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Gabriel Alves da Costa Lima

Director of Aremas


The challenge of allocating capex to reinvestments

This equation must be in the mind of all managers, whether they are maintenance, production, marketing etc. It is on the minds of Executive Directors and market analysts. But why? Simple, it is the motivator of any asset management movement in your company. The company has little control in the open market. Production is not controlled, but the market; the price is not controlled, but the market; the resale value of the assets is not controlled, but the market; the taxes are not controlled, but the congress. Therefore, the company only controls the cost of production.

In everyday life, it is common to hear phrases like these: “This equipment is failing too much”; “This equipment consumes a lot of energy, has many leaks”; “The cost of this equipment is the highest of the entire fleet”. This reminds us of the concept of economic life of the assets (in time: the tractor does not have a useful life, but an economic one; the tractor motor bearing has a useful life).

Every asset has an economic life, whether used in the production or processing of wood. It is the operating time interval that minimizes your total cost of ownership (usage). We will present two different (but complementary) asset management situations: (1) Replacement of individual assets and (2) Replacement of assets within the system.

1. Replacement of assets individually:
This type of management consists of carrying out an analysis at the individual level of assets (tractor, forwarder , truck, engine, etc. ) in terms of acquisition cost, maintenance cost, opportunity cost of capital, tax depreciation rules, among others. From these entries one can estimate economic life as shown in Illustration A.

The economic life is 6 years so the cost of ownership is minimized. But what is the managerial value of this replacement every 6 years? To explain, let's consider that there are two replacement options: every 6 years or every 12 years.

The illustration B, shows the cost comparison results of different managerial alternatives. Note that the replacement at the right time has a managerial value of 734 thousand reais. This is what is called management transformation based on large databases today. There is a lot of room for optimizing resources and controlling costs (the only manageable variable to generate return on assets). This result was for a device. Think of the gain of applying this model to all assets.

2. Substitution of assets within production systems:
Pulp production only takes place if, and only if, all system assets are in operation (chopper subsystem, digester subsystem, boiler subsystem, scrubber subsystem, bleaching subsystem, etc.). That is, it is the availability of the integrated system that matters, not the isolated subsystems. With that, the questions arise:

In which assets should we allocate investments in renovations this year and next?

What is the minimum amount of reinvestment so that the system has an availability of 92% in the next 5 years?

Currently, there are two engines with low performance, but which one should you replace immediately as your budget is limited?

When measuring the maintenance costs of each subsystem (or equipment) over time, behavior is similar to that shown in the illustration C.

Note that maintenance costs in each year are uncertain. On the other hand, the equivalent cost curve over time is always increasing, but with decreasing speed. On the other hand, as operating time accumulates, there is a reduction in asset availability as shown in the illustration D.

The illustration D shows that as time accumulates, equipment availability decreases and stabilizes due to constant maintenance services. But what happens to availability in the plant?

When replacing assets, there is a renewal of their availability, as shown in the illustration E. Note that without the reinvestments, the annual availability of the plant decreases to stabilize around 73%. However, as reinvestments are made, plant availability recovers to the desired level. Consider a case of a plant containing 20 assets. The company has an investment target of 15 million per year except in 2023 which will be 20 million per year. There is a target of 85% availability each year. The manager wants to know which assets should be replaced and when. The solution is found in the illustration F.

The managerial flexibility to generate the results shown in the illustration, F, consists of choosing which assets to invest in and in which years to do so.

This is shown in the illustration G. Note that the assets, A and B, must be replaced in 2022, the asset, C, must receive reinvestment in 2026 and so on.

Those assets that must be replaced sooner are shown in orange and those with longer economic lifespan are shown in blue. This approach is fundamental to strategic planning. However, without the use of data analysis, econometric modeling and computational applications it is not possible in practice.