Parallel replacement under capital rationing constraints

Contrary to serial replacement, parallel replacement problems require a decision maker to evaluate a portfolio of replacement decisions in each time period because of economic interdependencies among assets. In this paper, the authors describe a parallel replacement problem in which the economic interdependence among assets is caused by capital rationing. The research was motivated by the experience gained from a vehicle fleet replacement study where solutions to serial replacement problems could not be implemented since they violated management’s budget plan. When firms use budgets to control their expenditures, competition for the limited funds creates interdependent problems. In this paper, the authors formulate the problem as a zero-one integer program and develop a branch-and-bound algorithm based on Lagrangean relaxation methodology. A multiplier adjustment method is developed to solve one Lagrangean dual.