Optimization

S. Maiti ∗

Department of Mathematics
The LNM Institute of Information Technology,
Jaipur-302031, India

1 Replacement Model
1.0.1 Gradually deteriorating system with present worth of money

Let the money carries a rate of interest r per year per rupee. Then a rupee spent now will be
worth (1 + r) after a year. For next year, the interest on (1 + r) at rate r will be r(1 + r). So
rupee will be worth (1 + r) + r(1 + r) = (1 + r)2 just after two year and (1 + r)n in just after n
years. This means one rupee just after n years is equivalent to (1 + r)−n today. i.e. the present
worth of one rupee is possible from rupee (1 + r)−n just after n years.
Let C: capital cost of asset in the beginning
Sn : salvage value of the asset at the end of nth year (n =1, 2, 3, · · · )
Rn : Running or maintenance cost of the asset assumed to be payable at the start of the nth
year (n =0, 1, 2, · · · )
1
γ= 1+r
. The situation of present model cab be depicted in Fig.
Consider the k-th period. The present value of Rk is Rk γ k . If we replace the asset at the
end of year k, the present vale of all (total) cost is
k−1
X
k
T C = C − γ Sk + γ i Ri , (1)
i=0

the present worth of salvage cost Sk at the end of the k-th year is γ k Sk .
Observe that there will be no γS1 , γ 2 S2 etc. as the question of salvage value comes only
when the asset is replaced. To find the optimal k, it is not correct to find the average total cost
by dividing the above expression for T C by k and then finding k for which this average cost is
minimum. This is because average amount each year is not equivalent to same present value.
∗
Email address: maiti0000000somnath@gmail.com/somnath.maiti@lnmiit.ac.in (S. Maiti)

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 Thus approach must be modified. We assume that the total cost T C given by equation
(1) is equivalent of payment of equal installments of x at the beginning of each year for k
k
years i.e. T C = x + γx + γ 2 x + · · · + γ k−1 x = x 1−γ
1−γ
1−γ
. Or, x = T C 1−γ k. We seek that
x
k which minimizes x. Minimizing x is same as minimizing 1−γ
as 1 − γ does not involve
k. Thus the optimal strategy is to find k such that the following expression is minimized
k
X k−1
X
C − γ k Sk + γ i Ri C + R0 − γ k Sk + γ i Ri
i=0 i=1
f (k) = = ; k=1, 2, 3, · · ·
1 − γ k−1 1 − γk
Example 3: Solve the Example 1 with an interest rate 10% per year.
1 1
Solution of example 3: Here C=600, R0 =80, γ = 1+r
= 1+0.1
= 0.9091

Table 1: The total cost of deteriorating system with present worth money in example 3.
k−1
X
Year k Rk−1 γ k k−1
γ Rk−1 γ i Ri Sk γ k Sk Numerator f (k)
i=0
of f (k)
1 80 0.9091 80 80 400 363.64 316.36 3480.308
2 100 0.8265 90.91 170.91 280 231.392 539.318 3109.6138
3 120 0.7513 99.168 270.078 200 150.26 719.818 2894.3225
4 140 0.683 105.182 375.26 120 81.96 893.325 2817.9811
5 180 0.621 122.94 498.2 60 37.254 1060.946 2799.3298
6 240 0.5645 149.016 647.216 60 33.87 1213.346 2786.0987
7 320 0.5132 180.64 827.856 40 20.584 1407.328 2890.9778

The minimum value of f (k) occurs for k = 6. Hence the optimal replacement period is
6 years. Comparing this with example 1, we find that the optimal period of replacement has
changed from 4 to 6 years. With interest rate 10%, the annual cost T C is (1 − γ)f (k) =
0.0909 × 2786.0987 = 253.26. The average annual cost from example 1, when no interest was
charged is 230. The car must earn annual revenue of 230 if interest is not charged and a revenue
of 253.26 if the money is used to purchase the car and to run, it could be made to earn an
interest of 10% annually.

1.1 Replacement of items failing completely

The replacement of an item which has already failed is trivial. In fact, indirect costs may be
associated with the failing of am item besides the direct cost (cost of the item). For example,
failure of a condenser in a navigational equipment of an aircraft may result in the loss of an

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aircraft. The direct cost of the condenser is negligible but the indirect costs associated with the
condenser, i.e. the cost of the aircraft, is large. If one knows the failure probability distribution
of the item, it can be replaced before its sudden breakdown. By using so, the indirect costs may
vanish completely. In above situation, one may have individual replacement or may have group
replacement. In first type, one item is replaced immediately when it fails and in the 2nd type,
all the items are replaced after a fixed time irrespective of whether an item has failed or not
with provision that if an item fails before this fixed time, it is replaced immediately.

1.1.1 An item is replaced immediately

We assume that an item which fails in the interval (k, k + 1) is replaced at the end (k + 1)-th
of the interval, k =0, 1, 2, · · · . Let there be N identical items at the beginning in the system,
pk+1 be the probability that a new item fails in the interval (k, k + 1] and C be the cost of
replacing an individual item. C may include direct cost of the item and some associated costs.
Let nk be the number of items replaced at the end of the interval (k − 1, k], k =0, 1, 2, · · · .
Then n0 = N . The model can be shown in Fig. Clearly n0 = N and n1 = p1 n0 . Now, out
of n1 new items (which arise from the replacement at k = 1), the number to be replaced at
k = 2 is p1 n1 (as probability p1 for new item in (0,1)≈ at actual time (1,2)). Also the number
which will fail out of n0 = N replaced by k = 0 between k = 2 till k = 3 is p2 n0 . Thus
n2 = p2 n0 + p1 n1 . Similarly, n3 = p3 n0 + p2 n1 + p1 n2 , n4 = p4 n0 + p3 n1 + p2 n2 + p1 n3 , · · · ,
nk = pk n0 + pk−1 n1 + pk−2 n2 + · · · + p1 nk−1
It can be proved that the graph of nk oscillates having many local minima but finally the
number nk stabilizes. Let n̄ be the number of items replaced at the end of an interval when
steady state has been reached. Then n̄ = lim nk . We assume that limk→∞ nk exists and is
k→∞
equal to n̄. Let sufficient time has passed after the steady state has reached. Then the number
of items replaced at the end of each interval is the stabilized number n̄. Then (i) the number of
survivors at present out of n̄ replaced just at present moment =n̄, (ii) the number of survivors
at present out of n̄ replaced at the end of the previous interval =(1 − p1 )n̄, (iii) the number of
survivors at present out of n̄ replaced at the end of two interval previously =(1 − p1 − p2 )n̄.
The number of survivors just at present moment after replacing the n̄ failures is N , because
after replacing failure all are new. Hence total of above survivors must be equal to N . So,
N = n̄ + (1 − p1 )n̄ + (1 − p1 − p2 )n̄ + (1 − p1 − p2 − p3 )n̄ + · · · = n̄{(p1 + p2 + · · · ) + (p2 + p3 + · · · ) +
∞
X X∞
(p3 + p4 + · · · ) + · · · } as pi = 1. Or, N = n̄{p1 + 2p2 + 3p3 + · · · } = n̄ ipi = n̄×average
i=1 i=1

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 N N
life. Or, n̄ = average life
=X
∞ . So average cost per period (interval) for individual (not means
ipi
i=1
only one, but numbers required for replacement which have failed) replacement is n̄C.
Example 4: The probability of failure pk of an electric bulb in the month (k − 1, k], k =0,
1, 2, · · · is given below. Total number of bulbs are 1000 and cost of replacing an individual bulb
is Rs. 10. Find average cost associated with individual replacement.

Table 2: The probability of failure pk of an electric bulb in example 4

k 1 2 3 4 5
pk 0.04 0.12 0.25 0.4 0.19

Solution of example 4: The probabilities pk imply that a new bulb survives at most 5
months. If nk be the number of items replaced at the end of the interval (k−1, k], k =0, 1, 2, · · · ;
then n0 = 1000 and n1 = p1 n0 40, n2 = p2 n0 + p1 n1 = 0.12 × 1000 + 0.04 × 40 = 120 + 1.6 ≈ 122,
n3 = p3 n0 + p2 n1 + p1 n2 = 0.25 × 1000 + 0.12 × 40 + 0.04 × 122 = 250 + 4.8 + 4.88 ≈ 260,
n4 = p4 n0 + p3 n1 + p2 n2 + p1 n3 = 0.4 × 1000 + 0.25 × 40 + 0.12 × 122 + 0.04 × 260 = 400 +
10 + 14.64 + 10.4 ≈ 435, n5 = p5 n0 + p4 n1 + p3 n2 + p2 n3 + p1 n4 = 0.19 × 1000 + 0.4 × 40 +
0.25 × 122 + 0.12 × 260 + 0.04 × 265 = 190 + 16 + 30.5 + 31.2 + 17.4 ≈ 285. Since pk = 0 for
k ≥ 6, n6 = p6 n0 + p5 n1 + p4 n2 + p3 n3 + p2 n4 + p1 n5 ≈ 185, n7 = p7 n0 + p6 n1 + p5 n2 + p4 n3 +
p3 n4 + p2 n5 + p1 n6 ≈ 278, n8 = p8 n0 + p7 n1 + p6 n2 + p5 n3 + p4 n4 + p3 n5 + p2 n6 + p1 n7 ≈ 328,
n9 = p9 n0 + p8 n1 + p7 n2 + p6 n3 + p5 n4 + p4 n5 + p3 n6 + p2 n7 + p1 n8 ≈ 291, · · ·
From the above values of nk , we see that the number of bulbs failing every month is in-
creasing till 4th month and then decrease. Again it increases. This shows the fluctuating nature
(pattern) as explained in theory. After long time, when steady state reached, the number failing
N
every month will converge to the expected or average value given by n = p1 +2p2 +3p3 +4p4 +5p5
=
1000
0.04+2×0.12+3×0.25+4×0.4+5×0.19
= 279. The average cost per month for individual replacement is
Rs. 279×10=2790.

1.1.2 Group replacement

Individual replacement (say bulbs), the major cost is of bringing the electrician, ladder etc to
the bulb which has failed. In previous example, the cost Rs. 10 includes all this. The group
replacement is economical if the cost of the individual item is small. In group replacement,
items which have failed are replaced at the end of the interval and once all items (whether failed
or not) are replaced. This period of group replacement is to be determined so that the cost is

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minimized.
Let cg be the cost per item if they are replaced as a group and it is done at the end of
the k-th interval (period). Thus individual replacement of individual replacements of failed
items take place at the end of period 1, 2, · · · , k − 1 and the group replacement is done
at the end of k-th period. The situation can be shown in Fig. The total cost (T C) over k
k−1
X
period is T C = Cn1 + Cn2 + · · · + Cnk−1 + Cg n0 = C ni + Cg n0 (k =1, 2, · · · ). Note
i=1
that for k =1, the summation term is zeroand T C = Cg n0 . The average total cost (AT C) is
k−1
X
C ni + C g n0
i=1
AT C(k) = k
. We wish to find k such that AT C(k) is minimum. AT C(k) is again
a fluctuating function. We take first minimum . Clearly, the group replacement is justified if
the first minimum of AT C(k) is smaller than the average cost of never group replacement.
Example 5: Consider Example 4. Let the group replacement be Rs. 3 per bulb. Which
replacement policy is economical?
Solution of example 5:

Table 3: Cost of group replacement in example 5.

End of nk Cost of group replacement Average
month k cost per
month i.e.
AT C(k) =
T C(k)
k
1 40 1000×3=3000 3000
2 122 10×40+1000×3=3400 1700
3 260 10×(40+122)+1000×3=4620 1540
4 435 10×(40+122+260)+1000×3=7220 1805
5 285 10×(40+122+260+435)+1000×3=11570 2314
6 185 14420 2403
7 278 16270 2324
8 328 19050 2381
9 291 22330 2481

Table 3 shows that first minimum average cost occurs if the group replacement is done after
every 3 months. So if group replacement done after every 3 months, the average cost per month
for this is Rs. 1540. The average cost per month of strictly individual replacement is 2790.

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Clearly in this situation, the group replacement policy is more economical.
Note: Group replacement will be done every 3 months and in previous two months indi-
vidual replacement is done at the end of the months. This is what group replacement implies.

1.2 Replacement model under a general category

Replacement situation are met in actual practice. It is not possible to bring them under a
general framework and then discuss the process of taking the optimal decision. Any how, many
replacement models can be brought under a general category. In this, a new item is placed in
the system at time t = 0 and at time t > 0, it is replaced by a new one or by maintenance it is
as good as new. The interval [0, t] is called a cycle. It can be proved that in long run, average
expected cost over one cycle
(expected) cost per unit time is expected duration of one cycle
. Different alternative are compared using
above formula and most economical alternative is chosen. The case discussed in previous section
was one example of the use of this formula.
Example 6: The cost of a new tyre is Rs. 1000. A tyre either replaced or recapped when
it wears smooth. The recapping is possible only if tyre walls allow that. The recapping cost is
Rs. 500 per tyre. The data is given in Table 4. Find the average cost per thousand KM if (i)
we follow the policy of replacing a tyre always and not recapping it (ii) we follow the policy of
recapping a tyre whenever it is possible.
Solution of example 6: (i) If tyre is replaced , let X be the life length (in thousand of
KM ) of a tyre. Then X is a random variable with probability distribution is given by first
two column of the table 4. The expected value (average value) E(X) of X is given by E(X) =
0+0+0+0+0+10×0.05+11×0.1+12×0.15+13×0.15+14×0.25+15×0.2+16×0.1 = 13.45.
The above is expected length of a cycle for the case the tyre is not recapped. Then expected
cost per cycle with cost of a tyre Rs. 1000 is calculated as average cost per thousand KM
1000
= 13.45 =Rs. 74.35.
(ii) If the tyre is recapped provided it is possible, let Y = life length (in thousand of KM )
after recapping. (
X, if not possible to recap
Z=total life =
X + Y, if possible to recap
Note that policy is to recap, but it can be recapped only if it is possible. So the life is
either X or X + Y . hence from elementary probability theory, we have the expected life=
E(Z) = E(X) + E(Y )×probability it can be recapped. From the 1st and last column of Table
4, we have E(Y ) = 5 × 0.1 + 6 × 0.15 + 7 × 0.25 + 8 × 0.25 + 9 × 0.1 + 10 × 0.1 + 11 × 0.05 =
7.6. From 2nd and 3rd column of Table 4, we get probability that a tyre can be recapped

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 Table 4: The tyre replacement or recapping example 6
Age (thou- Probability of Probability that Probability of
sand of tyre becomes it can be re- failure of recap
KM ) smooth capped
5 0 0.1
6 0 0.15
7 0 0.25
8 0 0.25
9 0 0.1
10 0.05 0.8 0.1
11 0.1 0.7 0.05
12 0.15 0.6
13 0.15 0.6
14 0.25 0.5
15 0.2 0.5
16 0.1 0.3

=0.05 × 0.8 + 0.1 × 0.7 + 7 × 0.25 + 0.15 × 0.6 + 0.25 × 0.5 + 0.2 × 0.5 + 0.1 × 0.3 = 0.545.
So expected total life =13.45+7.6+0.545=17.59. This is expected length of a cycle in this case.
Using similar argument, we get
Expected total cost= expected cost before recapping+expected cost after recapping ×probability
it can be recapped=1000+500×0.545=1272.5. From the formula, average cost per thousand
KM = 1272.5
17.59
=Rs. 72.34.
Comparing alternative (i) and (ii), we find that tyre recap is economical.