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Overcoming Obsolescence Risk
Keeping Close Tabs on Your Aging Equipment Can Help Build a Business Case for Replacements
You can't fight time — eventually, the technology, manufacturing equipment and methods your company uses will become obsolete. Not only can that interrupt the regular course of business, but it could also present a potentially dangerous situation. Operating legacy equipment past its obsolescence date exposes your company to many forms of risk, including employee injuries when it breaks or malfunctions, downtime due to a lack of replacement parts and spiraling costs associated with inefficient techniques and processes.
Given the problems accompanying obsolescence risk, what strategies should your company employ to stay one step ahead? How can you build a strong business case for a potential lender to secure the funds to replace legacy equipment? And what should your executive team do when equipment fails and you need an emergency replacement?
Planning for Obsolescence
Before your business can mitigate the risk associated with obsolescence, you must gather information on every piece of equipment in operation:
Track equipment performance over time. If you've not done so already, create a scorecard for each piece of equipment to capture its performance. Gather information on the equipment's age and operating efficiency. Pay close attention to maintenance logs and the associated costs to repair and maintain it over time.
Accident rates. As legacy equipment ages, there is an increased chance for employee injuries. Review the number of accidents associated with a machine breakdown. Wherever possible, quantify the cost of each accident in terms of production time lost and medical expenses incurred.
Evaluate the benefits of predictive maintenance. The growing use of sensors in manufacturing allows plant managers to gather critical operating data as a means of predicting when to conduct maintenance. Evaluate the costs, benefits and feasibility of retrofitting sensors to track and report each piece of equipment's performance.
Does the manufacturer still support the equipment? If you don't know already, find out whether the original equipment manufacturer (OEM) still provides replacement parts. If they've previously issued a product discontinuance notice, note the date they plan to end their support. If the OEM offers a last-time buy option, meaning they plan to provide one last opportunity to buy replacement parts, consider the cost, which is often considerable, versus the investment needed to replace the equipment entirely.
Learn about aftermarket support. If the OEM plans to end their product support, find out whether an aftermarket third-party supplier exists. Alternatively, contact a competitor who operates the same equipment to determine whether they have individual parts to sell or equipment they plan to retire.
Justifying a Replacement
Having documented the status of your existing manufacturing equipment and determined how to support and extend its performance, it's never too early to create a business case for a potential lender to secure replacements. Developing a business case can either support a planned replacement or an emergency purchase in the event a machine breaks and your firm lacks access to replacement parts.
A solid business case should compare the output and costs of operating the legacy equipment against the purchase of new equipment. Ideally, your analysis should include a proforma detailing the impact of the investment on your company's financial statements. And don't overlook efficiency improvements as well as the avoidance of costly maintenance and the threat of accidents when you compile the business case to present to your lender.
As your legacy equipment ages, adopting a proactive approach to its management and replacement can mitigate obsolescence risk. To fund the investment in new equipment, a lender will need to understand why you want to replace your equipment, the impact on your company's operations and whether your company possesses the financial wherewithal to cover the resulting debt payment.
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