Increase ROI: 5 steps to just-in-time equipment replacement

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RTU in poor conditionIt’s the operations manager’s nightmare: A vital piece of mission-critical HVAC or restaurant equipment fails in the middle of the busiest season of the year. Suddenly, you’re coordinating an emergency replacement. You need it yesterday, and you’re forced to take what you can get.

Known as “run-to-fail”, for better or worse this is the dominant equipment replacement tactic used today. This approach defers purchases for as long as possible and tries to wring the maximum life out of old equipment.

Contrast this reactive run-to-fail tactic with just-in-time asset management, which uses proactive Total Cost of Ownership (TCO) analysis to decide when it makes sense to replace equipment.

This post explores the downsides of run-to-fail and shows how a just-in-time asset management strategy can save you time and money over the long haul. You’ll also get five steps to transition to a just-in-time approach, including a couple that can begin paying dividends immediately.

Run-to-fail costs more over time

First, let’s look at the potential problems with replacing equipment using a run-to-fail policy. Here are five:Increased costs of run-to-fail

  1. Replacement is most likely to occur during peak heating or cooling season, when equipment stresses cause more failures, costs are higher, and comfort impacts are at their highest.
  2. Equipment needs to be replaced as fast as possible, and if the most energy-efficient unit is not in stock, you risk higher lifetime energy costs.
  3. There’s little or no time to get competitive bids for equipment and installation, so you run the risk not only of paying more but also of paying for less-than-satisfactory service.
  4. Rushing the job leaves little time to research and apply for utility or other incentives for buying energy-efficient equipment.
  5.  A lack of time to analyze whether the system is properly sized for the application can lead to higher lifetime operating costs.

Run-to-fail increases the TCO for some equipment types by 10 to 20 percent. The costs add up, too: Multiply that per-location figure by 50 locations, and it could mean $200,000 or more a year in lost profits.

Beyond the specifics of this situation, there are bigger problems with a run-to-fail replacement approach. Think of the impact on your business: lost productivity, food spoilage, loss of revenue. Even worse is a potential hit to your brand reputation through unhappy customer experiences, amplified by social media and putting customer loyalty at risk.

Just-in-time replacement looks at TCO

Just-in-time replacement takes into account the total cost of ownership to get a true picture of lifecycle costs, including the costs of equipment, installation and energy, plus short- and long-term maintenance. This avoids owning and operating equipment during the most expensive part of its lifecycle. And it allows you to confidently identify and plan equipment replacement that delivers the best return on investment.

Here are five ways to transition to a just-in-time equipment replacement strategy:

  1. Identify all equipment beyond its useful life that could fail any day.
  2. Replace the oldest, least-efficient equipment first. Schedule replacements to coincide with off-peak periods with plenty of time to get equipment and installation bids.
  3. Asset Scoring AlgorithmGather the data. An effective TCO-based equipment replacement strategy requires good data. New technologies make it easier and more cost effective to collect data using advanced asset and energy management systems – starting with identifying exactly what equipment you have and what condition it is in and then identifying what it is actually costing to operate the equipment. Energy management systems, computerized maintenance management systems, mobile data collection tools and Internet-connected sensors help collect this critical information.
  4. Develop the systems and support to begin a planned equipment replacement strategy using TCO. This includes a system that can compare the cost of replacement with the cost of continuing to operate the equipment. There are asset management systems available that provide that kind of capability.
  5. Analyze the data. New cloud-based tools allow you to collect, analyze and report on different enterprise-wide data sets to enable effective capital planning.

Proactive asset management reduces costs

The financial and operational benefits of better asset management include reduced equipment operating costs, better employee productivity with fewer emergency situations, and a better customer experience. The good news is that today you can access technology to collect the needed data, and then use enterprise software tools to translate that data into a Total Cost of Ownership analysis. So it’s that much easier to transition to a more cost-effective just-in-time equipment replacement strategy.

To learn more about this strategic system of asset management, read our white paper, Total Cost of Ownership: Move to Just-in-Time Replacement.