When is the Right Moment to Replace Your Machines?
(September 1, 2021) - Replacing equipment is always a very strategic decision for every business. Many believe that an effective strategy when considering replacing equipment is to do a ‘sweet spot’ analysis – which examines the point in time when it is more cost effective to buy a new asset and dispose of the current used asset.
By performing this type of evaluation, based on today’s market conditions, fleets can determine the optimum point in time to replace necessary assets.
And while it doesn’t have to be rocket science, it should be based on some hard data – and requires some finesse to determine that specific point in time and the factors that need to be considered.
Some people tend to rely on intuition to replace a certain machine. Perhaps an untimely breakdown is etched into their memory, or they’ve heard about what could prove to be a better option (i.e., brand, model or equipment type). Don’t ignore your intuition, but allow it to lead you to the numbers, because the numbers don’t lie.
Pay Close Attention
If you’re defining your sweet spot as a fixed point in time or a predetermined number of miles, you’re going to leave money on the table just about every time. This way of thinking just doesn’t work in today’s economy or for today’s equipment. The replacement sweet spot is a moving target, and the math that defines it is complex and needs to be updated around every three months.
To that end, some valuable questions to ask yourself when considering extending or shortening your current replacement cycle: What is the cost of the new asset? / What is the current cost of fuel? / What is the current interest rate on borrowed money? / What is the sale price for this asset? / How many miles do I operate the asset each year?
Building from there, three common approaches can provide the metrics needed to make a compelling case for equipment replacement.
First, scrutinize the number of years a machine has been in service. Establish a trigger value where you’ll start to really examine if a machine should be retired. Perhaps that trigger value is 15 years. Either way, you want to be careful not to have too many units either at or near trigger value – the red zone – which means the fleet is collectively getting pretty old.
Conversely, the green zone is less than 80 percent of trigger value. And the yellow zone is somewhere between the two. Optimally, you want to have a mix of yellows, greens and reds – while keeping an eye on the reds.
Secondly, operating hours will function similarly in terms of the color zones, but those trigger values will vary by machine type, operating conditions and perhaps additional factors. This is where that intuition comes in to set some parameters – but you’ll still need to pay close attention to how many hours a specific machine tends to rack up in a given year.
Finally, machine costs – primarily, owning costs and operating costs. Owning costs go down over time because the residual value of a machine decreases as it gets older. Operating costs, on the other hand, increase over time as repair costs escalate.
You want to identify the owning costs and operating costs by year over a sustained period of time. Add them together, and use the data to identify the year in which the combined cost is at its lowest point – i.e., the sweet spot. While it’s not necessarily panic time at this point, you will want to pay attention over the next year or so. Ultimately, the further away from the sweet spot you get, the more costly a machine becomes.