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Dr Bhupender Som
Replacement Problems
2
Introduction:
4
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The efficiency of all industrial and military equipments deteriorates with time. Sometimes the
equipment fails completely and effects the whole system. The maintenance costs (running
costs) of an equipment also go on increasing with time. Thus it becomes more economical to
replace the old equipment with a new one. Hence there is a need to formulae a most
economical replacement policy which is in the best interest of the system.
Introduction:
5
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2. Replacement of an item (equipment) in anticipation of complete failure, the probability
of which increases with time (or age).
1. Replacement of major or capital item (equipment) that deteriorates with time; e.g.,
Machines, Trucks etc.
3. Problems in morality and staffing.
There are following types of Replacement problems under
discussion:
4. Replacement of an equipment (or item) may be necessary due to new researches,
otherwise the system may become out of date.
6
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For machine the maintenance cost always increase with time and stage comes when the
maintenance cost becomes so large that it is economical to replace the machine with a new
one.Thus the problem of replacement in this case is to find the best time (age of machine) at
which the old machine should be replaced by the new one.
Replacement of major or capital item (equipment) that
deteriorates with time; e.g., Machines, Trucks etc.
7
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Its maintenance cost is given by a function increasing with time.
The Money value is not considered.
Its scrap value is constant and,
To Find The Best Replacement Age (Time) of a Machine When
Let C = Cost of Machine
S = Scrap value of the machine at time t.
and, Cm(t) = Maintenance cost of machine at time t, [Cm(t) increases with t].
Case 1 : When time ‘t’ is a continuous variable.
Total maintenance cost of the machine in n years
The total cost of machine in n years
= Cost of machine – Scrap value of machine + Total maintenance cost in n years.
8
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The average cost of maintenance per year during n years is given by
dttCSC
n
m
0
)(
)1...(....................)(
1
)(
)(
)(
0
0







n
m
n
m
dttC
nn
SC
nA
n
dttCSC
nA
Now for A (n) to be minimum,
 
)(
)(
)(
)(
1
)(
1
)(
0
0
22
nA
n
dttCSC
tC
tC
n
dttC
nn
SC
nA
dn
d
n
m
m
m
n
m








[ from (1) ]
9
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i.e. Maintenance cost of the machine at time t
= Average cost of the machine per year.
Hence, the average cost of the machine per year is minimized by replacing it when the average
cost to date becomes equal to the current maintenance cost
Also
 


n
m dttC
nn
SC
dn
nAd
0
332
2
0)(
2)(2)(
10
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Case 2 : When time ‘t’ is a discrete variable.
But A(n) is minimum for that value of n for which
 (An -1) < 0 <  A (n)…………………….(3)
 A(n) = A(n + 1) – A(n)
Also
When time t takes the values 1, 2, 3,…..etc., then the total maintenance cost of the machine in n
years


n
m
m tC
1
)(
Therefore, in this case the average cost of the machine per year during n years is given by









n
m
m
n
m
m
tC
nn
SC
n
tCSC
nA
1
1
)2().........(
1
)(
)(


















  


n
m
m
n
m
m tC
nn
SC
tC
nn
SC
1
1
1
)(
1
)(
1
1
1
11
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From (2) A(n) is minimum for value of n for which
A(n) > 0 and A(n -1) < 0
 
)(
1)1(
)1(
)2...()(
1
1
1
)(
)(
1
1
)1(
)()(
)(
1
1
)(
1
1
1
)1(
)(
)(
1
)()(
1
11
1
1
1
1
1
1
1
11
1
tC
nn
nA
nA
fromtC
nn
nA
tC
nnn
tCSC
tC
n
tC
nnnn
SC
tC
n
tCtC
nnn
SC
n
n
n
n
m
m
m
n
m
m
n
m
m
n
m
mm





































































12
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From (4), we conclude that
1. Do not replace if the next years maintenance cost is less than the previous years average
total cost.
2. Replace if the next years maintenance cost is greater than the previous years average total
cost.
A Machine is continued up to the time the average cost per year (including cost of the new
machine, maintenance cost etc.) of the machine decrease and is replaced at the time when its
cost begins to increase.
and )1()(
)()(
0)(
1)1(
0)(
1
1
1
)(
1
1












nAtC
nAtC
tC
nn
nA
tC
nn
nA
n
n
n
ni.e
and
or
13
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Case 1:
The cost of a bike is $ 3000. The salvage value (resale value) and the running cost are given as
under. Find the most economical replacement age of the truck.
Table 1
Year 1 2 3 4 5 6 7
Running Cost 600 700 800 900 1000 1200 1500
Resale value 2000 1333 1000 750 500 300 300
14
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Solution:
Table 2
Age of
Replacement
(in Years)
Total
Running Cost
($)
Depreciation =
Cost of bike – Resale
Value
($)
Total Cost
($)
Average Cost per
year
($)
1 600 1000 1600 1600.00
2 1300 1667 2967 1483.50
3 2100 2000 4100 1366.66
4 3000 2250 5250 1312.50
5* 4000 2500 6500 1300.00*
6 5200 2700 7900 1316.67
Replace the bike in 5th year.
15
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Solution:
Table 3
Replace the bike in 5th year.
Year of Service 1 2 3 4 5
Running Cost 1800 2200 2700 3200 3700
Resale value 1900 1050 600 500 500
Machines in a factory have increased cost as they continue in service due to increased running
cost. The initial running cost is Rs 3,500 and resale price drops as time passes until it reaches a
constant value of Rs 500. Determine the proper length of service before machines should be
replaced. Cost data are given below.
16
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Solution:
Replace the machine in 4th year.
Year
of
Service
Running
Cost
Cumulative
Running Cost
Resale
Price
Difference
between
Initial Cost
and
Resale Price
Average
Investment
cost per Year
Average
Running
Cost per
Year
Average
Cost
Per Year
1 2 3 4 5 6 = 5/1 7 = 3/1 8 = 6 + 7
1 1800 1800 1900 1600 1600 1800 3400
2 2200 4000 1050 2450 1225 2000 3225
3 2700 6700 600 2900 967 2233 3200
4 3200 9900 500 3000 750 2475 3225
5 3700 13600 500 3000 600 2720 3320
17
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A. Machine A costs Rs 9000. Annual operating cost are Rs 200 for the 1st year, and then
increase by Rs 2000 every year. Determine the best age at which to replace the machine. If the
optimum replacement policy is followed, what will be the average yearly cost of owing and
operating the machine ? (Assume that the machine has no resale value when replaced, and that
future cost are not discounted).
Case 3:
B. Machine B costs Rs 10,000. Annual operating costs are Rs 400 for the first year, and
then increase by Rs 800 every year. You have now a machine of type A which is one year old.
Should you replace it with B, and if so when ?
C. Suppose you are, just ready to replace machine A with another machine of the same
type, when you hear that machine B will become available in a year. What you should do ?
18
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Solution:
a. The maintenance cost of machine A per year are as follows:
Table 3
Year 1 2 3 4 5
Maintenance cost in Rs 200 2200 4200 6200 8200
To find the average cost per year of machine A, we prepare the following table:
Table 4
Replacement at the end of
the year
Total Running Cost
Rs
Depreciation
Rs
Total Cost
Rs
Average Cost
Rs
1 200 9000 9200 9200
2 2400 9000 11400 5700
3* 6600 9000 15600 5200
4 12,800 9000 21,800 5450
It is clear from the table that the machine A should be replaced at the end of the 3rd year. The average yearly
cost in this situation will be Rs 5200.
19
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Solution:
b. The maintenance cost of machine B per year are as follows:
Table 5
To find the average cost per year of machine A, we prepare the following table:
Table 6
Year 1 2 3 4 5 6 7
Maintenance cost in Rs 400 1200 2000 2800 3600 4400 5200
Replacement at the end of the
year
Total Running Cost Rs Depreciation
Rs
Total Cost
Rs
Average Cost Rs
1 400 10000 10400 10400.00
2 1600 10000 11600 5800.00
3 3600 10000 13600 4533.33
4 6400 10000 16400 4100.00
5* 10000 10000 20000 4000.00
6 14400 10000 24400 4066.66
20
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Table 7
It is clear from the above table that if machine B is replaced after 5 years then its average cost
per year is Rs 4000.
Since the lowest average cost Rs 4000 for machine B is less than the lowest average cost Rs
5200 for machine A, the machine A should be replaced by machine B.
To find the time of replacement of machine A by machine B.
The machine A is replaced by machine B at the time (age) when its running cost of the next year
exceeds the lowest average yearly cost Rs 4000 of machine B.
Total cost of machine A in the successive years are as follows:
The running cost of third year of machine A is Rs 4200 which is more than the lowest average
yearly cost Rs 4000 of machine B. Therefore, the machine A should be replaced by machine B
when its age is 2 years. Since the machine A is one year old now, therefore it should be replaced
after one year from now.
Year 1 2 3 4 5
Total cost in the year 9200 Rs 11400 – 9200 = Rs
2200
Rs 15600 – 11400 = Rs
4200
Rs 21800 –
15600 = Rs
6200
Rs 30000 –
21800 = Rs
8200
21
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Table 8
c. As shown in (b), the machine A should be replaced after one year from now and the
machine B also available at that time. Therefore, the machine A should be replaced by machine
B after one year from now.
Determine the optimum period for replacement of the above machine.
For a machine, from the following data are available:
Year 0 1 2 3 4 5 6
Cost of spares (Rs) - 200 400 700 1000 1400 1600
Salary Maintenance staff (Rs) - 1200 1200 1400 1600 2000 2600
Losses due to break down (Rs) - 600 800 700 1000 1200 1600
Resale value 12000 6000 3000 1500 800 400 400
22
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The time value of money is the value of money figuring in a given amount of interest earned
over a given amount of time.
Few Important Terms:
The value of money changes with time. The statement is explained by the following example.
If we borrow Rs 100 at interest of 10% per year then after one year after one year we have to
return Rs 110. Thus Rs 110 after one year from now are equivalent to Rs 100 today. Therefore,
Rs 1.00 after one year from now is equivalent to Rs 100/110 i.e., (1.1)-1 today at the rate of 10%
So, Rs 1.00, n year from now is equivalent to Rs (1.1)-n today at the rate of 10% thus we can say
that the value of money changes with time.
23
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Present Value or Present Worth:
We have shown that Rs 100, n years after from now is equivalent to Rs (1.1)-n today at the rate
of 10%. In other words we say that (1.1)-n is the present value (or present worth) of one rupee
spent after one year from now.
In general if the interest on Rs 1 is Rs ‘i’ per year, then the present value of Rs 1 to be spent
after n years from now is Rs n
i)1(1 
24
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Discount Rate or Depreciation Ratio:
The value of the money decreases with a constant ratio which is known as its discount rate or
depreciation ratio.
If r is the ratio of interest per year on Rs 1.00. Then the present value of Rs 1.00 to be spent after
one year from now is Rs .
The ratio is the discount rate or depreciation ratio which is less than one.)1(
1
r
v


25
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To determine the best replacement age of items whose maintenance cost increase with time and the
value of Money also changes with time:
Thus, the best replacement age of machine is n years for which the above inequality holds.
)(.
1
1
0)1(.
1
1
1
11
nPC
v
v
nPC
v
v
n
n
n
n








1. Do not replace if the operating cost of next period (year) is less than the weighted average of
previous cost.
2. Replace if the operating cost of the next period (year) is greater than the weighted average of
the previous cost.
26
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Case: The cost pattern for two machines A and B when money value is not considered, is given as
follows:
Find the cost for each machine, when money is worth 10% per year, and hence find which
machine is less costly.
Year
Machine A Machine B
1
2
3
900
600
700
1400
100
700
Total 2200 2200
Table 9
27
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Solution :
The total expenditure for each machine in 3 years is equal to Rs 2200 when the money value is not
taken in to consideration. Thus, the two machines are equally good if the money has no value over
time.
When money value is 10% per year the discount rate
The present value of the maintenance cost in years 1, 2, 3 for two machines are shown in following
table
The present value of the total expenditure for machine A in three years is less than that of
machine B. hence machine A is less costly.
Table 10
9091.0
10100
100


v
Year Machine A
(Rs)
Machine B
(Rs)
1
2
3
900
600 × (0.9091) = 545.45
700 × (0.9091)2 = 578.52
1400
100 × (0.9091) = 90.91
700 × (0.9091)2 = 578.52
Total Rs 2023.97 Rs 2069.43
28
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Case :
Let the value of money be assumed to be 10% per year and suppose that the machine A is replaced
after every 3 years whereas machine B is replaced after every six years. The yearly costs of both the
machines are given as under.
Determine which machine should be purchased.
 The total discount cost (present worth) of costs of machine A for 3 years is
Since the value of money is 10% per year, the discount rate
Year 1 2 3 4 5 6
Machine A :
Machine B :
1000
1700
200
100
400
200
1000
300
200
400
400
500
Solution
11
10
10100
100


v
appRs1512
11
10
400
11
10
2001000
2













29
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and the total discount cost (present worth) of costs of machine B for 6 years is
 The average yearly cost of Machine A = 1512/3 = Rs 504
And average yearly cost of machine B = 2765/6 = Rs 460.83
From here machine B looks less costly but its not true because the time periods considered are not
the same
Now the total discount cost of costs of machine A for 6 years
= 1000 + 200 × (10/11) + 400 × (10/11)2 + 1000 × (10/11)3 + 200 × (10/11)4 + 400 × (10/11)5 = Rs
2647 app
The present value of the total expenditure in 6 years on machine A is less than that for machine B.
Thus the machine A is less costly and hence machine A should be purchased.
appRs2765
11
10
500
11
10
400
11
10
300
11
10
200
11
10
1001700
5432































30
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A pipeline is due for repairs. It will cost ` 10,000 and lasts for three years. Alternatively, a new pipeline
can be laid at a cost of ` 30,000 and lasts for 10 years . Assuming cost of capital to be 10% and ignoring
salvage value, which alternative should be chosen.
Consider two types of pipelines for infinite replacement cycles of 10 years for the new pipeline, and 3
years for existing pipeline.
The present worth factor is given by; 09091.0
10100
100


v
Let Dn denote the discounted value of all future costs associated with a policy of replacing the
equipment after n years. Then if we designate the initial outlay by C,
31
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The existing pipeline should be continued.
     
 
  
  
103
1010
33
22
48820
9091.01
000,30
,
40021
9091.01
000,10
1
1/1...1...
DD
RsD
and
RsD
v
C
D
vCvCvvCCvCvCD
nn
nnnnnn
n









 
32
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The existing pipeline should be continued.
Case 4:
A manufacturer offered two machines A and B. A is priced at Rs 5000 and running cost are estimated at
Rs 800 for each of the first 5 years, increasing by Rs 200 per year in the 6th and subsequent years.
Machine B, which has the same capacity as A, costs Rs 2500 but with running cost of Rs 1200 per year
for the first six years, increasing by Rs 200 per year there after. If money is worth 10% per year, which
machine should be purchased?
(Assume that the machine will eventually be sold for scrap at negligible price.)
If n is the optimum replacement age of the machine we have
Where, P (n) = A + C1 + C2v + C3v2 +……+Cnvn-1
Here, v = 0.9091, 1 – v = 1/11.
For machine A, A = Rs 5000
To find the value of n, satisfying (1) for machine A, we compute this table.
33
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Form the table, it is clear that equation (1) satisfied for n = 9.
It would be best to replace machine A after 9 years. The fixed annual payment for machine A
Year
n
Cn vn-1=(0.909)n-1 (vn-1) Cn (1-vn-1) Cn P(n)
1 2 3 4 = 2 × 3 5 = 2 – 4 6 7 8 = 6 – 7
1
2
3
4
5
6
7
8
9*
10
800
800
800
800
800
1000
1200
1400
1600
1800
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
800
727
661
601
546
621
677
718
746
763
0
73
139
199
254
379
523
682
854
1037
800
1529
2189
2794
4169
5753
7502
9394
11407
-
5800
6527
7188
7789
8335
8956
9633
10351
11097
-
< 0
< 0
< 0
< 0
< 0
< 0
< 0
< 0
> 0
1752
11097
4241.01
0909.0
11097
)9091.0(1
9091.01
)9(.
1
1
9
91
Rs
P
v
v
x










Table 12
34
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Table 13:
Again for machine B, A = Rs 2500
To find the value of n satisfying (1) for machine B, we compute thee following table
Form the table, it is clear that equation (1) satisfied for n = 8.
It would be best to replace machine B after 8 years. The fixed annual payment for machine A
Year
n
Cn vn-1=(0.909)n-1 (vn-1) Cn (1-vn-1) Cn P(n)
1 2 3 4 = 2 × 3 5 = 2 – 4 6 7 8 = 6 – 7
1
2
3
4
5
6
7
8*
9
1200
1200
1200
1200
1200
1200
1400
1600
1800
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
1200
1091
992
902
820
745
790
821
840
0
109
208
298
380
455
610
779
960
1200
2288
3278
4180
5005
6710
8369
10560
-
3700
4791
5783
6685
7505
8250
9040
9861
-
< 0
< 0
< 0
< 0
< 0
< 0
< 0
> 0
35
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Since x1 > x2
It would be better to purchase machine B instead of A.
1680
)8(.
1
1
82
Rs
P
v
v
x




Replacement of the machines in anticipation of complete failure the probability of which increases
with time:
In general the probability of failure of an item increases with time. The complete failure of an item
(machine) may result in complete break down of the system which puts the organization to a heavy
loss. Thus there is a need of some replacement policy of such items to avoid the possibility of complete
breakdown. Such items may be replaced even when they are in working order.
The following policies are followed:
1. Individual Replacement Policy:
According to this policy the failed item is immediately replaced by the new one, e.g. in house fused
bulb is replaced by the new one.
36
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
1. Group Replacement Policy:
In general a system contains a large number of identical low – cost items such that the probability of
their failure increases with time or age. In such cases there is a set up cost for replacement which is
independent of the number replaced. Here in such systems it may be advantageous to replace all
the items at some fixed interval. Such policy is called the group replacement policy. This policy is
followed in the systems where the cost of an individual item is so small that the cost of keeping
records of individual’s age can not be justified.
Group replacement should be made at the end of nth period if the cost of individual
replacement for the n – th period is greater than the average cost per period by the end of
n periods.
Group replacement should not be made at the end of nth period if the cost of individual
replacement at he end of (n - 1)th period is not less than the average cost per period by the
end of (n - 1) periods.
To determine the interval of optimum replacement:
37
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
The problems are the special cases of the problems in industry where the failure of any item (machine)
can be treated as death and the replacement of any item (machine) can failure can be taken to a
birth in the human populations. We consider the following morality problem:
Let a large population be subjected to a given morality curve for a very long period of time under the
following assumptions.
(i) All death's are immediately replaced by births.
(ii) There are no other entries or exit.
Then we shall prove the following results
(i) The number of deaths per unit time becomes stable.
(ii) The age distribution ultimately becomes stable.
Problems in Morality:
38
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
The problems connected with recruitment and promotion of the staff in any system (organization)are
known as the staffing problems. These problems are also treated as the replacement problem where
the staff of the system is treated like a machine part. The problem of staff replacement arises due
to resignation, retirements deaths of the staff members from time to time. Therefore to maintain a
suitable strength of the staff in a system there is a need of some useful recruitment policy.
Staffing Problem:
Morality Tables:
Morality tables for any item can be used to obtain the probability distribution of its life span.
Let N = The total number of items in the system in the beginning
And N (t) = Number of survivors at any time t.
Then the probability that any item will fail in the time interval (t – 1, t) is given by
since N (t - 1) > N (t)
And the probability that any item that survived up to the age (t - 1) will die in the next year is given by
)1.........(..........
)()1(
N
tNtN 
)2.........(..........
)1(
)()1(


tN
tNtN
39
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
The following morality rates have been observed for a certain type of light bulb:
There are 1000 bulbs in use and it costs Rs 1.00 to replace an individual bulb which has burnt out. If all
bulbs were replaced simultaneously it would cost 25 paise per bulb. It is proposed to replace all
bulbs at fixed intervals, whether or not they have burnt out and to continue replacing burnt out
bulbs as they fail. At what intervals should all the bulbs be replaced?
Case:
Morality Tables:
Solution:
25.0
100
2550
15.0
100
1025
10.0
100
10
3
2
1







P
P
P
1,
20.0
100
80100
30.0
100
5080
54321
5
4







PPPPPHere
P
P
Week 1 2 3 4 5
Percent failing by the end of the week 10 25 50 80 100
40
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
Since the sum of all probabilities is equal to 1.
 P6, P7, ……. Are all zero.
Therefore, a bulb can not survive for more than five weeks i.e., a bulb which has survived for four weeks is sure to fail in the fifth
week.
Assuming that the burnt out bulbs in any week are replaced just at the end of that work. If Ni be the number of replacements at the
end of ith week, while all 1000 bulbs were new initially, then we have
N0 = Number of bulbs in the beginning. = 1000
N1 = Number of burnt out bulbs replaced at the end of 1st week
= N0P1 = 1000 × 0.10 = 100
N2 = Number of burnt out bulbs replaced at the end of 2nd week
= N0P2 + N1P1 = 1000 × 0.15 + 100 × 0.10 = 160
N3 = Number of burnt out bulbs replaced at the end of 3rd week
= N0P3 + N1P2 + N2P1 = 1000 × 0.25 + 100 × 0.15 + 160 × 0.10 = 281
N4 = Number of burnt out bulbs replaced at the end of 4th week
= N0P4 + N1P3 + N2P2 + N3P1
= 1000 × 0.30 + 100 × 0.25 + 160 × 0.15 + 281 × 0.10 = 377
N5 = Number of burnt out bulbs replaced at the end of 5th week
= N0P5 + N1P4 + N2P3 + N3P2 + N4P1
= 1000 × 0.20 + 100 × 0.30 + 160 × 0.25 + 281 × 0.15 + 377 × 0.10 = 350
N6 = Number of burnt out bulbs replaced at the end of 6th week
= N0P6 + N1P5 + N2P4 + N3P3 + N4P2 + N5P1
= 0 +100 × 0.20 + 160 × 0.15 + 281 × 0.25 + 377 × 0.15 + 350 × 0.10 = 230
41
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
N7 = Number of burnt out bulbs replaced at the end of 7th week
= N0P7 + N1P6 + N2P5 + N3P4 + N4P3 + N5P2 + N6P1
= 0 + 0 + 160 × 0.20 + 281 × 0.30 + 377 × 0.25 + 350 × 0.15 + 350 × 0.10 + 230 × 0.10
= 230
And so on……..
From the above calculations we see that Ni the expected number of bulbs failing each week increases up - to fourth
week and then decreases up to 6th week and then increases again. In this way Ni oscillates till the system settles
down to steady state.
The average life of bulb
=  Xi Pi
= 1P1 + 2P2 + 3P3 + 4P4 + 5P5 +………………
= 0.10 + 2 × 0.15 + 3 × 0.25 + 4 × 0.30 + 5 × 0.20 = 3.35
 Average number of replacement per week = N / (Mean Age) = 1000/3.35 = 299
 Average cost of weekly individual replacement policy = Rs 299
(Since the cost of individual replacement of a bulb cost Rs 1)
Now we consider the case of group replacement
End of week Total cost of group Replacement in Rs Average cost per week in Rs
1
2
3
1000 × 0.25 + 100 × 1 = 350
1000 × 0.25 + (100 + 160) × 1 = 510
1000 × 0.25 + (100 + 160 + 281) × 1 = 791
350
255
263.66
42
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
Thus, the minimum cost per week is Rs 255.00 if the bulbs are replaced as a group after every two
weeks and this cost is also less than the average cost of weekly individual replacement policy.
Hence for minimum monthly cost all the bulbs should be replaced after every two weeks.
Jagan Institute of Management Studies
44
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
About JIMS
JIMS Rohini is one of the leading MBA
institutes of Delhi. We impart professional
education both at post graduate and
undergraduate levels in the fields of
management and information technology.
Our PGDM program is approved by the AICTE and is
accredited from NBA for excellence in quality education.
PGDM program has also been granted equivalence to
MBA degree by the AIU. We offer specialized PGDM
programs in International Business and Retail as well.
JIMS, Rohini, Sector 5 also offers technical programs viz BBA,
BCA & MCA affiliated from GGSIPU.
Established in 1993, JIMS completed its 20 years of
Excellence in 2013. We offer excellent academic
structure, industry interaction and job opportunities.
Address
3, Institutional Area, Sector-5,
Rohini
(Near Rajiv Gandhi Cancer
Research Institute), Delhi-110085.
Contact Details
Phone : 011-45184000/1/2
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Email : admissions@jimsindia.org
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Replacement Problem - Dr. Bhupender SOM - JIMS Rohini Faculty Presentation

  • 2. 2
  • 4. 4 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The efficiency of all industrial and military equipments deteriorates with time. Sometimes the equipment fails completely and effects the whole system. The maintenance costs (running costs) of an equipment also go on increasing with time. Thus it becomes more economical to replace the old equipment with a new one. Hence there is a need to formulae a most economical replacement policy which is in the best interest of the system. Introduction:
  • 5. 5 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org 2. Replacement of an item (equipment) in anticipation of complete failure, the probability of which increases with time (or age). 1. Replacement of major or capital item (equipment) that deteriorates with time; e.g., Machines, Trucks etc. 3. Problems in morality and staffing. There are following types of Replacement problems under discussion: 4. Replacement of an equipment (or item) may be necessary due to new researches, otherwise the system may become out of date.
  • 6. 6 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org For machine the maintenance cost always increase with time and stage comes when the maintenance cost becomes so large that it is economical to replace the machine with a new one.Thus the problem of replacement in this case is to find the best time (age of machine) at which the old machine should be replaced by the new one. Replacement of major or capital item (equipment) that deteriorates with time; e.g., Machines, Trucks etc.
  • 7. 7 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Its maintenance cost is given by a function increasing with time. The Money value is not considered. Its scrap value is constant and, To Find The Best Replacement Age (Time) of a Machine When Let C = Cost of Machine S = Scrap value of the machine at time t. and, Cm(t) = Maintenance cost of machine at time t, [Cm(t) increases with t]. Case 1 : When time ‘t’ is a continuous variable. Total maintenance cost of the machine in n years The total cost of machine in n years = Cost of machine – Scrap value of machine + Total maintenance cost in n years.
  • 8. 8 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The average cost of maintenance per year during n years is given by dttCSC n m 0 )( )1...(....................)( 1 )( )( )( 0 0        n m n m dttC nn SC nA n dttCSC nA Now for A (n) to be minimum,   )( )( )( )( 1 )( 1 )( 0 0 22 nA n dttCSC tC tC n dttC nn SC nA dn d n m m m n m         [ from (1) ]
  • 9. 9 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org i.e. Maintenance cost of the machine at time t = Average cost of the machine per year. Hence, the average cost of the machine per year is minimized by replacing it when the average cost to date becomes equal to the current maintenance cost Also     n m dttC nn SC dn nAd 0 332 2 0)( 2)(2)(
  • 10. 10 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Case 2 : When time ‘t’ is a discrete variable. But A(n) is minimum for that value of n for which  (An -1) < 0 <  A (n)…………………….(3)  A(n) = A(n + 1) – A(n) Also When time t takes the values 1, 2, 3,…..etc., then the total maintenance cost of the machine in n years   n m m tC 1 )( Therefore, in this case the average cost of the machine per year during n years is given by          n m m n m m tC nn SC n tCSC nA 1 1 )2().........( 1 )( )(                        n m m n m m tC nn SC tC nn SC 1 1 1 )( 1 )( 1 1 1
  • 11. 11 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org From (2) A(n) is minimum for value of n for which A(n) > 0 and A(n -1) < 0   )( 1)1( )1( )2...()( 1 1 1 )( )( 1 1 )1( )()( )( 1 1 )( 1 1 1 )1( )( )( 1 )()( 1 11 1 1 1 1 1 1 1 11 1 tC nn nA nA fromtC nn nA tC nnn tCSC tC n tC nnnn SC tC n tCtC nnn SC n n n n m m m n m m n m m n m mm                                                                     
  • 12. 12 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org From (4), we conclude that 1. Do not replace if the next years maintenance cost is less than the previous years average total cost. 2. Replace if the next years maintenance cost is greater than the previous years average total cost. A Machine is continued up to the time the average cost per year (including cost of the new machine, maintenance cost etc.) of the machine decrease and is replaced at the time when its cost begins to increase. and )1()( )()( 0)( 1)1( 0)( 1 1 1 )( 1 1             nAtC nAtC tC nn nA tC nn nA n n n ni.e and or
  • 13. 13 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Case 1: The cost of a bike is $ 3000. The salvage value (resale value) and the running cost are given as under. Find the most economical replacement age of the truck. Table 1 Year 1 2 3 4 5 6 7 Running Cost 600 700 800 900 1000 1200 1500 Resale value 2000 1333 1000 750 500 300 300
  • 14. 14 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution: Table 2 Age of Replacement (in Years) Total Running Cost ($) Depreciation = Cost of bike – Resale Value ($) Total Cost ($) Average Cost per year ($) 1 600 1000 1600 1600.00 2 1300 1667 2967 1483.50 3 2100 2000 4100 1366.66 4 3000 2250 5250 1312.50 5* 4000 2500 6500 1300.00* 6 5200 2700 7900 1316.67 Replace the bike in 5th year.
  • 15. 15 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution: Table 3 Replace the bike in 5th year. Year of Service 1 2 3 4 5 Running Cost 1800 2200 2700 3200 3700 Resale value 1900 1050 600 500 500 Machines in a factory have increased cost as they continue in service due to increased running cost. The initial running cost is Rs 3,500 and resale price drops as time passes until it reaches a constant value of Rs 500. Determine the proper length of service before machines should be replaced. Cost data are given below.
  • 16. 16 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution: Replace the machine in 4th year. Year of Service Running Cost Cumulative Running Cost Resale Price Difference between Initial Cost and Resale Price Average Investment cost per Year Average Running Cost per Year Average Cost Per Year 1 2 3 4 5 6 = 5/1 7 = 3/1 8 = 6 + 7 1 1800 1800 1900 1600 1600 1800 3400 2 2200 4000 1050 2450 1225 2000 3225 3 2700 6700 600 2900 967 2233 3200 4 3200 9900 500 3000 750 2475 3225 5 3700 13600 500 3000 600 2720 3320
  • 17. 17 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org A. Machine A costs Rs 9000. Annual operating cost are Rs 200 for the 1st year, and then increase by Rs 2000 every year. Determine the best age at which to replace the machine. If the optimum replacement policy is followed, what will be the average yearly cost of owing and operating the machine ? (Assume that the machine has no resale value when replaced, and that future cost are not discounted). Case 3: B. Machine B costs Rs 10,000. Annual operating costs are Rs 400 for the first year, and then increase by Rs 800 every year. You have now a machine of type A which is one year old. Should you replace it with B, and if so when ? C. Suppose you are, just ready to replace machine A with another machine of the same type, when you hear that machine B will become available in a year. What you should do ?
  • 18. 18 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution: a. The maintenance cost of machine A per year are as follows: Table 3 Year 1 2 3 4 5 Maintenance cost in Rs 200 2200 4200 6200 8200 To find the average cost per year of machine A, we prepare the following table: Table 4 Replacement at the end of the year Total Running Cost Rs Depreciation Rs Total Cost Rs Average Cost Rs 1 200 9000 9200 9200 2 2400 9000 11400 5700 3* 6600 9000 15600 5200 4 12,800 9000 21,800 5450 It is clear from the table that the machine A should be replaced at the end of the 3rd year. The average yearly cost in this situation will be Rs 5200.
  • 19. 19 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution: b. The maintenance cost of machine B per year are as follows: Table 5 To find the average cost per year of machine A, we prepare the following table: Table 6 Year 1 2 3 4 5 6 7 Maintenance cost in Rs 400 1200 2000 2800 3600 4400 5200 Replacement at the end of the year Total Running Cost Rs Depreciation Rs Total Cost Rs Average Cost Rs 1 400 10000 10400 10400.00 2 1600 10000 11600 5800.00 3 3600 10000 13600 4533.33 4 6400 10000 16400 4100.00 5* 10000 10000 20000 4000.00 6 14400 10000 24400 4066.66
  • 20. 20 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Table 7 It is clear from the above table that if machine B is replaced after 5 years then its average cost per year is Rs 4000. Since the lowest average cost Rs 4000 for machine B is less than the lowest average cost Rs 5200 for machine A, the machine A should be replaced by machine B. To find the time of replacement of machine A by machine B. The machine A is replaced by machine B at the time (age) when its running cost of the next year exceeds the lowest average yearly cost Rs 4000 of machine B. Total cost of machine A in the successive years are as follows: The running cost of third year of machine A is Rs 4200 which is more than the lowest average yearly cost Rs 4000 of machine B. Therefore, the machine A should be replaced by machine B when its age is 2 years. Since the machine A is one year old now, therefore it should be replaced after one year from now. Year 1 2 3 4 5 Total cost in the year 9200 Rs 11400 – 9200 = Rs 2200 Rs 15600 – 11400 = Rs 4200 Rs 21800 – 15600 = Rs 6200 Rs 30000 – 21800 = Rs 8200
  • 21. 21 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Table 8 c. As shown in (b), the machine A should be replaced after one year from now and the machine B also available at that time. Therefore, the machine A should be replaced by machine B after one year from now. Determine the optimum period for replacement of the above machine. For a machine, from the following data are available: Year 0 1 2 3 4 5 6 Cost of spares (Rs) - 200 400 700 1000 1400 1600 Salary Maintenance staff (Rs) - 1200 1200 1400 1600 2000 2600 Losses due to break down (Rs) - 600 800 700 1000 1200 1600 Resale value 12000 6000 3000 1500 800 400 400
  • 22. 22 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. Few Important Terms: The value of money changes with time. The statement is explained by the following example. If we borrow Rs 100 at interest of 10% per year then after one year after one year we have to return Rs 110. Thus Rs 110 after one year from now are equivalent to Rs 100 today. Therefore, Rs 1.00 after one year from now is equivalent to Rs 100/110 i.e., (1.1)-1 today at the rate of 10% So, Rs 1.00, n year from now is equivalent to Rs (1.1)-n today at the rate of 10% thus we can say that the value of money changes with time.
  • 23. 23 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Present Value or Present Worth: We have shown that Rs 100, n years after from now is equivalent to Rs (1.1)-n today at the rate of 10%. In other words we say that (1.1)-n is the present value (or present worth) of one rupee spent after one year from now. In general if the interest on Rs 1 is Rs ‘i’ per year, then the present value of Rs 1 to be spent after n years from now is Rs n i)1(1 
  • 24. 24 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Discount Rate or Depreciation Ratio: The value of the money decreases with a constant ratio which is known as its discount rate or depreciation ratio. If r is the ratio of interest per year on Rs 1.00. Then the present value of Rs 1.00 to be spent after one year from now is Rs . The ratio is the discount rate or depreciation ratio which is less than one.)1( 1 r v  
  • 25. 25 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org To determine the best replacement age of items whose maintenance cost increase with time and the value of Money also changes with time: Thus, the best replacement age of machine is n years for which the above inequality holds. )(. 1 1 0)1(. 1 1 1 11 nPC v v nPC v v n n n n         1. Do not replace if the operating cost of next period (year) is less than the weighted average of previous cost. 2. Replace if the operating cost of the next period (year) is greater than the weighted average of the previous cost.
  • 26. 26 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Case: The cost pattern for two machines A and B when money value is not considered, is given as follows: Find the cost for each machine, when money is worth 10% per year, and hence find which machine is less costly. Year Machine A Machine B 1 2 3 900 600 700 1400 100 700 Total 2200 2200 Table 9
  • 27. 27 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Solution : The total expenditure for each machine in 3 years is equal to Rs 2200 when the money value is not taken in to consideration. Thus, the two machines are equally good if the money has no value over time. When money value is 10% per year the discount rate The present value of the maintenance cost in years 1, 2, 3 for two machines are shown in following table The present value of the total expenditure for machine A in three years is less than that of machine B. hence machine A is less costly. Table 10 9091.0 10100 100   v Year Machine A (Rs) Machine B (Rs) 1 2 3 900 600 × (0.9091) = 545.45 700 × (0.9091)2 = 578.52 1400 100 × (0.9091) = 90.91 700 × (0.9091)2 = 578.52 Total Rs 2023.97 Rs 2069.43
  • 28. 28 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Case : Let the value of money be assumed to be 10% per year and suppose that the machine A is replaced after every 3 years whereas machine B is replaced after every six years. The yearly costs of both the machines are given as under. Determine which machine should be purchased.  The total discount cost (present worth) of costs of machine A for 3 years is Since the value of money is 10% per year, the discount rate Year 1 2 3 4 5 6 Machine A : Machine B : 1000 1700 200 100 400 200 1000 300 200 400 400 500 Solution 11 10 10100 100   v appRs1512 11 10 400 11 10 2001000 2             
  • 29. 29 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org and the total discount cost (present worth) of costs of machine B for 6 years is  The average yearly cost of Machine A = 1512/3 = Rs 504 And average yearly cost of machine B = 2765/6 = Rs 460.83 From here machine B looks less costly but its not true because the time periods considered are not the same Now the total discount cost of costs of machine A for 6 years = 1000 + 200 × (10/11) + 400 × (10/11)2 + 1000 × (10/11)3 + 200 × (10/11)4 + 400 × (10/11)5 = Rs 2647 app The present value of the total expenditure in 6 years on machine A is less than that for machine B. Thus the machine A is less costly and hence machine A should be purchased. appRs2765 11 10 500 11 10 400 11 10 300 11 10 200 11 10 1001700 5432                               
  • 30. 30 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org A pipeline is due for repairs. It will cost ` 10,000 and lasts for three years. Alternatively, a new pipeline can be laid at a cost of ` 30,000 and lasts for 10 years . Assuming cost of capital to be 10% and ignoring salvage value, which alternative should be chosen. Consider two types of pipelines for infinite replacement cycles of 10 years for the new pipeline, and 3 years for existing pipeline. The present worth factor is given by; 09091.0 10100 100   v Let Dn denote the discounted value of all future costs associated with a policy of replacing the equipment after n years. Then if we designate the initial outlay by C,
  • 31. 31 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The existing pipeline should be continued.               103 1010 33 22 48820 9091.01 000,30 , 40021 9091.01 000,10 1 1/1...1... DD RsD and RsD v C D vCvCvvCCvCvCD nn nnnnnn n           
  • 32. 32 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The existing pipeline should be continued. Case 4: A manufacturer offered two machines A and B. A is priced at Rs 5000 and running cost are estimated at Rs 800 for each of the first 5 years, increasing by Rs 200 per year in the 6th and subsequent years. Machine B, which has the same capacity as A, costs Rs 2500 but with running cost of Rs 1200 per year for the first six years, increasing by Rs 200 per year there after. If money is worth 10% per year, which machine should be purchased? (Assume that the machine will eventually be sold for scrap at negligible price.) If n is the optimum replacement age of the machine we have Where, P (n) = A + C1 + C2v + C3v2 +……+Cnvn-1 Here, v = 0.9091, 1 – v = 1/11. For machine A, A = Rs 5000 To find the value of n, satisfying (1) for machine A, we compute this table.
  • 33. 33 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Form the table, it is clear that equation (1) satisfied for n = 9. It would be best to replace machine A after 9 years. The fixed annual payment for machine A Year n Cn vn-1=(0.909)n-1 (vn-1) Cn (1-vn-1) Cn P(n) 1 2 3 4 = 2 × 3 5 = 2 – 4 6 7 8 = 6 – 7 1 2 3 4 5 6 7 8 9* 10 800 800 800 800 800 1000 1200 1400 1600 1800 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 800 727 661 601 546 621 677 718 746 763 0 73 139 199 254 379 523 682 854 1037 800 1529 2189 2794 4169 5753 7502 9394 11407 - 5800 6527 7188 7789 8335 8956 9633 10351 11097 - < 0 < 0 < 0 < 0 < 0 < 0 < 0 < 0 > 0 1752 11097 4241.01 0909.0 11097 )9091.0(1 9091.01 )9(. 1 1 9 91 Rs P v v x           Table 12
  • 34. 34 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Table 13: Again for machine B, A = Rs 2500 To find the value of n satisfying (1) for machine B, we compute thee following table Form the table, it is clear that equation (1) satisfied for n = 8. It would be best to replace machine B after 8 years. The fixed annual payment for machine A Year n Cn vn-1=(0.909)n-1 (vn-1) Cn (1-vn-1) Cn P(n) 1 2 3 4 = 2 × 3 5 = 2 – 4 6 7 8 = 6 – 7 1 2 3 4 5 6 7 8* 9 1200 1200 1200 1200 1200 1200 1400 1600 1800 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 1200 1091 992 902 820 745 790 821 840 0 109 208 298 380 455 610 779 960 1200 2288 3278 4180 5005 6710 8369 10560 - 3700 4791 5783 6685 7505 8250 9040 9861 - < 0 < 0 < 0 < 0 < 0 < 0 < 0 > 0
  • 35. 35 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Since x1 > x2 It would be better to purchase machine B instead of A. 1680 )8(. 1 1 82 Rs P v v x     Replacement of the machines in anticipation of complete failure the probability of which increases with time: In general the probability of failure of an item increases with time. The complete failure of an item (machine) may result in complete break down of the system which puts the organization to a heavy loss. Thus there is a need of some replacement policy of such items to avoid the possibility of complete breakdown. Such items may be replaced even when they are in working order. The following policies are followed: 1. Individual Replacement Policy: According to this policy the failed item is immediately replaced by the new one, e.g. in house fused bulb is replaced by the new one.
  • 36. 36 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org 1. Group Replacement Policy: In general a system contains a large number of identical low – cost items such that the probability of their failure increases with time or age. In such cases there is a set up cost for replacement which is independent of the number replaced. Here in such systems it may be advantageous to replace all the items at some fixed interval. Such policy is called the group replacement policy. This policy is followed in the systems where the cost of an individual item is so small that the cost of keeping records of individual’s age can not be justified. Group replacement should be made at the end of nth period if the cost of individual replacement for the n – th period is greater than the average cost per period by the end of n periods. Group replacement should not be made at the end of nth period if the cost of individual replacement at he end of (n - 1)th period is not less than the average cost per period by the end of (n - 1) periods. To determine the interval of optimum replacement:
  • 37. 37 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The problems are the special cases of the problems in industry where the failure of any item (machine) can be treated as death and the replacement of any item (machine) can failure can be taken to a birth in the human populations. We consider the following morality problem: Let a large population be subjected to a given morality curve for a very long period of time under the following assumptions. (i) All death's are immediately replaced by births. (ii) There are no other entries or exit. Then we shall prove the following results (i) The number of deaths per unit time becomes stable. (ii) The age distribution ultimately becomes stable. Problems in Morality:
  • 38. 38 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The problems connected with recruitment and promotion of the staff in any system (organization)are known as the staffing problems. These problems are also treated as the replacement problem where the staff of the system is treated like a machine part. The problem of staff replacement arises due to resignation, retirements deaths of the staff members from time to time. Therefore to maintain a suitable strength of the staff in a system there is a need of some useful recruitment policy. Staffing Problem: Morality Tables: Morality tables for any item can be used to obtain the probability distribution of its life span. Let N = The total number of items in the system in the beginning And N (t) = Number of survivors at any time t. Then the probability that any item will fail in the time interval (t – 1, t) is given by since N (t - 1) > N (t) And the probability that any item that survived up to the age (t - 1) will die in the next year is given by )1.........(.......... )()1( N tNtN  )2.........(.......... )1( )()1(   tN tNtN
  • 39. 39 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org The following morality rates have been observed for a certain type of light bulb: There are 1000 bulbs in use and it costs Rs 1.00 to replace an individual bulb which has burnt out. If all bulbs were replaced simultaneously it would cost 25 paise per bulb. It is proposed to replace all bulbs at fixed intervals, whether or not they have burnt out and to continue replacing burnt out bulbs as they fail. At what intervals should all the bulbs be replaced? Case: Morality Tables: Solution: 25.0 100 2550 15.0 100 1025 10.0 100 10 3 2 1        P P P 1, 20.0 100 80100 30.0 100 5080 54321 5 4        PPPPPHere P P Week 1 2 3 4 5 Percent failing by the end of the week 10 25 50 80 100
  • 40. 40 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Since the sum of all probabilities is equal to 1.  P6, P7, ……. Are all zero. Therefore, a bulb can not survive for more than five weeks i.e., a bulb which has survived for four weeks is sure to fail in the fifth week. Assuming that the burnt out bulbs in any week are replaced just at the end of that work. If Ni be the number of replacements at the end of ith week, while all 1000 bulbs were new initially, then we have N0 = Number of bulbs in the beginning. = 1000 N1 = Number of burnt out bulbs replaced at the end of 1st week = N0P1 = 1000 × 0.10 = 100 N2 = Number of burnt out bulbs replaced at the end of 2nd week = N0P2 + N1P1 = 1000 × 0.15 + 100 × 0.10 = 160 N3 = Number of burnt out bulbs replaced at the end of 3rd week = N0P3 + N1P2 + N2P1 = 1000 × 0.25 + 100 × 0.15 + 160 × 0.10 = 281 N4 = Number of burnt out bulbs replaced at the end of 4th week = N0P4 + N1P3 + N2P2 + N3P1 = 1000 × 0.30 + 100 × 0.25 + 160 × 0.15 + 281 × 0.10 = 377 N5 = Number of burnt out bulbs replaced at the end of 5th week = N0P5 + N1P4 + N2P3 + N3P2 + N4P1 = 1000 × 0.20 + 100 × 0.30 + 160 × 0.25 + 281 × 0.15 + 377 × 0.10 = 350 N6 = Number of burnt out bulbs replaced at the end of 6th week = N0P6 + N1P5 + N2P4 + N3P3 + N4P2 + N5P1 = 0 +100 × 0.20 + 160 × 0.15 + 281 × 0.25 + 377 × 0.15 + 350 × 0.10 = 230
  • 41. 41 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org N7 = Number of burnt out bulbs replaced at the end of 7th week = N0P7 + N1P6 + N2P5 + N3P4 + N4P3 + N5P2 + N6P1 = 0 + 0 + 160 × 0.20 + 281 × 0.30 + 377 × 0.25 + 350 × 0.15 + 350 × 0.10 + 230 × 0.10 = 230 And so on…….. From the above calculations we see that Ni the expected number of bulbs failing each week increases up - to fourth week and then decreases up to 6th week and then increases again. In this way Ni oscillates till the system settles down to steady state. The average life of bulb =  Xi Pi = 1P1 + 2P2 + 3P3 + 4P4 + 5P5 +……………… = 0.10 + 2 × 0.15 + 3 × 0.25 + 4 × 0.30 + 5 × 0.20 = 3.35  Average number of replacement per week = N / (Mean Age) = 1000/3.35 = 299  Average cost of weekly individual replacement policy = Rs 299 (Since the cost of individual replacement of a bulb cost Rs 1) Now we consider the case of group replacement End of week Total cost of group Replacement in Rs Average cost per week in Rs 1 2 3 1000 × 0.25 + 100 × 1 = 350 1000 × 0.25 + (100 + 160) × 1 = 510 1000 × 0.25 + (100 + 160 + 281) × 1 = 791 350 255 263.66
  • 42. 42 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org Thus, the minimum cost per week is Rs 255.00 if the bulbs are replaced as a group after every two weeks and this cost is also less than the average cost of weekly individual replacement policy. Hence for minimum monthly cost all the bulbs should be replaced after every two weeks.
  • 43. Jagan Institute of Management Studies
  • 44. 44 Jagan Institute of Management Studies (JIMS) www.JimsIndia.org About JIMS JIMS Rohini is one of the leading MBA institutes of Delhi. We impart professional education both at post graduate and undergraduate levels in the fields of management and information technology. Our PGDM program is approved by the AICTE and is accredited from NBA for excellence in quality education. PGDM program has also been granted equivalence to MBA degree by the AIU. We offer specialized PGDM programs in International Business and Retail as well. JIMS, Rohini, Sector 5 also offers technical programs viz BBA, BCA & MCA affiliated from GGSIPU. Established in 1993, JIMS completed its 20 years of Excellence in 2013. We offer excellent academic structure, industry interaction and job opportunities.
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