Buy New or Rebuild?

If you read the last column you know I was writing from assignments in unusual environments in Alaska and Dubai. We spent time at both work sites discussing the important decision to buy new or rebuild. As you can imagine, the decision is traceable back to costs, but there are other concerns.

The discussion in Alaska revolved around what to do with a shovel operating in the pit moving coal. Mine-sized equipment is very hard to get now—the prices are high and the lead times have gone through the roof. In fact, the last new haul truck took 18 months to purchase. To complicate matters there are no other coal mines nearby, so there is no local market for heavy equipment.

The question was, should we take an old shovel out of the bone yard and rebuild it, or buy new? If we rebuild it should we do it in-house or use contractors? Should we do a complete rebuild or just the minimum necessary to get by?

In Dubai, the issue came up in a different context. There was a large compressor that had failed a couple of times. A decision was made by the office to replace it. The local maintenance engineer, on the ground and looking at the equipment, thought replacement was unnecessarily costly and a rebuild would be more effective.

These kind of questions are asked by fleets everyday. Many fleets have guidelines. For example, the US Postal fleet designed the new aluminum body to be transferable to a new chassis. Each body might last 15 years and go through three chassis.

I still use the first guidelines I came across at the Pepsi Bottling Group more than two decades ago. Their guideline stated that for beverage bodies, the rebuild should cost less than half of new and should give more than 2/3 of the life of new.

The Dubai problem was the easiest to dispatch. The full cost of the rebuild by a contractor knowledgeable about the compressor with a short warranty was $5,000, while a new unit with a longer warranty was $15,000. The engineer who had some experience with the unit thought that, due to the sand and environment, the life of the rebuilt one was about the same as the new unit. The warrantee on the new unit was four times as long. In some cases that would swing the scale, but in this case the warranties were mostly used for protection from major defects that would show up in the first month. In this case the rebuilt one wins hands down.

The situation in Alaska is tougher, because it is less an economic decision than it is a business decision. There are also more variables (unknowns), and because the size and scale of the decision is much greater you have to be more careful. The cost to completely rebuild the old shovel was about $300,000 and the new unit was over $500,000. Equipment is in severe service in the coal mine. Even new equipment has maintenance exposures. As a result no one had could day whether the life would be more, less or the same. I recommended assuming that the rebuilt shovel would have 2/3 of the life of new.

One problem was lead time. The lead time on doing a rebuild was 7 months shorter then the lead time on purchasing a new shovel.

The real question is not a maintenance question at all. Were they confident in the sales forecast and the coal prices? Everyone agreed that if the sales held up and the price held up they could easily afford the new shovel. Also, everyone was tired of the old equipment and wanted the new shovel (except the boss who was paying the bills). I reminded them that if they had the sales they would have to add the profit that would have been generated by the rebuilt shovel for the seven months until the new one was delivered to the cost of the new shovel!

With that added incentive the rebuilding economics won the day. The second question was who should rebuild the shovel. Here we parted company. I thought that by taking on such a large project they would lose control of their existing work load. What has happened in the past is that PMs and identified corrective work were delayed while a rebuild was going on. I thought that was a mistake. They decided they could save some big money by doing it themselves (indeed they could, but at what cost in breakdowns and disruptions?).

To minimize the cost they also did as little rebuilding as they could get away with to get the machine 'in the dirt.' The uptime will be problematic for years to come. Perhaps this is a temporary decision, and the new one was ordered too! I hope so.