Repair or Replace
December to March is maintenance season at Pinicon. Every vehicle, tillage tool, tractor, harvester and sprayer gets inspected to determine if they have another twelve months of cost effective reliability. Just as it is wise to pick your battles, so it is with the question of when to repair or replace a machine.
Machinery expense is the third highest expense category in our budget, after land and inputs. Whereas land and input costs are highly determinant, machinery expense is an area where we have more control and correspondingly, more potential for competitive advantage.
A poll of ten farmers would yield a range of opinions on this topic. From the large operation that replaces every machine annually at a fixed hourly rate (known as a “MUD” or “multi-unit discount”) to the smaller farmer who buys older used machines and runs them until they die an unnatural death. Generally, the tradeoffs between these opposing strategies are the newer your fleet, the higher your depreciation and interest expense while having fewer repairs. The older your fleet, depreciation and interest are lower while repair expense is higher.
Young Jim believed there was one best equipment ownership plan that achieved least cost. After much trial and error, I have concluded it depends. Considerations include size and skill of workforce, in house capabilities, management aptitudes, perceived importance of timeliness, volume of workload, and even business purpose. (Yes, there is such a thing as tax shelter farmers) Any combination of old or new, green or red, fast or slow, and big or small could be appropriate for your farm.
We arrived at our current strategy after a three-year experiment with the MUD. The appeal of the MUD is fixed annual cost coupled with new state of the industry equipment every year. Predictable cash flow, high productivity and little or no maintenance costs or machine downtime are the main advantages. The ability to dispatch an army of hot off the press equipment and accomplish an extraordinary amount of work with no breakdown drama is seductive. However, we found there were unintended consequences.
Because we only used the machines for one year and they were under warranty, there is no incentive to take care of them. This apathy infected the Team and carried over to other areas of the operation. It was hard to enforce high standards of care throughout the organization while essentially ignoring basic maintenance on the MUD machines. Changing grease tubes became a lost art.
Secondly, we decided we were becoming overly exposed to one manufacturer. Per terms of the MUD, you will purchase all the machines you are leasing if you quit participating in the annual replacement. Although you may be getting a 30% discount off list for a large volume trade, MSRP goes up every year regardless of economic conditions. Over time, the price tag to discontinue trading and purchase all those new machines becomes staggering. Almost all MUD's are financed by the manufacturer. The farmer has no equity in the package.
More than any other reason, we came to see the MUD primarily as a scheme to keep manufacturing capacity maximized, used equipment lots full, and list prices artificially high. Prematurely depleting earth's resources for the purpose of JD shareholder enrichment is not a cause we wanted to be part of.
In the ten years since we did our last MUD, we have adopted a selective repair/replace strategy. We occasionally buy new machines when there is an opportunity to substantially improve efficiency. Typically, we look for quality used machines and maintain them with the goal of realizing many years of dependable productivity. When attaining safe reliability is no longer economical, we resell or part out. Courtesy of the trend towards under engineering combines (planned obsolescence), we upgrade every three years. The cost of parts and down time makes this the least costly option.
Once we focused on giving all our equipment the highest level of care, the idea that “we take care of our stuff" has become more consistently practiced. Our approach to repairing or replacing a machine is aligned with our outlook on life. Appreciate and take care of what you have, minimize your consumption and waste, consider the larger consequences of your decisions.
Doing what is often right means valuing effects outside your P&L.
Jim
