The manufacturing activities use various types of machines and equipments in their production processes. Such machines and equipments require huge investments and they enjoy relatively longer physical life. The expired costs of such investments are considered in the form of depreciation while ascertaining the unit cost of the production.
All machines and equipments are not merely subject to wear and tear which is adjusted in the form of depreciation, but they are also exposed to the risk of obsolescence. A machine becomes obsolete when it becomes valueless through the introduction of a new machine or new method in the market. Due to continued technological development, the obsolescence may occur at any time, even few months after the installation of a new machine.
Thus, at any point of time the existing equipment is put on the defensive fronts. They are compelled to justify their tenure of existence against the challenges of newly developed modern machines or methods.
In the modern competitive world with continued technological developments, the replacement of machines and equipment has emerged as a continuous and complex problem. For tapping the cost advantages with a view to strengthen the competitive abilities, the replacements and transformation of the installed capacities assumes the strategic role in the modern manufacturing management.
It should be noted that if any existing equipment fails to meet the challenges made by the advancement of the technologies, it must be replaced irrespective of its age or operating conditions. Thus, even if equipment has â€œphysical valueâ€? (i.e. it is not worn out), it should be discarded if it looses its â€œeconomic valueâ€?, measured in terms of the competitive advantage.
It is not always practical to discard the existing machines and equipment because the existing installed capacity always lags behind the best machine or technique available in the market at any point of time. The replacement analysis does not strive to eliminate such lagging, but it attempts to keep it at the lowest that are economically justifiable.
Reasons for equipment replacement:
The factors necessitating the replacement of machines and equipment can broadly be classified into the following two categories:
1. Technical factors.
2. Cost factors
1. Wear and tear of equipment
2. Obsolescence caused by new invention.
3. Unsuitability of existing equipment due to:
(a) Size of the work
(b) Speed of operation
(c) Degree of accuracy
(d) Rate of output
(e) Need for power
4. Automation combining two or more processes
5. To eliminate the slack time of some machines through line balancing.
6. Reduced safety as compared to new equipment.
7. Additional operations by the new machine.
8. Reduction or elimination of manual operation and the resultant hazards by the new machine.
9. Easy, quick and convenient setting-up and operation of new machine
10. Reliability of performance
1. High repair cost of existing machine
2. Reduction in the spoiled work by the new machine.
3. More output at faster rate from new machine.
4. Combination of two or more existing operations into one by a new machine.
5. Reduction in the labor cost caused by the reduced number and lower type of operators.
6. Consumption of less power of fuel by the new machine.
7. Lesser space required by the new machine.
8. Improvement in the quality with the use of new machine.
9. Flexibility in the use of the new machine for other types of operations.
10. Probable economic life of the new machine.
11. Reduction in the cost of jigs, tools, fixtures, etc by the use of new machine.
12. Size of the investment required in new machine.
It should be noted that there are certain â€œintangible factorsâ€? which are incidental to equipment replacement. They are:
(a) Displacement of employees caused by replacements.
(b) Introduction of Hazards by new equipments.
Being intangible factors they are not measured in monetary value and hence are not included in the replacement analysis. They involve sociological and humanitarian considerations with far reaching influences.
A careful consideration based on the above factors must be made before implementing equipment replacement. It is prudent to defer replacement if the information is on cards that advanced model of the same machine is developed and is available in the very near future. This enables the replacement by state of the art version of the machine and the replacement is more justified for the capital invested.