1. Replacement Theory
Operations Research

2. Content
• Failure Mechanism
• Replacement Models
• Selecting Best Equipment
• Recruitment and Promotion

3. When do we replace products or
services?

4. Replacement Problem
• When should a product or service be
replaced?
– Economic/ Financial considerations (when cost of
maintenance becomes higher than cost of
replacement)
– Other considerations
• Replace on complete breakdown
• Replace after n failures
• Replace at periodic intervals
• Etc.

6. A thought experiment
• When a product or service deteriorates gradually, how to
decide when to replace?
• How to mitigate the risk of sudden failure? (Your car engine
stalls)
• How to handle a scenario where people rather than
products are involved? (When one of your best people’s
performance goes down, what to do?)
• What to do if a product goes out of fashion/ obsolete
compared to other new products? (When to replace your
Sony Walkman?)

7. General approach to solve
replacement problems
• Analyze the failure or performance reduction
pattern over time
• Assess probability
• Assess costs of replacement
– Actual cost
– Cost of replacement (labour etc.)
– Cost of disruption (opportunity loss, lost
production, lost orders, learning curve)

8. Scenario 1: Maintenance cost
increases over time
Purchasing Maintenance Maintenance Maintenance Scrap
Price Cost Cost Cost Value

9. Point of Lowest Cost

10. Adjusting for time value of money

11. Sudden Failure Scenario
• We have to look at probabilities of failure and
cost of failure
• Individual replacement
– Replace on failure
– Attrition of employees also falls under this
scenario
• Group replacement
– When one individual in a set of products fails,
replace the entire group