Jim Kline: When is Equipment Replacement Cost-Justified?

by Jim Kline
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As International Baking Industry Exposition (IBIE) approaches, most of us are assessing our equipment needs — what has to be replaced, what can help us reduce costs, what do we need to make that new or modified product? IBIE provides an impetus to plan ahead and think about our upcoming capital expenditures, setting the stage for what we will be looking for when touring the Baking Exposition.

I have always considered shopping for automation and new equipment to be the fun stuff — a time when you can think “blue sky,” dream a bit and be creative. Actual replacement requirements, however, are always harder — justifying the cost, integrating new designs into older lines, planning for the future while addressing the present, etc.

I t is this latter requirement I want to focus on. The most difficult part of replacement investment decisions is when to make them and how long you continue to pour money into existing equipment before it is time to replace it. One problem with making replacement decisions is the lack of accepted industry standards for effi ciency, downtime, ROI analysis and performance benchmarks.

Efficiency can be simply defined as the ratio of scheduled operating time at standard operating rates (for a given product), less equipment related downtime and minus the downtime equivalent of nonspecification product. When assessing a particular production line or piece of equipment, the scheduled operating time, downtime and non-spec product would be that attributable to the particular production line or machine. Putting the definition into a formula becomes a bit more interesting, because true efficiency is a product of the following factors.

In the above formula, “Actual Run Time” is the time the line or equipment is productive, running production; “Scheduled Run Time” is the number of hours the unit was scheduled to operate less any line downtime associated with changeovers or operations downtime; “Actual UPM is the number of units per minute produced during the Actual Run Time; “Planned UPM” is the number of units per minute that should have been produced during the Scheduled Run Time; “Actual In-Spec Production” is the number of products produced during the Actual Run Time that met established quality targets for acceptance; and “Total Units Produced” is the total number of units produced during the Actual Run Time.

Thus, a production line scheduled to run eight hours that only ran 6.8 hours and had a planned UPM of 160 yet its actual UPM only averaged 138 and produced a total of 56,304 units but of that only 52,224 were saleable units would have a line effi ciency of 67.99%.

Looking at line and equipment performance from an effi ciency perspective can certainly paint a different picture than looking at mechanical downtime on its own. Mechanical downtime is the time equipment is operational and running, against the hours it was scheduled to be running. However, mechanical downtime does not capture the lost production associated with damaged product or line running rates reflected in effi ciency calculations. Using the example provided for effi ciency, and using only the running hours, the downtime would be reported as 1.2 hours, or an uptime of 85% — a significant difference from the 67.99% that the line actually ran.

If a line or a piece of equipment is really running 67.99% effi cient, how much is the cost of 32% in line downtime? Stated another way, what is the value of 32% in additional capacity? To determine these costs and opportunity income another series of costs must be considered and captured. These include the costs of variable labor, overtime, indirect labor, idle labor, materials, fixed costs, cost of assigned overhead and value of incremental sales.

Once the real costs of aged assets are peeled back, and bakers consider the possibilities associated with their asset replacement, opportunities can surface that did not initially appear to be realistic.

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