A framework for incorporating business risks in physical asset replacement decisions in capital-intensive industries

[摘要] ENGLISH ABSTRACT: The global financial crisis in 2008 and the subsequent recession brought theturmoil of unprecedented uncertainty and risk to capital-intensive organizationsforcing themto re-evaluate capital investment strategies for physical assets. Thebusiness landscape now, in 2016, share similar economic and business risk relatedcircumstances. Capital-intensive organizations are frequently faced withthe challenging decision of when to replace physical assets. This decision needsto be made as a function of traditional asset replacement factors such as performancedegradation, operating and maintenance costs, asset salvage value, andtax implications as well as organization-specific circumstances and the externalbusiness environment. Today, many organizations tend to focus on traditionalasset replacement factors therefore not including the evolution and impact ofbusiness risks which may significantly influence strategic initiatives such as operatingand capital expenditure decisions.In this study, a quantitative framework is developed to incorporate the forecastedimpacts and evolution of business risks over time into physical asset replacementdecisions in capital-intensive industries. More specifically, a logicaland structured framework incorporating both qualitative and quantitative busness risks as well as traditional asset replacement factors using theMarkov DecisionProcess (MDP) modeling technique is developed. The framework providesmanagers with a tool to assist them in generating an optimal physical asset replacementpolicy for a finite period of time into the future while adhering to aspecified objective function.An extensive literature review is conducted which covers Asset Management(AM), asset replacement theories, business riskmanagement, and modeling techniquesserving as the foundation of the proposed framework. Validation of theproposed framework was accomplished by means of a case study conducted at adiamond mining organization in Southern Africa facing a volatile business environmentproving both the theoretical and practical value of the framework. Theresults indicate that the developed framework is a useful tool to incorporate businessrisks in physical asset replacement decisions in capital-intensive industries.

[发布机构] Stellenbosch University