Introduction

In fact, in any system the efficacy (efficiency) of an item deteriorates with

time. In such cases, either the old item should be replaced by a new item,
or some kind of restorative action (maintenance) is necessary to restore
the efficiency of the whole system. The cost of maintenance depends
upon a number of factors, and a stage comes at which the maintenance
cost is so large that it is more profitable to replace the old item. Thus,
there is a need to formulate the most effective replacement policy.
The purpose of this chapter is to show what replacement models look
like.
Definition
Replacement models are concerned with the problem of replacement of
machines, individuals, capital assets, etc. due to their deteriorating
efficiency, failure, or breakdown
It is evident that the study of replacement is a field of application rather
than a method of analysis. Actually, it is concerned with methods of
comparing alternative replacement policies. The various types of
replacement problems can be broadly classified in following categories:
Replacement of items whose efficiency deteriorates with time, e.g.,
machine, tools, etc.
Replacement of items that fail suddenly and completely like electric
bulbs & tubes.
Replacement of human beings in an organization or staffing problem.
Replacement of items may be necessary due to new researches and
methods; otherwise, the system may become outdated.
Reasonsforreplacement
1. Deterioration
2. Obsolescence
3.Technologicaldevelopment
4.Inadequacy

TYPESOFFAILURESAsthetermfailureencompasseswiderconcept,
failurescanbediscussedunderthefollowingtwocategories.
(a) GradualFailure:Inthis,thefailuremechanismisprogressive.As
theageofanitemincreases,itsperformancedeteriorates.This
resultsin:
IncreasedoperatingcostDecreasedproductivityoftheitem
Decreaseinresalevalueofitem(Ex:Mechanicalitemslikepistons,
bearingrings,tyres,etc.,)
(b) SuddenFailure:Thistypeoffailurecanbeobservedintheitems
thatdonotdeteriorategraduallywithagebutwhichfailsuddenly
aftersomeperiodofservice.Thetimeperiodbetweeninstallation
andfailurewillnotbeconstantforanyparticularequipment.
Howeverthefailurepatternwillfollowcertainfrequency
distributionthatmaybeprogressive,retrogressiveorrandomin
nature.
Progressivefailure:Itissaidtobeprogressivefailure,when
probabilityoffailureincreaseswiththeageofanitem.Ex:light
bulbs,tyresetc.
Retrogressivefailure:Certainitemswillhavemore
probabilityoffailureintheinitialyearsoftheirlifeandwiththe
increaseinthelifeofanitemthechancesoffailurebecomeless.
Thatis,theabilityoftheitemtosurviveintheinitialyearsoflife
increasesitsexpectedlife.Aircraftenginesexemplifyindustrial
equipmentswiththistypeofdistributionoflifespan.Random
failure:Itissaidtoberandomfailure,whenconstantprobability
offailureisassociatedwithequipmentthatfailsbecauserandom
causessuchasphysicalshocksthatareindependentofage.Inthe
caseofrandomfailure,virtuallyallitemsfailbeforeaginghas
anyeffect.Forexample,vacuum18tubes,itemsmadeofglassor
mirror,fruits,vegetablesetcmayfailindependentoftheirage.

Replacement Of Items That Deteriorates With Time

Model1:ReplacementofitemswhosemaintenanceCostincreaseswith
timeandthevalueofthemoneyremainsconstantduringtheperiod

Model2:replacementofitemswhosemaintenancecostincreaseswith
timeandvalueofmoneyalsochangeswithtime.
ReplacementofitemswhosemaintenanceCostincreaseswithtime
andthevalueofthemoneyremainsconstantduringtheperiod
Theorem:Themaintenancecostofamachineisgivenasfunction
increasingwithtimeandmachinesscrapvalueisconstant.
(a)Whentimeisacontinuousvariable,thenreplacingthemachinewhen
themaintenancecostisequaltotheaverageannualcostwillminimizethe
averageannualcost.
(b)Whentimeisadiscretevariable,thenreplacingthemachinewhenthe
maintenancecostinthe(n+1)thyearbecomesgreaterthantheaverage
annualcostinthenthyearwillminimizetheaverageannualcost.

Inthistypeofproblemstwopoliciesaresupposetobefollowed
Policy1ifnextyear(n+1)runningcostismorethanaveragecostofn
year,thenitiseconomicaltoreplacetheitemattheendoftheyear
Policy2ifpresentyearrunningcostislessthenthepreviousyearscost
thendonotchangetheitem
We begin here with the simplest replacement model where the
deterioration process is predictable. More complex replacement models
are studied in the subsequent sections
This model is represented by:
Increasing maintenance cost.
Decreasing salvage value.

Notation and symbols

C- Purchase cost of the machinery or equipment
S- Salvage value or resale value or scrap value of the
machinery or equipment
Tc -total cost increased on the item or equipment during
the period y
Tc = C + m(Y) S
Where M(Y) is the cumulative maintenance cost in that
period.
G(Y) Average cost incurred on the equipment or item
during the period.
G(Y) = Tc / y
Problem 1
The cost of the machine is Rs 6100/- and its scrap value is
Rs 100 at the end of every year. The M.C. found from
experience are as follows:
YEA
R
M.C

100

250

400

600

900

1200 1600 2000

When should the machine be replaced?

Solution:
Given: C=6100
S=100
YEA
R
1

MAINTENANC CUMILATIVE
E COST
MAINTENCE
COST
m(y)
100
100

TOTAL
COST
N=C-S +
m(y)
6100

AVERAGE
COST(N/Y)
6100

2
3
4
5
6
7
8

250
400
600
900
1200
1600
2000

350
750
1350
2250
3450
5050
7050

6350
6750
7350
8250
9450
11050
13050

3175
2250
1837.5
1650
1575
1578.5
1631.25

Its clear from the above analysis that theItsclearfromthe

aboveanalysisthatthemachinehastoreplacedattheendof6thyearor
atthebeginningof7thyearbecausethemaintenancecostof7thyearis
morethantheaveragecostofthemachinei.e1578.5>1575.5
We did approx. 4 examples in the class . pl check the notebook
Model II
Replacement of items whose maintenance cost increases with time
and the value of money also changes with time
The maintenance cost varies with time and we want to find out the
optimum time period at which the items will be replaced value of money
decreases with a constant rate which is known as depreciation ratio or
discounted factor which isgiven by
V= 1/ (1+i)power n
for the value of 1 rupee where i rate of interest , n no. of years
Problem 6:A company buys a machine for Rs 6000/-. The maintenance cost are
expected to be Rs 300/- in each year for the first 2 years and go up
annually as follows 700, 1000, 1500, 2000, and 2500. Assume the money
is worth of 20% per year. When the machine should be replaced.
Solution:C = 6000/I = 20%
Assumption: - in this to solve the problem we assume that the
maintenance cost is spent on the machine at the beginning of each year as
1.

YE
AR

MAINT
ENCE
COST

Present
value of
Maintenanc
e
Cost(M
COST*PR
ESENT
VALUREO
F RUPEE

Cumula
tive
Present
value
Mainte
nance
cost m
(y

Tota
l
cost
Tc
=
C-S
+
m(y
)

Cumul
ative
Present
value
of 1 Re

Weig
hted
Avera
ge
cost

300

PRESE
NT
VALU
E OF
RUPE
E1
(USE
ABOV
E
FORM
ULA
1

300

300

6300

300

.833

249.9

549.9

1.833

700

.694

486.1

1036

1000

.578

578

1614

1500

.482

723

2337

2000

.401

802

3139

2500

.334

835

3974

630
0
654
9.9
703
6
761
4
833
7
913
9
997
4

3573.
32
2784.
32
2452.
17
2324.
22
2291.
62
2307.
72

2.527
3.105
3.587
3.988
4.322

Specimencalculationsfor3rdyearbyV=1/(1+i)n
=1/ (1.2)2
=0.694
=0.694*700 = 486.1
The machine should be replaced at the end of 6th year or at the beginning

of 7th year because the maintenance cost in the 7th year is more than the
average costof the machine 2500 > 2291.62
Note In the class we did various examples too ..
Replacement Of Items That Fail Completely
In some situations, failure of a certain item occurs all of a sudden, instead
of gradual deterioration (e.g., failure of light bulbs, tubes, etc.). The
failure of the item may result in complete breakdown of the system. The
breakdown implies loss of production, idle inventory, idle labour, etc.
Therefore, an organization must prepare itself against these failures.
Thus, to avoid the possibility of a complete breakdown, it is desirable to
formulate a suitable replacement policy. The following two courses can
be followed in such situations.
Individual replacement policy. Under this policy, an item may be
replaced immediately after its failure.
Group replacement policy. Under this policy, the items are replaced
in group after a certain period, say t, irrespective of the fact that items
have failed or not. If any item fails before its preventive replacement is
due, then individual replacement policy is used. In situations where the
items fail completely, the formulation of replacement policy depends
upon the probability of failure. Mortality tables or Life testing techniques
may
be used to obtain a probability distribution of the failure of items in a
system.
Mortality Tables
M(t) = Number of items surviving at time t
M(t - 1) = Number of items surviving at time (t - 1)
N = Total number of items in the system
The probability of failure of items during the interval t and (t - 1) is given
by
M(t - 1) - M(t) / N
The conditional probability that any item survived upto age (t - 1) and
will fail in the next period is given by
M(t - 1) - M(t) / M(t - 1)
Example 1
Following mortality rates have been observed for certain type of light

bulbs.
TIME
0
(WEEKS)
NO OF
100
BULBS
STILL
OPERATING

94

82

58

40

28

19

13

Calculate the probability of failure.

Solution:
Here, t is the time (weeks) and M (t) is the number of bulbs still operating. The
probability of failure can be calculated as shown in the following table.

Table Time (t)

M (t)

0
1
2
3
4
5
6
7
8
9
10

100
94
82
58
40
28
19
13
7
3
0

Probability of failure
pi = [ M (t - 1)- M (t) ] / N
100 - 94)/100 = 0.06
(94 - 82)/100 = 0.12
(58 - 40)/100 = 0.18
(58 - 40)/100 = 0.18
(40 - 28)/100 = 0.12
(28 - 19)/100 = 0.09
(19 - 13)/100 = 0.06
(13 - 7)/100 = 0.06
(7 - 3)/100 = 0.04
(3 - 0)/100 = 0.03

9 1
0
3 0