Determining when a piece of equipment has reached the end of its usefulness given the company’s marketplace and profitability goals can be a perplexing situation if not viewed from the proper perspective. This is especially true since the industry downtown occurred and many door and window companies found themselves over-leveraged in a declining marketplace.

Coming out of the downturn, I have now found that many companies tend to be overly cautious when it comes to investing in new equipment. So what are the considerations involved in determining whether or not it is time to retire existing equipment and move on to more modern capital equipment?

The first and foremost consideration when it comes to replacing a piece of equipment is safety. If it can no longer be operated safely by the average worker, then it is time to decommission it. This does not mean sell it, either – it means put it out of service. No piece of equipment is worth operating if it increases the risk of an injury or death to a production associate – period. Even if you are lucky and no one has yet been hurt, having unsafe equipment on the floor can have a huge impact on employee morale and productivity. People take pride in their work, and they like to work with modern machinery equipped with the latest safety features. If an accident does happen, loss of life or limb could have a devastating effect on employee morale, and the consequent fines and lawsuits could have a huge impact on the company’s profitability — or even its future existence.

The second consideration is whether the equipment is still cost-effective to operate given the other options currently available. Cost effectiveness itself is measured along three guidelines — annual maintenance cost, down time and output per man-hour vs other alternatives currently available. If it costs too much to maintain, then the average cost per year to operate it can escalate to include buying numerous parts, inventory costs of having these parts on hand, shipping costs of constantly bringing unexpected parts onto the scene, and labor associated with installing the parts and completing repairs.

Then there is the down time. In a door and window plant, lost time is lost money. This is especially true in the busy season when many plants are operating at near-peak capacity. When back orders pile up, customers’ orders are delayed, which could result in lost sales and worse yet – lost customers. Managers will have to pay overtime to employees to get the back-order situation caught up, and this further inflates unit cost while negatively affecting profitability.

Then there is the third guideline related to cost-effectiveness, which is determined by the inherent design of the machine itself vs. what is out there now that’s the state of the art. A machine can be operating just as good as the day it was purchased, but a question remains, in light of new developments: is this still good enough? Row boats can still row, but can they beat a boat with an outboard engine? If your competitors have made investments in new technology that enable them to produce doors and windows at lower price points due to investments in new technology, then they will pull ahead of you in the marketplace unless your old manual method adds some type of mystique or perceived unique quality for which customers are willing to pay a higher price.

The third major consideration involves required customer specifications. Is your machinery capable of meeting them? Everybody knows Energy Star requirements are being revised every few years. The thermal performance requirements are continuously getting tougher to meet. Lower U-values mean switching to different (usually non-metal) materials and updated frame designs. Your equipment may be designed to run like a beast using yesterday’s spacer, frame designs and glass types, but will it keep you competitive in the next five years with new spacer materials, soft-coat glass and modern frame designs that are entering the marketplace in response to these increasingly tougher energy performance requirements? If not, it may be time to invest in the future, even if the current equipment is still running smoothly because, in the end, meeting customer requirements at the most attractive price point will ultimately land you the orders.

Ultimately, a decision to replace equipment comes down to a capital investment so a financial analysis must ultimately be completed. In my last blog, I discussed the net present value (NPV) method of analyzing preventative maintenance (PM) programs. The same NPV method can be applied to capital investment decisions for new equipment. The series of cash payments in each year for the lifespan of the equipment are represented by cash outflows and are discounted back to their present value using the discount rate, or cost of capital. The same is done with the series of cash inflows, which are represented by the cash savings or revenue streams that will generated by the equipment due to improved efficiency or from gaining new business. The overall net difference is the NPV, and if it is positive, then the investment in new equipment is justified.

So as many of us prepare to head to the GlassBuild America, the U.S. industry’s premier venue for seeing new fenestration-related equipment, let’s keep these three major factors in mind as we determine which modern equipment innovations will be next on our shopping list.

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