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

Van Wyk, Franco (2016-12)

Thesis (MScEng)--Stellenbosch University, 2016.

Thesis

ENGLISH ABSTRACT: The global financial crisis in 2008 and the subsequent recession brought the turmoil of unprecedented uncertainty and risk to capital-intensive organizations forcing themto re-evaluate capital investment strategies for physical assets. The business landscape now, in 2016, share similar economic and business risk related circumstances. Capital-intensive organizations are frequently faced with the challenging decision of when to replace physical assets. This decision needs to be made as a function of traditional asset replacement factors such as performance degradation, operating and maintenance costs, asset salvage value, and tax implications as well as organization-specific circumstances and the external business environment. Today, many organizations tend to focus on traditional asset replacement factors therefore not including the evolution and impact of business risks which may significantly influence strategic initiatives such as operating and capital expenditure decisions. In this study, a quantitative framework is developed to incorporate the forecasted impacts and evolution of business risks over time into physical asset replacement decisions in capital-intensive industries. More specifically, a logical and structured framework incorporating both qualitative and quantitative busness risks as well as traditional asset replacement factors using theMarkov Decision Process (MDP) modeling technique is developed. The framework provides managers with a tool to assist them in generating an optimal physical asset replacement policy for a finite period of time into the future while adhering to a specified objective function. An extensive literature review is conducted which covers Asset Management (AM), asset replacement theories, business riskmanagement, and modeling techniques serving as the foundation of the proposed framework. Validation of the proposed framework was accomplished by means of a case study conducted at a diamond mining organization in Southern Africa facing a volatile business environment proving both the theoretical and practical value of the framework. The results indicate that the developed framework is a useful tool to incorporate business risks in physical asset replacement decisions in capital-intensive industries.

AFRIKAANSE OPSOMMING: Die wêreldwye finansiële krisis in 2008 en die gevolglike resessie het ongekende onsekerheid en risiko teweeggebring in kapitaalintensiewe organisasies en hulle sodoende gedwing om bestaande kapitaal beleggingstrategieë vir fisiese bates te hersien. Die huidige besigheidslandskap, in 2016, toon soortgelyke ekonomiese en besigheidsrisiko verwante omstandighede. Kapitaalintensiewe organisasies word dikwels gekonfronteer met die uitdagende besluit wanneer om fisiese bates te vervang. Hierdie besluit moet gemaak word as ’n funksie van tradisionele batevervangingsfaktore soos die agteruitgang in bateverrigting, toenemende bedryfs- en instandhoudingskoste, bate herwinningswaarde en belastingimplikasies asook organisasie-spesifieke omstandighede en die eksterne bedryfsomgewing. Baie organisasies is geneig om op die tradisionele batevervangingsfaktore te fokus en neem dus nie die evolusie en impak van besigheidsrisiko’s, wat ’n aansienlike invloed kan hê op strategiese inisiatiewe soos bedryfskostes en kapitaalbesteding besluite, in ag nie. In hierdie studie word ’n kwantitatiewe raamwerk ontwikkel om die voorspelde impak en evolusie van besigheidsrisiko’s met die verloop van tyd te integreer in fisiese batevervangingsbesluite in kapitaalintensiewe nywerhede. ’n Logiese en gestruktureerde raamwerk word ontwikkel waarin beide kwalitatiewe en kwantitatiewe besigheidsrisiko’s sowel as tradisionele batevervangingsfaktore ingesluit word met behulp van die Markov besluitnemingsproses modellering tegniek. Die raamwerk bied aan bestuurders ’n instrument om hulle te help in die ontwikkeling van ’n optimale fisiese batevervangingsbeleid vir ’n beperkte tydperk in die toekoms, terwyl dit aan ’n bepaalde doelfunksie voldoen. ’nOmvattende literatuurstudie is uitgevoerwat batebestuur, batevervangingsteorieë, besigheidsrisiko-bestuur, en modellering tegnieke insluit en dien as die basis van die ontwikkeling van die voorgestelde raamwerk. Die validering van die voorgestelde raamwerk is tot stand gebring deur middel van die uitvoering van ’n gevallestudie by ’n diamantmyn in Suider-Afrika wat ’n uitdagende sosioekonomiese en sakeomgewing in die gesig staar. Die gevallestudie beklemtoon beide die teoretiese en praktiese waarde van die raamwerk. Die resultate dui daarop dat die ontwikkelde raamwerk ’n waardevolle instrument is om besigheidsrisiko’s in fisiese batevervangingsbesluite te integreer in kapitaalintensiewe nywerhede.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/100294
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