“If the repair and maintenance cost gets way too high, just replace it” This phrase, which we have all heard, represents the currents attitude in people about capital asset management. Unfortunately, this is what our business schools are teaching.
From a financial standpoint and at face value, the phrase sounds correct, but until you take a deeper look at all the factors that come into play when making such a decision, you will never understand why this phrase is an indication of ignorance. The myriads of factors to take into consideration necessitate the need for you as a manager to do a proper data analysis before concluding on whether to replace or repair. Here are some things you need to do to help you do the analysis.
As a manager, you will need to understand that the expense of a new asset is not just the cost of purchasing the asset. Other costs include operating cost, expected life cycle cost, potential salvage value and the increase in revenue that it will bring. On the other hand, for the current asset, you need to understand its sunk cost, repairing cost, remaining service life, current market value, and future salvage rate. With this data, you will be in a position to do a proper data analysis enabling you to make an informed decision
Since assets do not age gracefully, their age is directly proportional to their repair cost. The older an asset is, the more it will cost you to fix. Further, with age, the asset will give you fewer returns on your repair investment.
For an old asset that is often under repair, it leads to a considerable amount of downtime that leads to a loss of productivity over many hours. Nevertheless, you should also consider the amount of time it will take for you to replace the asset. Remember that replacing means waiting for the new asset to arrive. On arrival, its installation, staff training, and commissioning will also consume time, which will still be downtime. The goal is to ensure that your institution does not lose too much in productivity.
These are only three of the many things you need to consider before deciding whether to repair or replace a capital asset. At Performance Solutions we are committed to helping you optimize your assets and you should therefore feel free to contact us for more information.