The authors begin by formulating a manufacturing problem called the “drilling problem” - one which features certain elements of traditional machining economics problems in an intelligent manufacturing setting. Two types of policies are then considered: (i) the traditional age replacement policy and (ii) the one-step feedback policy. A diffusion- threshold stochastic model, new in this setting, is introduced and compared to a Taylor tool life formula. The new model in fact allows the drilling problem to be formulated as a stochastic optimal control problem. A numerical example is supplied.