 $60.00 replacement
4 Bad, 0 points 1994 14,000 700 65% 5 1.3 $75.00
5 Weighting 10% 15% 25% 10% 15% 10% 15%
6 HD 2 15/2 2015 2,658 1,980 96% 1 1.05 $57.00 10.0
7 HD 2 13/1 2015 5,278 2,167 91% 1 1.00 $59.00 9.8
8 HD 2 15/1 2015 3,800 2,123 81% 2 1.22 $62.00 8.5
9 HD 2 10/2 2010 8,500 1,265 88% 2 1.25 $67.00 6.0
10 HD 2 12/2 2012 4,989 700 75% 3 1.11 $65.00 5.4
11 HD 2 09/2 2009 12,124 986 66% 5 1.16 $71.00 2.9
12 HD 2 09/4 2009 12,674 1,200 60% 6 1.25 $74.00 2.5
13 HD 2 94/2 1994 14,236 987 85% 4 1.33 $72.00 2.1
14 HD 2 07/1 2007 15,634 800 69% 4 1.22 $75.00 1.8
15 HD 2 95/4 1995 17,236 760 77% 4 1.36 $81.00 1.0
33

YES.
We need to know our decision criteria.
We need to have the ingredients in the pantry.
We need to know what is “good” and what is “bad”.
We need to know what counts.
Intuition guides the process. The numbers lie where they fall.
Year of Miles Cost, last 12 months Inspection Cost per mile last 12 mo
2 Unit Number
manufacture To date Last 12 mo Labor Parts score Labor Parts FINAL
SCORE
3 Good, 10 points 2013 80,000 30,000 8 $0.08 $0.25
4 Bad, 0 points 1994 700,000 10,000 3 $0.30 $0.40
5 Weighting 15% 15% 30% 10% 15% 15%
6 BA Tri 28 2010 226,685 47,800 $5,509 $15,312 7 $0.12 $0.32 8.3
7 BA Tri 62 2015 37,226 37,226 $3,210 $6,541 9 $0.09 $0.18 10.0
8 BA Tri 54 2012 93,768 30,125 $5,487 $5,310 6 $0.18 $0.18 8.8
9 BA Tri 46 1995 712,677 11,579 $4,457 $7,690 2 $0.38 $0.66 0.3
10 BB Tri 22 2009 91,944 14,971 $3,671 $5,478 6 $0.25 $0.37 4.7
11 BB Tri 35 2013 73,578 37,500 $4,476 $6,732 9 $0.12 $0.18 9.7
12 BB Tri 19 1994 709,678 34,219 $7,431 $10,987 4 $0.22 $0.32 4.6
13 BC Tri 27 2010 114,820 23,706 $5,790 $7,726 8 $0.24 $0.33 6.9
14 BC Tri 15 2007 627,808 14,826 $5,732 $5,981 4 $0.39 $0.40 2.1
15 BC Tri 19 2009 270,126 16,900 $5,221 $7,568 3 $0.31 $0.45
34
3.3
Decisions.
35
Decisions.
1. Understand your options.
2. Job one is to identify and rank alternatives.
3. Include as much as you can in the scope of the analysis.
• The ingredients must be in the pantry.
• You must know what is good and what is bad
4. Intuition is good. Use it to set up the framework and then analyze
the numbers and let them lie where they fall
5. Once the alternatives are ranked, do the numbers, develop a
financing/acquisition strategy and act.
36
Decisions.
SESSION OUTLINE.
“Equipment replacement decisions present asset managers with on going
challenges. The “sweet spot” model is one of several tools that can be used
to rank units for replacement. Other metrics such as reliability, availability
and utilization should also play a role in replacement decisions. ”
• Define the replacement process.
• Understand metrics that can be used.
• Develop simple tools that can be used to assist.
The three Rs of Equipment Management. January 2017
37
Decisions.
38
Questions?
Please complete the session evaluation on the
CONEXPO – CON/AGG Mobile App
Mike Vorster.
www.cempcentral.com
Equipment Executive
By MIKE VORSTER, Contributing Editor
Ranking for Replacement

Equipment replacement decisions incorporate subjective and objective data
W
e are too focused on cost when it The unit numbers and the required data need to be
comes to thinking about equipment entered into the green cells. Then calculate cost per
replacement. It certainly is impor- mile for labor and parts by dividing columns F and G
tant to know what it will cost to own by column E to obtain the values in columns I and J.
and operate a unit in the year ahead and to make To set up the scoring system, award “points” to
wise replacement decisions when the old unit—the each unit under each of the six factors. Determine
defender—is likely to cost more than the minimum what value is “good” and worthy of 10 points and
lifecycle cost you can expect from a new unit—the what value is “unacceptable” and not worthy of
challenger. The defender-versus-challenger replace- any points. Rows 3 and 4 indicate those ranges. For
ment theory is well accepted in practice, and many example, a year of manufacture of 2013 or later is
companies use this approach to plan replacements worth 10 points, and a year of manufacture of 1994
and manage fleet average age. or earlier is worth zero. The process of deciding what
But there is more to it than cost. Other metrics is “good” and “bad” takes some discipline. You need
Mike Vorster such as age and utilization are important, and we to quantify your expectations for each factor and de-
Mike Vorster is the David H. frequently face the problem of balancing many cide where the boundaries lie. It is not easy, but it is
Burrows Professor Emeritus factors when we try to identify necessary. It makes the process
of Construction Engineering or, at the very least, rank units Factors other than cost repeatable, and once you have
at Virginia Tech and is the for replacement. set the boundaries, the process
author of “Construction The American Public Works influence our equipment- is defendable.
Equipment Economics,” a Association (APWA) proposes replacement decisions. Units will not be at the
handbook on the manage- the use of a simple subjective boundaries; some will be
ment of construction equip-
points system to rank vehicles We need to know how to above expectations, some
ment fleets. Mike is lead
for replacement. The system include them. below expectations, and some
asks users to award a certain in between. The next step is to
presenter at the annual
number of points for factors such as age, miles trav- decide how to apportion points regardless of where
Construction Equipment elled, reliability, cost and condition, based on their units fall. If they fall above and below the bound-
Management Program assessment of each factor. The points are totaled, ary, values are easy: 10 points or zero points. If they
(CEMP) and serves as a and the unit with the highest score “needs immediate fall in between boundary values, we apportion the
consultant in the area of consideration” for replacement. It has been proven to points on a straight-line basis defined by the values
fleet management and work, but it is subjective. in rows 3 and 4.
organizational development. The need to combine many factors when trying to The graph on the left shows how it is done for year
identify units for replacement is a common prob- of manufacture: zero points for units older than 1994,
lem. Building on the APWA system, let’s add a little a straight-line proportion of the points between 1994
technology and develop a spreadsheet that combines and 2013, and 10 points for units newer than 2013.
subjectivity and analysis to give us a practical tool The graph on the right shows how it is done for labor
we can use to help in replacement decisions for large cost per mile travelled during the last 12 months: 10
equipment groups such as pickups and tri-axle trucks. points for under $0.09 per mile, a straight-line pro-
The nearby spreadsheet table serves as an ex- portion between $0.09 and $0.30 per mile, and zero
ample of how this might work with a grouping of if the cost is more than $0.30 per mile.
tri-axle trucks. These six factors do not, or should not, count
Columns C, D, E, H, I and J show we are looking equally in determining the final score. A weight-
at six factors: year of manufacture; miles travelled, ing factor applied to each of the six factors aids in
life to date; miles travelled in the past 12 months; calculating the final score. In row 5, 30 percent of
a subjective inspection score; repair labor cost per the weighting goes to factors that measure age (15
mile; and repair parts cost per mile. percent for age in years, column C, and 15 percent
44 May 2016 | Construction Equipment

Replacement Decisions for Tri-Axle Trucks
2 Year of Miles Cost, last 12 months Inspection Cost per mile, last 12 months
Unit number score
manufacture To date Last 12 months Labor Parts Labor Parts
FINAL
3 Good, 10 points 2013 80,000 30,000 8 $0.08 $0.25
SCORE
4 Bad, 0 points 1994 700,000 10,000 3 $0.30 $0.40
5 Weighting 15% 15% 30% 10% 15% 15%
6 BA Tri 28 2010 226,685 47,800 $5,509 $15,312 7 $0.12 $0.32 8.3
7 BA Tri 62 2015 37,226 37,226 $3,210 $6,541 9 $0.09 $0.18 10.0
8 BA Tri 54 2012 93,768 30,125 $5,487 $5,310 6 $0.18 $0.18 8.8
9 BA Tri 46 1995 712,677 11,579 $4,457 $7,690 2 $0.38 $0.66 0.3
10 BB Tri 22 2009 91,944 14,971 $3,671 $5,478 6 $0.25 $0.37 4.7
11 BB Tri 35 2013 73,578 37,500 $4,476 $6,732 9 $0.12 $0.18 9.7
12 BB Tri 19 1994 709,678 34,219 $7,431 $10,987 4 $0.22 $0.32 4.6
13 BC Tri 27 2010 114,820 23,706 $5,790 $7,726 8 $0.24 $0.33 6.9
14 BC Tri 15 2007 627,808 14,826 $5,732 $5,981 4 $0.39 $0.40 2.1
15 BC Tri 19 2009 270,126 16,900 $5,221 $7,568 3 $0.31 $0.45 3.3
This spreadsheet combines subjectivity

for age in miles, column D); 30 percent of the weight Finally, use the analysis to help in your decisions. and analysis into a practical tool to
goes to utilization (miles in the last 12 months, col- In this example, units in rows 9, 14 and 15 have low help in replacement decisions.
umn E); 30 percent of the weight goes to cost factors scores and are clearly candidates for replacement.
(cost per mile in the last 12 months for labor and Row 9 must go, the other two might depend on
parts, columns I and J); and 10 percent of the weight available capex budget. The unit in row 7 is better
goes to the subjective inspection (column H). than the boundary values for all factors except labor
With all the data in place, do the mathematics to cost per mile. It is a keeper, as are the units in rows
determine the final score. It is a little technical but 11, 8 and 6.
not complicated. The final score is the weighted Tools like this enable us to move away from a
total of the points calculated for each of the six fixation about cost. Other factors influence our deci-
factors considered. sions. We need to know how to include them.
Rankings that fall in between boundary values can be apportioned to correspond to points on a straight-line basis.
ConstructionEquipment.com Construction Equipment | May 2016 45

Equipment Executive
By MIKE VORSTER, Contributing Editor
The Three Rs of Equipment Management

A tool for evaluating whether to repair, rebuild, or replace
R
eading, writing, and arithmetic—if you machine is likely to be a candidate for replacement,
get them right, you will be on your way to and a given “burn rate” used to track the situation as
great things. The same is true for the repair/ units progress toward and perhaps beyond their trig-
rebuild/replace decision. Get it right, and ger point. The spreadsheet shows how it works.
many of the requirements for success fall into place. Columns A, B, and C give the details for seven
As with most sound bite titles, it is best to start articulated dump trucks in the rate class used in our
with some definitions. “Repair” means the deci- example. Column D gives the trigger point or the
sion to keep a relatively old machine in the fleet number of hours we expect the unit to work before it
and repair it for the foreseeable future without any is likely to become a candidate for replacement. This
major expenditure. You keep it and keep it running. will most likely be the number of hours of expected
“Rebuild” means to make a significant investment in life that was used in the rate calculation, and it can
the future of the machine by replacing major compo- be set using knowledge and experience or a detailed
nents and doing the work needed to extend life, low- minimum lifecycle cost calculation. It can be simple
Mike Vorster er future repair costs, and improve performance. You or complex, but there is no way you can properly
Mike Vorster is the David H. keep the old machine but invest manage or cost a given rate
Burrows Professor Emeritus of
Construction Engineering at
the money needed to give it a Increasingly complex justi- class of equipment if you do
Virginia Tech and is the author longer future. “Replace” means fications are required to not know, set, or assume an
of “Construction Equipment to retire the machine and bring expected life and establish a
Economics,” a handbook on the in a new equivalent or nearly show that all alternatives trigger point for decision mak-
management of construction
equipment fleets. Mike is lead
equivalent. You dispose of the have been quantified and ing. The spreadsheet shows
old and commit to a newer that we expect 12,000 hours
presenter at the annual Con-
struction Equipment Manage- unit that will produce a lower carefully considered. from HT6-21; 18,000 hours
ment Program (CEMP) and lifecycle cost. from HT6-26 on the basis that
serves as a consultant in the Good repair/rebuild/replace decisions follow a we performed a fairly substantial rebuild a short
area of fleet management and three-step process. while ago; and 14,000 from the other newer-model
organizational development.
First, you need to identify candidates for replace- 37-ton trucks.
ment: the machines you believe require an explicit Column E is the burn rate or the number of hours
decision as to whether you should continue to run our data shows us the trucks are or are likely to work
them and repair them, rebuild them now, or replace in a year. We see that we expect 1,500 hours per year
them in the next short while. for all the trucks except the three 37-ton units work-
Second, you need to do the numbers. You make ing extended shifts on a landfill project. Column F
the estimates you need and analyze costs going gives the current age, and columns G through K give
forward for repairing, rebuilding, or replacing each the expected age at the end of the next five years. The
of the identified candidates. calculations for columns G through K are not com-
Third, you need to decide and act. Doing nothing plex; HT6-21, for example, has worked 13,000 hours
to the identified candidates is not an option. to date and has a burn rate of 1,500 hours per year.
Identifying candidates for replacement and sup- We can therefore assume that it would have worked
porting your decision with hard facts and figures is 14,500 hours (13,000 + 1,500) in one years’ time and
not easy. We can no longer say, “This old dozer is 17,500 hours (13,000 + 4,500) in three years’ time.
at the end of its life, it is time for it to go.” We must The visual impact comes from the standards set
plan and manage capital expenditure, and increas- in the first two rows of the spreadsheet. Here we see
ingly complex justifications are required to show that the cells in columns G through J will be green if
that all alternatives have been quantified and consid- the estimated hours worked falls between 60 percent
ered. Many of these justifications are based on two and 80 percent of the trigger point, orange if the
factors: a preset “trigger point” that defines when a estimated hours worked falls between between 80
42 January 2017 | Construction Equipment

Churn Chart
ARTICULATED DUMP Green Orange Red
TRUCKS 60% - 80% of Trigger point 80% - 120% of Trigger point More than 120% of Trigger point
Expected hours in the given number of years ahead
Unit # Make Model Trigger point Burn Rate Hours now 1 2 3 4 5
Hours worked Hrs/yr
HT6-21 AA 32 ton ADT 12,000 1,500 13,000 14,500 16,000 17,500 19,000 20,500
HT6-26 AA 32 ton ADT 18,000 1,500 18,789 20,289 21,789 23,289 24,789 26,289
HT6-32 BB 37 ton ADT 14,000 2,000 10,300 12,300 14,300 16,300 18,300 20,300
HT6-33 BB 37 ton ADT 14,000 2,000 10,650 12,650 14,650 16,650 18,650 20,650
HT6-35 BB 37 ton ADT 14,000 2,000 6,500 8,500 10,500 12,500 14,500 16,500
HT6-37 CC 37 ton ADT 14,000 1,500 4,367 5,867 7,367 8,867 10,367 11,867
HT6-40 CC 37 ton ADT 14,000 1,500 2,589 4,089 5,589 7,089 8,589 10,089
Decisions on which machines are candidates for replacement can be supported with data such as this.
percent and 120 percent of the trigger point, and red Capital Alternatives
if the estimated hours worked is greater than 120
percent of the trigger point. Run and repair
Rebuild Replace
as needed
It is easy to see that HT6-21 is a present candidate
for replacement and HT6-26 is not far from that Capital required now $0 $400,000 $1,100,000
point. Having been rebuilt once, HT6-26 is a clear Next capital required Will need to be replaced Will most likely need to Rebuild in 4 years,
candidate for replacement. HT6-32 and HT6-33 are in the next period. be replaced in 3 years. replace in 8 years.
not far behind, and we will have to start thinking Cost per hour going Past minimum point. $70 Minimum $62 per hour Minimum $64 per hour
about rebuilding or replacing them. HT6-37 and forward per hour and growing. with sweet spot in 9,000 with sweet spot in 21,000
hours. hours.
HT6-40 are young and will still see a lot of service.
The spreadsheet is simple, easy to understand, Reliability and Unlikely to achieve 60 hours per week will Good to excellent. Will
availability required 60 hours per become a risk at some achieve required hours.
and a visual way to identify candidates for replace-
week. point.
ment and give insight into challenges that may lie
Productivity Maintaining standards. Will maintain standards. Can expect 10 percent
ahead. Its simplicity is a bit of a disadvantage in that
faster cycle times.
it relies on one parameter—age—to rank candidates.
Major risk Major component Rebuild estimate, time, Very few.
More complex tools such as the multi-parameter tool failure. and costs following
discussed in May 2016 are clearly better because rebuild.
they can be structured to include parameters such as
availability, reliability, and utilization. But complex This table shows what results can be
methods may be seen as “smoke and mirrors,” so it Many factors come into play, not the least of obtained by each of the decisions, as
is often a good idea to use a simple tool that gets the which are differences in the amount of capital well as what factors to consider.
job done. The given spreadsheet certainly works. required to implement each alternative and the time
The next step, doing the numbers and analyzing spans over which the alternatives are optimized.
options, can be complex. Remember that repair/re- The nearby table gives the kind of results obtained
build/replace decisions are about the future. You are and the factors that must be considered in a typi-
at a given point in time and are concerned with costs cal study. As you can see, you are definitely not
and hours worked going forward. Money spent and comparing apples with apples and in many cases the
hours worked to date are behind you. You must look intangibles and risks will rule the day.
forward and optimize the future, not rework the past. Step three is decide and act. Understanding the
The run and repair decision is relatively easy. alternatives and doing the numbers give you the
You know what it cost last year, you know it is at framework for your decision. It is complex and
or beyond its sweet spot, and you know that the may depend on your strategic plans, the work you
next year’s costs are likely to be the best costs in have on the horizon, and your confidence in the
the future of the machine. The question is, are they future. You gather your data, do your analysis, look
the best costs that you could obtain if you were to forward, and exercise your best judgment. Again, no
rebuild it and keep it for a few more years? Are they right answers, just intelligent decisions.
the best costs you could obtain if you were to re- For more on asset management, visit Construc-
place it and keep the new unit for its optimum life? tionEquipment.com/Institute.
ConstructionEquipment.com Construction Equipment | January 2017 43

W16 Vorster Equipment Replacement Decisions

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What are some of the metrics discussed for evaluating equipment replacement?

What are some of the metrics discussed for evaluating equipment replacement?

What are the steps in the equipment replacement process?

What are the steps in the equipment replacement process?

Equipment

Wednesday, March 8. 9:30am – 10:30am.

2. Understand the alternatives.

2. Understand the alternatives.

3. Cost based approaches.

Many texts define economic life as

200 That period that ends when the average

Hourly Owning Hourly Operating Hourly O&O

We use the term “sweet spot” to avoid 200

right there is very little difference.

easily understood and accepted term. 0 1 2 3 4 5 6 7 8

Hourly Owning Hourly Operating Hourly O&O

3. Cost based approaches.

Cost per hour - Life-to-Date

3. Cost based approaches.

Cost per hour $100.00 Repair

Cost per hour $100.00 Repair

4. Age based approaches.

Churn Chart by individual unit

45061 1996 Beuthlng B100 Roller RLR‐S‐49 1996 15 1 21 22 23 24 25 26

Cost per hour - Life-to-Date

4. Age based approaches.

Churn Chart by individual unit

5. Multi factor tools.

TRI AXLES Rate Class TT OH 5

5. Multi factor tools.

5. Multi factor tools.

DOZERS Rate Class HD 2 16

1 Class HD 2 Dozers Analysis date 12/19/2016

Hours worked R.E.D. O&O cost per hour

5. Multi factor tools.

Ranking for Replacement

44 May 2016 | Construction Equipment

This spreadsheet combines subjectivity

ConstructionEquipment.com Construction Equipment | May 2016 45

The Three Rs of Equipment Management

42 January 2017 | Construction Equipment

ConstructionEquipment.com Construction Equipment | January 2017 43

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