Traditionally, it's been hard to know precisely when to stop maintaining an asset and replace it altogether. Hitting the right time involves a lot of different numbers, and so you're always aiming at a moving target.
When to repair or replace assets
The concept is straightforward. When the cost of repairing an asset is more than its value, you replace it. When the cost of the repairs is less than the value, you repair it.
It's basically the same concept used by car insurance companies. Let's say you're in a small fender bender, and there's $2000 worth of damage. The first thing the insurance company does is figure out the value of the car before the accident. For an $80,000 Ferrari, they repair it. But for an $800 Yugo, they write it off. It's not worth doing repairs that cost more than the value of the car. That's because it was an $800 car before the accident. To get it back to its pre-accident value, $800, which is the maximum value that car will ever have, they'd need to pour in $2000 of repairs. Remember, with both the Ferrari and the Yugo, there's $2000 worth of damage. That number is the same. The company decides by comparing the cost of repairs to the car's value before the accident.
The idea of determining asset value will come up again in more detail, but for now, it's worth pointing out that the insurance companies don't care what you paid for your car. They're focused on its value just before the accident, which what it would cost to get roughly the same car in roughly the same shape.
Why repair or replace is important for asset management
When you replace too early, you're throwing away value. It's like filling your tank, driving a bit, and then dumping the rest of the gas by the side of the road.
When you replace too late, there are real impacts on your organization, including increased:
- Risk of accidents
- Labor costs
- Production delays
On top of that, more on-demand work orders means more pressure to reschedule and reallocate resources. It's a real pain in the neck.
To make the right decision, you need three numbers: cost to repair, cost to replace, and asset value. But you can't just find them. You need to calculate them.
That's were your computerized maintenance management software comes in handy. A CMMS is perfect for collecting data, and then keeping it both safe and accessible. Modern platforms are cloud-based, which means everything is kept in one place, ensuring your data is always up to date. You're not wasting time working with a ton of different versions of the data floating around on slips of paper or stuck in spreadsheet email attachments. As soon as something changes, a new work order gets assigned or an existing one gets closed out, the one master set of data gets updated. And because everyone is working off the same data, everyone is in the loop. Modern work order softwares not only collect and protect your data, they also crunch it. Autogenerated reports packed with KPIs and easy-to-understand graphs paint the maintenance big picture.
How to calculate cost to repair using CMMS software
There are two types, one-time and ongoing costs.
One-time costs can include:
- Associated materials and spare parts
- Lost productivity
- Environmental cleanup and abatement
- Regulatory fines
It's possible for the cost of a one-time repair to be so high that it's better to replace the asset. Like in our example with the Yugo, one $2000 repair means going out and finding a replacement. Maybe a nice classic Lada.
But there are also cases where ongoing costs over the remaining useful life of an asset are predicted to be so high that it's better to replace than repair. Ongoing costs can include lost production quality and capacity as well as maintenance costs over the asset's remaining useful life.
Now that you know what numbers you need, it's easy to get the CMMS to give them to you. Looking at similar historic work orders should give you an idea of how much a one-time repair is going to cost. For ongoing costs, you can get the CMMS to autogenerate reports for you.
If you're finding that your cost to repair is high for every asset, it's likely time to look at preventive maintenance. If you don't have a program in place, now's the time to get one. If you do have one, but it's not delivering the results you'd hoped for, now's the time to fine-tune it. In either case, CMMS software is going to help. Check out our ebook series to learn more about preventive maintenance.
How to calculate cost to replace using CMMS software
It's not just the cost of the new asset. Replacement starts with removal. Before you can install your new asset, you need to dispose of the old one. There are then the costs associated with choosing the replacement, and these usually include online research and working with sales departments. New assets also mean investing in new inventory of associated materials and spare parts. Technicians then need to be trained on the proper maintenance workflows and best practices. When the new asset is being installed, there's the cost of lost productivity.
To calculate cost to replace, add up these numbers. Not all of them are in your CMMS, but a lot of them are. For example, the tech' hourly rates are there because you're already using that to track labor costs. Why is that number useful for calculating cost to replace? If you want to know how much the training is going to cost, you need to know how much you're paying each tech per hour of training. Looking at historic work orders can also give you a sense of the cost of lost productivity.
How to calculate an asset's current value
The easiest way is to use the straight-line method, which tells you how much value your asset loses each year. It's called the straight-line method because your asset loses the same amount each year.
The straight-line method to calculate your asset's current value
- What you paid for it when you first bought it
- What you can get for it when you're selling it for scrap, the salvage value
- How many years it's predicted to be useful
Then use this formula to find the annual depreciation.
(ORIGINAL PRICE – SALVAGE VALUE) / YEARS OF PREDICTED USEFUL LIFE
Here's a quick example. If an asset cost $10,000, later you can sell it as scrap for $1000, and it should last ten years, it loses $900 a year. When it's 4 years old, it's lost $3,600, (which is $900 X 4 years). So, at four years, it's worth $6,400, (which is $10,000 - $3,600).
Knowing when to repair and when to replace saves you money by getting the most value out of assets over their useful life. A good CMMS makes it easier by helping you collect, protect, and work with the data you need to make the right decision.