Maintenance management professionals constantly face the critical question of whether to repair or replace an asset. This decision isn’t a simple routine task; each situation presents a unique case that requires careful consideration of the costs and benefits of each option. Making this decision without thorough analysis can lead to significant financial and operational risks.
In this article, we’ll explore what to consider when making repair vs. replace decisions, walk through a typical analysis, and discuss how a computerized maintenance management system (CMMS) can help you make an informed, data-driven decision.
Importance of Repair vs. Replace Decision
At its core, the goal of a repair vs. replace decision is to minimize an asset’s total cost of ownership to your organization. Rushing into a decision without proper evaluation can be costly and have other long-term effects. Each option – repair or replace – comes with its own benefits and drawbacks, which makes the decision challenging.
Repairing equipment is often a cost-effective option, at least in the short term. Repairs are typically less expensive than purchasing new equipment, can be completed more quickly than sourcing and installing new equipment, and when done correctly, may extend the life of the asset. However, if you don’t address the underlying causes of failure, ongoing repairs will inevitably increase maintenance costs, lower productivity, and cause costly unplanned downtime.
On the other hand, replacing problematic equipment sometimes proves more beneficial in the long run. New equipment typically needs less maintenance in the early stages of life, offers new features that enhance productivity, and is more reliable, but requires a significant upfront investment.
Beyond the direct costs to repair or replace, one must also consider factors including:
- Estimated useful life
- Equipment age and condition
- Costs of lost production due to downtime for repairs or new equipment installation
- Budget constraints
- Warranty coverage
- Safety or health risks
- Historical and current performance
- Energy efficiency
- Availability of maintenance resources
- Time required for installation and training
- Costs of supporting spare parts and inventory
As you can see, balancing the costs and benefits of equipment repair versus replacement is a strategic choice requiring thorough analysis. By evaluating these factors, you can make informed asset management decisions.
Repair vs. Replace Analysis
Many sources encourage you to start your repair vs. replace analysis using depreciation, specifically straight-line depreciation, as a rule of thumb. Straight-line depreciation spreads the cost of an asset evenly over its estimated useful life. For example, imagine a forklift truck costs $30,000 and is expected to last 15 years. It depreciates in value by $2,000 every years ($30,000 ÷ 15 years = $2,000 per year), so in year 1 the forklift is worth $30,000, in year 2 it is worth $28,000, and so on.
| Warning: It’s important to remember that accounting depreciation, including straight-line depreciation, is designed for tax and financial reporting purposes, as outlined by Internal Revenue Service (IRS) guidelines. These guidelines are meant to standardize how assets are depreciated for tax compliance purposes, but do not necessarily reflect actual equipment performance. As a result, accounting depreciation and the depreciation estimated by the maintenance team may not match. |
Suppose there is a transmission failure in year 12. By year 12, the forklift has lost $24,000 in value (12 years × $2,000 per year = $24,000) and now has a value of $6,000 ($30,000 original cost – $24,000 depreciation = $6,000 remaining value), and is expected to last just 3 more years. A vendor quotes you $4,000 to rebuild the transmission, and you discover that a new forklift costs $35,000.
Using straight-line depreciation as your guide, you can see that the forklift’s value is relatively low, and that the cost to repair is a significant portion of that remaining value. Now comes the critical question: do you repair it or replace it? To answer that question, further analysis is needed.
Analyzing the Repair vs. Replacement Dilemma
Let’s explore the business case for both the repair and replace options using our forklift example from earlier. To recap, the forklift is worth $6,000 and has an estimated 3 years of useful life remaining. A transmission rebuild is quoted at $4,000 and the forklift costs $35,000 to replace.
Option 1: Repair the Forklift
Depending on the nature of a given repair, you must determine whether value will be added back to the asset in terms of performance and useful life. In this case, we must determine whether the repair will extend the forklift’s useful life.
For example, suppose you determine that rebuilding the transmission allows the forklift to fulfill its remaining 3 years of useful life. Your $4,000 in maintenance costs allows you to maintain the forklift’s operation, but does not add any new value or increase performance.
Alternatively, if you estimate that the transmission rebuild will enhance performance and extend the forklift’s useful life by an additional 3 years, the situation changes. The $4,000 repair allows the forklift to operate for another 6 years total (3 remaining useful years + 3 extended years) and you avoid the significant cost of replacement.
Applying a Rule of Thumb to Repair Decisions
A common rule of thumb in repair vs. replace decisions is the “50% rule.” This guideline suggests that if a repair costs more than 50% of the cost of replacement, it is more cost-effective to replace the asset. Some organizations use a different threshold, such as the United States Marine Corps, which uses a threshold of 65%. In our example, the cost of replacement is $35,000, and 50% of that is $17,500. The repair cost is only $4,000, suggesting that repair might be a good option.
Further Considerations
It is important to recognize that the forklift may require other significant repairs (and as a result, downtime) as it approaches the end of its lifecycle. Future maintenance and operational costs will impact your total cost of ownership and should be weighed in your repair vs. replace decision.
For example, assume that the forklift’s annual maintenance cost under normal operation is $800, and costs are expected to increase by 10% each year. By the end of its 3 remaining years of useful life, you’ll incur another $2,648 in routine maintenance costs ($800 in the third-to-last year + $880 in the second-to-last year + $968 in the last year = $2,648), barring any additional major repairs. These standard repairs do not add new value to the forklift truck, and now the remaining total cost of maintenance over the 3 years is $6,648 ($4,000 + $2,648 = $6,648), compared to its current value of $6,000.
If the lifespan is extended to 6 years, the ongoing maintenance cost becomes $6,172 ($800 + $880 + $968 + $1,064 + $1,171 + $1,288 = $6,172), again barring any major repairs. Add this to the cost of the transmission rebuild, and you’re in for $10,172 ($4,000 + $6,172 = $10,172), which is about 30% of the cost to replace.
Option 2: Replace the Forklift
Replacing the forklift requires an upfront capital investment of $35,000, which is more than 8 times as much as the repair. However, the new forklift is expected to last for 15 years, which is an additional 9 – 12 years compared to the repaired one. Newer equipment typically has lower maintenance costs in their first few years, leading to lower maintenance costs. Additionally, any new technology, improved design, and advanced capabilities may make the new lift more productive compared to the current one.
Using CMMS Data to Build a Better Business Case
Gaining buy-in for your repair vs. replacement recommendation can be challenging without solid evidence to back you up. A CMMS provides you with the data you need to build a strong business case and justify your decision. Here’s how a CMMS can help:
- Asset Tracking: CMMS software stores critical data about your assets throughout their lifecycle, including original cost, age, condition, warranty status, service history, and performance metrics. This comprehensive data provides context for making repair vs. replace decisions.
- Historical Maintenance Data: A CMMS tracks your maintenance activities over time, allowing you to identify trends and evaluate whether assets are undergoing more frequent repairs and becoming more costly to maintain. This historical reference helps support whether to make ongoing repairs or invest in a replacement.
- Performance Reports: Maintenance management reports allow you to track key performance indicators (KPIs) and metrics such as Mean Time Between Failures (MTBF), Mean Time to Repair (MTTR), and Overall Equipment Effectiveness (OEE). These reports help evaluate how well an asset is performing and how it compares to similar assets.
- Spare Parts Management: By tracking inventory data – such as stock levels, usage history, and replenishment costs – a CMMS provides a more comprehensive picture of the total cost of maintaining your assets. This includes understanding the costs associated with managing an asset’s related spare parts and supplies, which may affect your decision to repair or replace.
- Work Requests: Work requests provide visibility into how an asset’s performance affects others within your facility. By analyzing these requests, you can gauge how often assets require attention, the types of issues users are experiencing, and their level of frustration. This information helps you better understand whether the asset is meeting operational expectations.
Make Better, Data-Driven Decisions with FTMaintenance Select
The decision to repair or replace an asset directly impacts your organization’s operational efficiency and financial performance. Making these decisions without a thorough analysis can lead to costly mistakes that strain your budget and jeopardize plant productivity. A CMMS solution, like FTMaintenance Select, provides you with critical maintenance data needed to make these decisions with confidence.
FTMaintenance Select is a centralized platform for managing all aspects of your maintenance operations including work orders, equipment and facility assets, spare parts and inventory, preventive maintenance, and more. Request a demo today to learn more.