DEVELOPMENT OF SYSTEMATIC EQUIPMENT DEVELOPMENT PROGRAM
The equipment replacement involves financial commitment along with certain monetary benefits. The top management should have a great concern over this issue of the management. Like capital expenditure programs, the establishment of sound policies with regard to equipment replacement program is the sole responsibility of the top management.
The systematic approach to the equipment replacement program involves the following considerations:
a) Emergence of equipment replacement
b) Classification of equipment replacement
c) Assignment of responsibility for equipment replacement
d) Selection of the equipment
e) Follow-up reports
Emergence of equipment replacement:
There are two popular approaches to the emergence of the equipment replacement problem. One is the recommendation from the operative staff who are always dealing with the operational efficiency of the equipment. Generally, the operating supervisors recommend the equipment, if they worthwhile. The other extreme is the corporate level management who are familiar with the development of latest technology which can be tapped to the advantage of the company.
Classification of equipment replacement:
The equipment replacement recommendation should be classified by their objectives . The general classification can be made as under:
(i) Cost reduction.
(ii) Increased production.
(iii) Better quality
(iv) New products
(v) Improvement in profits
Such classification enables the management to give priorities to varied equipment replacement situations which arise frequently in the company.
Assignment of responsibility for the equipment replacement:
If the equipment replacement recommendation initiate from the operating level, the operating supervisor should be held accountable for installation, utilization and getting the return on investment on the equipment. The equipment replacement recommendation of the operating supervisor is generally screened by the works manager, the plant engineer, product engineer, methods engineer and quality control staff before it reaches the top management for their sanction. Various operating and technical staff should be held accountable for that part of their respective contribution made by them in the decision process.
The purchasing department and the treasurer are also the concerned parties in the implementation of the decision, and so should be held responsible in their respective areas.
Selection of the equipment:
One man cannot adequately investigate and decide on the selection of the new equipment along with his other major duties. Conversely, it is also not considered desirable to establish a separate departmental for the purpose. The appropriate solution would be the formation of the committee of the concerned department so that due importance may be given to the departmental considerations.
The committee should deliberate and decide about the selection of the equipment if it is considered worthwhile and it should report to the works manager. It should be noted that while selecting the equipment, due consideration should be given to the equipment standardization, because it enables the use of uniform equipments, interchangeability of machines in the layout, reduction of machine replacement spares and parts, development of the most efficient use of the equipment taking and using time and motion studies, training to operators, efficiency of labor, proper planning of routine, scheduling and dispatching etc.
After the introduction of the new equipment, the follow-up reports of its operational performance along with the incidental costs should be prepared for the immediate post implementation year or years. The important areas of the reporting are project start-up time equipment utilization and equipment savings. All these factors have a direct bearing on the return on investments. This should be compared with estimated performance which was considered at the time of installation. Such reports highlight the faulty replacement policy and deter careless recommendations. Moreover, they prove a good guide for the future replacement decisions.
Advantages of the Sound Equipment Replacement Program
The well developed equipment replacement program is advantageous as under:
(i) It reduces the cost and improves profitability.
(ii) The quality of the production is improved resulting in higher sales and greater consumer satisfaction.
(iii) It results in increased production reducing the per unit absorption of the fixed costs.
(iv) It ensures continued operations.
(v) The equipment is replaced on a continuous basis rather than on an emergency basis which proves inconvenient as well as costlier.
Finally to note is, the investment in single large capital expenditure eliminates smaller maintenance charges over a period time which not only lead to machine down time but cumulatively higher expenses. Sound replacement policy emphasizes the need for the creation of depreciation reserves for replacement purposes. Such policy reduces the risk of using such funds for working capital or such other purposes. The use of the depreciation reserves for the replacement programs yields a higher return than it does as cash or investment in marketable securities.