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A Computerized Equipment Replacement Methodology

Jos Weissmann1, Angela Jannini Weissmann 2 and Srinivas Gona 3


The University of Texas at San Antonio
Department of Civil Engineering
6900 North Loop 1604 West
San Antonio, Texas 78249-0665
Telephone (210) 458-5595
Fax (210) 458-5589
1
jweissmann@utsa.edu
2
transanalysis@att.net
3
gonasrinu@yahoo.com
Submitted for consideration for presentation at the 82nd Transportation Research Board, January 2003, and
subsequent publication in the Transportation Research Record

Abstract.
The Texas Department of Transportation (TxDOT) owns and maintains an active fleet inventory of over
17,100 units and replaces ten percent of the fleet annually. Evidently, any methodology that can improve
the replacement procedures currently used at TxDOT has the potential of savings millions of dollars of the
taxpayers money. This paper describes an economically sound methodology developed to assist equipment
replacement at TxDOT. This new method takes full advantage of the comprehensive TxDOTs Equipment
Operating System (EOS) database, and is based on criteria that prioritize the units based on comparisons
among all units within any desired class of equipment.
The research objectives were to develop, test and implement a computerized system capable of updating
the analysis data sets, processing and comparing the life cycle cost profiles for all equipment units in
TxDOTs inventory, supporting equipment replacement decisions with life cycle cost based replacement
criteria, and generating reports in tabular and graphical formats in order to simplify the analysis of the
results by TxDOT decision makers.

Keywords: Equipment Replacement, life cycle cost analysis, computerized system

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BACKGROUND
In 1993, Loren Wiseman of Pacific Electric Co. surveyed the utility industry to find the "perfect"
replacement program. After analyzing over 100 responses, he found almost as many variations in
replacement programs and criteria as there were responses (1).
The primary function of equipment managers is to provide the proper equipment, at the right time
and at the lowest overall cost. A major task in accomplishing this function is fleet planning, which
involves identifying the requirements of equipment users, developing optimal strategies to meet those
needs, and putting the plan into action. Economic equipment replacement is a complex portion of this
process, and is the main thrust of this paper. It requires developing procedures to assure that each unit is
replaced or remanufactured at its optimal economic life point, as well as assisting in the development of
effective specifications and procurement procedures.
Currently, the Texas Department of Transportation (TxDOT) uses Texas Equipment Replacement
Methodology (TERM) to identify candidates for replacement one year in advance. TERM uses threshold
values for age and usage of an equipment unit as inputs for replacement. For example, current threshold
values for dump trucks with tandem rear axles (class code 540020) for age and usage are respectively 10
years and 150,000 miles.
In addition to targeting life and usage, units with exceptionally high repair cost are also targeted,
by establishing an exception threshold, so that units that exceed the class average repair costs can be
identified. For example, TxDOT's TERM identifies units that exceeded a certain predetermined threshold
of the repair costs represented as a percentage of the original purchase cost. Using the dump trucks with
tandem rear axles again as an example, the current threshold in TxDOT's TERM system for the repair cost
is 100 percent.
RESEARCH APPROACH AND OBJECTIVES
The current TERM provides TxDOT with a very good tool to make equipment replacement
decisions. However, the equipment life-cycle costs are taken into account in a simplified manner, and the
data reports are not fully automated. A comprehensive equipment replacement method should include the
following steps:

Identify units targeted for replacement,


Obtain replacement requests from users,
Apply an economic analysis model,
Prioritize replacement units,
Develop new equipment specifications,
Acquire new equipment, and
Dispose of old equipment.

Replacement decisions should ideally consider some form of economic analysis such as Life
Cycle Cost Benefit Analysis (LCCBA), which requires the accumulation of accurate cost historical data.
TxDOT's Equipment Operations Systems (EOS) database is very comprehensive, containing a wealth of
information relevant to life cycle cost analysis and replacement decisions.
TxDOTs General Services DivisionPurchase and Equipment Sections originated the research
project summarized in this paper as a response to the need for developing equipment replacement analysis
procedures based on engineering economics principles. The project staff assigned to this research project
developed a computerized Transportation Equipment Replacement Methodology (TERM) system for the
State of Texas. TERM is composed of four modules: a database update module, a database query module, a
life-cycle module, and a priority ranking module. Together, these modules allow the user to maintain an
updated replacement database, retrieve information on specific equipment units or groups of equipment,
and obtain replacement priorities based on user-selected criteria that can include life-cycle costs,
downtimes, age, mileage, and others. This paper summarizes the capabilities of this computerized system.

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DATA AVAILABILITY
TxDOT's Equipment Operations Systems (EOS) database is very comprehensive, containing a
wealth of information relevant to life cycle cost analysis and replacement decisions. As such, the first task
was to select variables relevant for a replacement analysis database, and validate the records available for
them. Next, the project team developed the analysis data sets, and the data update module.
At the time of the data validation analysis, the study team had EOS files from fiscal year 1995 to
fiscal year 2000. The historical data set extracted from TxDOT's EOS database contained 118,158 records,
and included minor equipment as well as both retired and active equipment. The final data sets used by the
system contain records from 1990 through 2001, and can be updated whenever another EOS file becomes
available.
It is relevant to note that the data validation checks resulted in a remarkable overall level of
accuracy over 99.5%. Nevertheless, the replacement system contains code to flag data inconsistencies that
may be present. The levels of tolerance used for flagging each variable were selected in concert with
experienced equipment managers at TxDOT.
Data items are summarized in the following categories: Date variables like receipt date for the
equipment, Life-Cycle-Cost variables such as repair costs, fuel, downtime and usage in miles or hours,
Equipment identification and status variables such as equipment ID and retirement status.
The initial step in developing the Texas Equipment Replacement Methodology (TERM) system
consisted of developing a Statistical Analysis System (SAS) data set containing only the variables needed
for replacement decisions. Next, this data set was split into two: active and retired equipment. The active
data set records were validated, and records containing values that may negatively impact accuracy were
flagged in four different manners.
The active data set is the basis for the TERM system. Information from the retired data set is not
necessary for the TERM system. The retired data set was used in this study to establish default values for
some life-cycle cost variables such as depreciation and inflation rates. Maintenance of the retired
equipment database is recommended for future research.
EQUIPMENT LIFE-CYCLE COST ANALYSIS
Life Cycle Cost (LCC) of an equipment unit is the sum of all costs incurred during the entire
equipment life, as discussed in several references (2,3,4). It includes the purchase cost, resale cost, repair
costs, operational costs, and indirect costs. Ideally, it should also include the monetary value of intangibles
such downtimes, and equipment depreciation and obsolescence.
The concept of annualized cost is extensively covered in the engineering economics literature
(2,4). It consists of converting lump sums into equivalent annual installments, using time value of money.
These installments are termed Equivalent Uniform Annual Costs (EUAC). The factors to convert the costs
accrued by the equipment during its life into EUACs can be found in any engineering economics book.
They are a function of the number of years, or equipment age ("n") and the annual discount rate ("i"),
assumed constant over the analysis period. The beginning of the analysis period is the reference date for
the present worth values.
If the Equivalent Uniform Annual Life-Cycle Costs (EUALCCs) are calculated for each year a
unit is in operation, and plotted against time (equipment age), one should obtain the trends depicted in
Figure 1. In the beginning of the equipment life, the cost of acquiring the unit is spread into a small number
of installments and weighs heavily on the annual cost, while the maintenance costs are low. As time passes,
the initial investment offsets over the years, while repair costs increase. Adding these two costs results in
the equivalent uniform annualized LCC curve, which decreases as the initial investment offsets over the
years, and increases as the operating costs become greater than the capital cost installments. Theoretically,

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the total EUALCC reaches a unique point of minimum (optimal age in Figure 1). There is a region of low
EUALCC before and after this minimum, where the first derivative of the EUALCC with respect to age
(slope of the curve) is very small, and the EUALCC changes little with time. Then, the slope increases
faster, until the EUALCC is equal to the EUALCC of a new equipment.
Ideally, an equipment should be replaced right before the point where the EUALCC equals the
purchase cost of a new unit. If one wants to avoid decisions based on single-point forecasting, the
equipment should be replaced after the region of optimality and before the EUALCC reaches the purchase
value. The region of the graph where the EUALCC is still declining should have the lowest replacement
priority; the region of optimality is the second lowest replacement priority; and the region where the
EUALCC increases with time is the highest priority. The longer the equipment has been in the upwards
region, the higher the priority. Predicting exactly when to replace within this period is a delicate exercise,
because in real life the cost data are affected by randomness, intangible factors such as equipment
obsolescence or vendor warranties must be taken into account, and expenditures are not as smooth as
assumed in the literature, as clearly shown in figure 2, which depicts real data for a specific equipment.
Figure 2 shows that annualized life cycle costs are not as smooth as theory indicates. Actual
operational costs contain atypical surges and drops in equipment use, downtimes, and operational costs.
This is to be expected. Unforeseen repairs do occur, and usage is not uniform every year. Figure 2 was
selected as a good illustrative example of this fact. It clearly indicates that automobile 00137C is in the
optimal EUALCC region (see Figure 1), since the general trend of its EUALCC is neither increasing nor
decreasing. However, there are two atypical peaks in the operational costs, at age 5 and a higher one at age
7. A closer inspection of the data base indicates that highest sum of repair cost and downtime of the entire
history, was, indeed, at age 7 (year 1996), totaling $4,342.89.
The peaks in operational costs depicted in Figure 2 are the norm for most units. This situation
creates the need for a programmable method to identify when the overall trend in EUALCC is exiting the
optimal region and entering the upward cost slope. This method must enable a computerized routine to
distinguish between localized cost surges and drops, and overall increasing or decreasing trends.

EUAC
Purchase
Cost

Annualized LCC

Minimum
EUAC

Annualized operating costs

Annualized ownership costs

Region of
Lowest
Replacement
priority

Optimal
age
Region of
Optimalilty

Years
Region of High
Replacement
Priority

Figure 1 Theoretical EUACs of Owning and Operating an Equipment Unit

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4500
4000
3500
EUAC

3000
Capital Costs

2500

Operational Costs

2000

LCC

1500
1000
500
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Age
Figure 2 EUALCC of Equipment ID= 00137C (Automobile)
Time Series Trend Analysis
The graph of EUALCC versus age meets the mathematical definition of a time series: a series of
autocorrelated values with a general trend in time that is a function of external factors. Autocorrelated
means that the value in year "x" depends not only on the external factors, but on the previously observed
values as well.
Among the many techniques for analyzing time series, the research team selected the Bayesian
trend modeling (5). This statistical method decomposes a time series Yt into three components, as follows:

Yt = Tt + S t + t

(1)

Where:
Yt =

Variable under study (in this case, EUALCC in each year or age "t");

Tt =

Trend component, the part of the variable that explains the general trend;

St =

Seasonal component, applicable in cases where the time series is affected by a


seasonal factor whose effects repeat at regularly spaced intervals (this component
is zero for equipment costs);

t =

Random, or irregular component.

The method filters the random (irregular) factors and the seasonal factors out of a time series,
leaving only the general trend. The trend can increase with time, decrease with time, remain stable, or
combine one or more trends. Figure 3 shows an example of an actual EUALCC and its trend. In the
computerized TERM system, the trend calculations start at the third year of equipment age, since the initial
depreciation always causes a sharp downward slope that is not relevant for the replacement analysis, and
may bias the estimate of the relevant part of the trend.

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1400

10996E
1200

1000

Capital Costs
Operational Costs
LCC
Trend

800

600

400

200

0
0

10

15

20

25

30

35

Age

Figure 3 EUALCC of Equipment ID= 10996E with Bayesian Trend Analysis.


To be feasible for implementation in a computerized environment, a replacement priority criterion
based on EUALCC would have to "look" at the graphs, assigning the highest priorities to equipment units
that have been in the upward region for the longest time, followed by those that have been in the same
region for shorter times. It would assign the lowest priority to equipment units that have not yet been
amortized (downward trend), and the second lowest priority to those that still are in the optimal region.
Among the latter, the longer the equipment has been in the optimal region, the higher the priority, since it is
more likely to start the upward trend in the near future.
In order to actually use the EUALCC and trend analysis as described above, it was necessary to
develop an automatic, programmable method to "look" at the graphs that would give the same results as the
human eye. This required converting the trends calculated as discussed previously into a combination of
single numbers that can be examined by a computer.
The EUALCC Trend Score
The project team developed a EUALCC trend score, a number that combines three attributes
relevant to equipment replacement: (1) which region of the LCC graph the equipment is, (2) how long it
has been there, and (3) how steep is the upward slope. The trend score can be seen as a numerical method
to examine each EUALCC graph, and mimic decisions based on a human eye looking a the graph.
The EUALCC trend score is defined as:

Trendscore = 100

T T T
n

t =3

For: Tt Tt +1 > 0

(2)

For: Tt Tt +1 0

Trendscore = 0

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t +1

Paper revised from original submittal.

Where:
T =

EUALCC trend component

n =

equipment age (number of years in service)

t =

time (in years of service, the same as equipment age).

Therefore, the greater the trendscore, the highest the replacement priority. Units with trendscore
closer to zero have the lowest priority. The trendscore is greater than zero only for the part of the EUALCC
history that has an upward trend. For these cases:

The steeper the upward trend slope, the higher the trendscore; and
The longer the unit has presented an upward trend, the higher the trendscore.

Table 1 summarizes the calculations for four equipment units, and present them in a rank order of
trendscores.
Table 4.1 Trendscore and EUALCC Replacement Criteria
Unit ID

Trendscore

10996E
00015D
00004D
00015D

43
27
0
-9.5

Priority Based on
Trendscore

Priority Based on
Graph visual examination

1
2
3
4

1
2
3
4

MULTI ATTRIBUTE PRIORITY RANKING


The most important finding of this study's literature review is that, conceptually, all replacement
strategies are the same in one important way. They all compare the condition of a challenged unit to some
pre-determined threshold, which can be age, usage, downtimes, cost ratios or a probability of failure. None
of these strategies provide a way to directly compare units with the rest of the fleetin other words, a way
to look at the entire fleet (or a desired subgroup) and see where the challenged unit stands in comparison
with the other units in the fleet or subgroup, rather than pre-determined values, thresholds, or cost ratios.
This approach requires a comprehensive historical database of equipment attributes, which was
established during the development of TERM, and it is an approach that allows the manager to compare the
challenged unit to all other active units within a desired class or group. The attributes used for comparison
can be selected by the manager, and include, but are not restricted to, life-cycle costs, operational costs,
repair costs, cumulative usage, and the trend scores discussed previously. The priority ranking is calculated
for the combination of attributes and relative weighs selected by the manager. The replacement budget can
be matched to the units on the top of the replacement priority list.
This approach was programmed into the system and is available in addition to the trend score
analysis discussed previously. It was based on the conceptual approached developed for TxDOT's Bridge
Division (6).
This methodology allows managers to weight the relative importance of replacement indicators;
however, rather than depending on predetermined threshold values, this approach looks at how many units
have attribute values better than those of the unit in question. The ranking methodology is summarized by
the following equation:

Rank =

w P
n

i =1

i i

(3)

Where:

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w =

weight of attribute "i"

i =

attribute (such as age, downtime, trendscore, etc.)

P =

percentile ranking of attribute, i.e., percent of units that have an attribute "i" value
better than that of the unit being ranked

The weights ("w") will be input by the user and will represent the relative importance placed on
each attribute. For example, if the user feels that downtimes and repair costs should be twice as important
as the operational cost and the mileage, the weights of these attributes could be respectively 0.335, 0.335,
0.165 and 0.165. This will calculate the rank in equation 3 as a number between 0 and 100, with 100 being
the highest priority. If the user does not wish to consider an attribute, the weight for that attribute can be set
to zero.
The percentiles ("P") are calculated from the historical data set, and represent the percent of
equipment units that have better attribute values than those of the specific unit being ranked. In the
computerized system TERM, these percentiles for the different attributes are maintained in tabular format.
For example, Figure 4 depicts the downtime percentiles for a class code 1010 (Aerial Personnel Device
Truck Mounted). For this particular class code, equipment 06163C has a cumulative downtime of 515
hours, giving it a calculated percentile of 25%. This means that if the decision was to be based only on
down time, this particular equipment would have a rank according to equation 3 of 25. By the same token,
an equipment with a downtime of 3,000 hours and above would have a rank of 100, and would be the first
priority for replacement.
The system also allows for the user to take advantage of an automatic qualifying procedure where
thresholds for attributes are established to bring the equipment to the top of the priority list.
100
90

Percentile %

80
70
60
50
40
30
20
10
0

500

1000
1500
2000
2500
Cumulative Down Time (hours)

3000

3500

Figure 4 Downtime Percentiles for Class Code 1010.


IMPLEMENTATION: THE TERM COMPUTERIZED SYSTEM
The development of the TERM computerized system is documented in References (7, 8 and 9).
TERM is an automated PC based-system for equipment replacement analysis. The Graphics User Interface
(GUI) design of the TERM application provides TxDOT personnel with a computerized user-friendly
environment to support equipment replacement decisions. The TERM application processes the life cycle
cost profiles for different pieces of equipment in the TxDOT inventory, applying the replacement criteria

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discussed previously in this paper. The Graphics User Interface (GUI) integrates all the PC SAS modules in
a fully automated way.
The SAS programming environment is used for both the calculation modules of the TERM system
and for the development of the user interface. SAS has powerful data management as well as graphical and
reporting capabilities. The components of SAS used for user interface development were SAS/AF frames
and SCL (Screen Control Language) and SAS Macros. Figure 5 depicts the main menu screen for the
system. In this screen there are several buttons that allow access to the different modules of the system that
apply the concepts discussed previously, such as the Ranking and LCC Ranking modules. The top of the
screen allows the user to directly browse through the equipment data base. The retrieve data button answers
queries for a specific equipment unit history. The LCC Trend button calls routines that perform the lifecycle trend analysis for a specific piece of equipment, while the Ranking button calls the routines that
perform the multi-attribute ranking procedure.
Figure 6 depicts the implementation of the trendscore analysis discussed previously. At the top of
this figure is the ranked list in order of trendscore for class code 1010 (Aerial Personnel Device Truck
Mounted). In addition, the user is able to query a specific equipment ID and display historical EUALCC
information. In this particular case, the user has requested a plot for equipment ID 06101C, the second
replacement priority for this class code, and the complete LCC and trend analysis are depicted on a window
floating over the menus window.

Figure 5 Main Menu for the TERM System.

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Figure 6 Sample Screen for Ranking Using Trendscores in TERM.


SUMMARY AND CONCLUSIONS
There are two sets of objectives that the new TERM system must fulfill. There are conceptual
objectives, i.e., the system must rely on a replacement strategy that includes life-cycle costs, takes full
advantage of the existing data, and allows the manager to compare challenged units to the rest of the fleet,
in addition to pre-determined thresholds. There are also practical objectives, that relate to a balance
between a powerful software, and its ease of use.
In order to meet these objectives, this project proposed and developed a new equipment
replacement approach, the multi-attribute priority ranking combined with a life-cycle cost trend analysis. It
balances elements the basic replacement strategy approaches currently in use by different agencies. This
approach requires a comprehensive historical database of equipment attributes, and it is perhaps the only
approach that allows the manager compare the challenged unit to all other active units within a desired
class or group. Replacement priorities are calculated based on comparing the challenged unit to all other
units in the same group. The attributes used for comparison can be selected by the manager, and include,
but are not restricted to, life-cycle cost trends, operational cost, cumulative usage, and other criteria. The
priority ranking is calculated for the combination of attributes and relative weighs selected by the manager.
The replacement budget can be matched to the units on the top of the replacement priority list.

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This priority ranking system was programmed into TERM and is in the process of being
implemented at TxDOT's General Services DivisionPurchase and Equipment Sections for immediate use.
This menu-driven software will allow TxDOT to use the new system immediately for the entire fleet. The
system will also allow TxDOT to compare the LCC and multi-attribute ranking methodologies, developing
a basis not only for equipment replacement, but also for future modifications and upgrades on the software
and the methodology developed by this project.
ACKNOWLEDGMENTS
The authors are grateful to the Texas Department of Transportation for providing the funds for the
development of this study. We also would like to acknowledge the invaluable contributions of Mr. Glenn
Hagler and his staff at the Texas Department of Transportation for their input and feedback during the
development of this research..
REFERENCES
1. Bibona, Salvatore. Vehicle Replacement Strategies. Utility Fleet Manager, October 1996, pp. 1927.
2. B.S. Dhilon. Life Cycle Costing. Gordon and Breach Science Publishers, New York, 1989.
3. Weissmann, Jos, R. Harrison, and M. Euritt. Conversion of the Texas Department of
Transportation 6- and 10- yard dump truck fleet from standard to automatic transmissions. Research
Report 979-1F, Center for Transportation Research, Bureau of Engineering Research, The University
of Texas at Austin, November, 1991.
4. Grant, E.L., W.G. Ireson and R.S. Leavenworth. Principles of Engineering Economy. John Wiley
and Sons, New York, 1990.
5. SAS/ETS Users Guide, Version 6, Second Edition, SAS Institute Inc, SAS Campus Drive, Carry,
NC, 1998.
6. Weissmann, J., N. H. Burns, and W. R. Hudson. "Operating the Texas Eligible Bridge Selection
System (TEBSS)", Research Report N 1911-1F, Center for Transportation Research, The University
of Texas at Austin, 1991.
7. Weissmann, J., and Angela J. Weissmann, "Analysis of Cost Data and Development of Equipment
Replacement Framework", Research Report 4941-1, University of Texas at San Antonio, San Antonio,
January 2002.
8. Weissmann, Angela J., and Jos Weissmann. "Development of a Multi-Attribute Automated
System For Equipment Replacement Decisions", Research Report 4941-2, University of Texas at San
Antonio, San Antonio, 2002.
9. Weissmann, Angela J., Jos Weissmann, and Srinivas Gona "Development of The TxDOT
Equipment Replacement Software Environment ", Research Report 4941-3F, University of Texas at
San Antonio, San Antonio, 2002.

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