Rebuild or replace?

by Jim Kline
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The time is approaching once again when the two major trade shows for the baking and snack food industries will be taking place. This September, iba will be held in Munich, and in October 2016, the International Baking Industry Exposition (IBIE) convenes in Las Vegas. This is a great time to be taking stock of your current operations and planning for the future. This year has been dubbed “The March to Munich,” and I’d offer that the “Voyage to Vegas” isn’t far behind.

Okay, there are the doubters among you who will think this is much too early to be considering these upcoming trade fairs. Consider this: Most companies begin preparation for next year’s operating and capital budgets early in the third quarter, and typically the budget isn’t fixed until the fourth quarter. Once the first of the year comes, the accounts are funded, and the process of getting spending approval begins. Easily, two to four months can go by as proposals are received, equipment is selected and funding is approved. Now add in four to six months for delivery. That means delivery of that new-and-improved piece of equipment you need could easily be nine to 15 months away from when you first consider your replacement needs. 

Complicating the capital planning process even further is considering the right time to replace an asset that has served you well for many years. Getting to the crux of the matter, the question is when to rebuild and when to replace an asset. We do a good job at keeping equipment running; we do what we must to get our products to market. And that skill has translated to extending the useful life of production equipment. But is that always a good thing? When is enough enough? I suggest the answers are situational; however, the path to developing that answer is quite common.

First is establishing a solid performance history for the equipment in question. What does it cost per year to maintain? Parts, labor, preventive maintenance and sanitation all need to be quantified. Once you have a good baseline of data, you can start to forecast future costs. Operational costs also need to be considered. What is the cost for utilities? How well is it performing? What is the cost of labor to operate it, and what is the value of the scrap or defects it produces? What is the cost of downtime — how much downtime is being incurred? 

Second is determining the feasibility of rebuilding the unit. Are parts and support available to restore the unit? What will be the total cost of the rebuild (parts, labor, operational impact of taking the unit off-line, etc.)? What will be the expected life and performance of the unit after rebuilding? 

Third is developing the knowledge of your best alternative for replacement equipment. For each performance measure that was identified and quantified in building the equipment’s performance history, what would be the projected performance of the replacement equipment? What will be the operational cost of the new equipment? What is the labor required to operate it? What is the output in terms of units per hour and its expected efficiency?

Finally, you have assembled the information needed for your analysis. On the spending side, you need to consider the total costs associated with the rebuild vs. the total replacement cost. Parts and labor are obvious, but don’t neglect freight, rental equipment, supervision, commissioning, training and start-up costs. To evaluate the return on the investment, there are also several factors to be included, such as the projected cost of operation, impact on operations and support labor and the impact on operations (quality, throughput, reduced process loss, etc.). 

A point frequently missed in evaluating rebuild or replacement is that the savings associated with the new equipment (assuming there are some) are measured against the incremental cost of the new equipment as opposed to the cost of rebuilding the existing. Stated a bit differently, if the question is to rebuild or replace, then the incremental cost of replacement is evaluated against the incremental savings that would be realized through it.

There is no better time to begin the analysis on your aging or poorly performing equipment than now. And there will be no better time to shop for your replacement and growth needs than the next 15 months.

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