Repair vs Replace - Part 1

Key concepts for better decision-making

This paper was presented to the Asian Maintenance in Mining Conference, Lombok, Indonesia on 15 March 1999

Author : Sandy Dunn

1.1 Do you want to save $2 million per year?

The Repair vs Replace decision is one which is made dozens of times each day in most mining operations. Should we repair this hoist cylinder or repair it? Should we repair this transmission or replace it? And if we replace it, should we replace it with a brand new transmission, or a rebuilt unit? Frequently, the people making these decisions are not managers or engineers, but front-line supervisors and tradespeople.

The impact of these decisions are often significant - an incorrect decision can significantly impact on future equipment performance, maintenance and operating costs and, in some cases, will determine whether target production output is achieved. Yet the rules for making these decisions are often vague and unclear (for example, decisions are based on "gut-feel" and "experience"), or are based on rudimentary and often inappropriate rules of thumb.

How effective are the tools and guidelines that in your organisation that guide these people to an appropriate decision?

Even where the decision rules are well-defined, then there is frequently no follow-up to ensure that the rules are being adhered to, or that the rules are appropriate.

When did you last assess whether you were making effective repair vs replace decisions?

In our experience, the repair vs replace decision is generally not well understood or implemented in most mining organisations. This paper puts forwards the principles upon which effective repair vs replace decisions should be based, discusses some of the practical issues frequently encountered in applying these principles, and then makes some suggestions about how to improve repair vs replace decisions in a mining environment.

1.2 Life Cycle Costing - the basis for effective decision making

The repair vs replace decision is all about costs. We want to choose the option that will give us the lowest possible cost. But which costs are we talking about? And over what time period should we consider those costs?

1.2.1 What costs should we consider?

It is important to realise that maintenance costs are only one part of the costs we should consider. Best Practice maintenance organisations consider the total cost to the organisation when evaluating options for component rebuilds. Focusing exclusively on the direct cost of the rebuild, or solely on the reliability of rebuilt components will lead to sub-optimal decision making.

In the case of rotable spares, total costs include:

the cost of removing and installing the component
the rebuild or repair cost
the cost of equipment downtime associated with component replacement

1.2.1.1 Rebuild or Repair Cost and Cost of Exchanging the Component

These costs clearly includes all direct costs, including

Direct labour costs
Direct materials costs
Material freight costs

However, when making longer-term strategic decisions, they should also include an allocation of indirect, fixed costs such as:

Supervision costs
Other indirect labour costs, including:

training,
safety meetings,
meals and accommodation, etc.

The reason for this is that, in the longer term, these costs are not fixed - through strategic decisions, we can influence the total size of these costs.

1.2.1.2 Cost of Equipment Downtime

This cost is determined by the total downtime associated with component replacement, which in turn is determined by:

the downtime required to exchange the component
the frequency with which the component fails

The cost of equipment downtime includes:

the opportunity cost of additional capital required for the purchase of additional equipment to compensate for the downtime, or
the cost of lost profit from lost production,

depending on the operational circumstances

The costs in each situation may be calculated as follows:

1.2.1.3 Opportunity Cost of Additional Capital

Let's assume that there is sufficient spare machinery for the downtime not to impact on production output - however in the long run, we need to purchase spare equipment to be able to cover the downtime - and this is an additional expense. For example, if we require the productive carrying capacity of 10 trucks, and if we have 90% availability, then we would need to purchase 11 trucks in order to meet our production requirements - this additional capital expenditure represents an additional downtime related cost.

As outlined above, a 10% drop in equipment availability leads to a requirement to purchase one additional truck for every 10 trucks employed, in order to maintain production. This is equivalent to saying that for each truck, a 10% drop in availability leads to a requirement to purchase 0.1 additional trucks, or a 1% drop in availability leads to a requirement to purchase an additional 0.01 trucks.

If each truck has a capital cost of $2,000,000, then a 1% drop in availability leads to a requirement to invest 0.01 x $2,000,000 in additional trucks, or $20,000.

Assuming that this capital would otherwise have been invested in a productive activity that gives a return of 15% per annum, the $20,000 capital invested leads to a potential loss of return of 15% x $20,000 per annum, or $3,000 per annum.

Assuming that the truck is expected to operate, on average, 6,000 hours per annum, an additional 1% downtime is equivalent to 1% x 6000 hours per annum, or 60 hours. Therefore, the cost of downtime of a truck is $3,000/60 or $50 per hour.

1.2.1.4 Cost of Lost Production

Alternatively, if the downtime did lead to lost production, we could calculate the cost as follows:

Assuming that the average load per truck is 200 tonnes, and the average cycle time per truck is 20 minutes, then one hour of downtime leads to 600 tonnes lost haulage. Assuming a stripping ratio of 2 to 1, this means that we would not have hauled (on average) 400 tonnes of waste and 200 tonnes of ore in that hour. Assuming that the gross profit margin per tonne of ore is $1 per tonne, this is equivalent to lost profit of $200 per hour.

1.2.2 Over what timeframe should we assess the costs?

A life cycle approach should be taken - this means that the total costs should be assessed for the period until the equipment is due to be scrapped or replaced. This could be a period of some years. Often, therefore, we include the time value of money in our considerations - the fact that receiving $1 today is worth more to us (because we can do something useful with it) than it will be if we received the $1 next year or the year after. This approach is called a Present Value approach. It is not the intention of this paper to explain the Present Value approach in any detail, but it is best explained by means of an example.