Life Cycle Costing LCC

For years, many R&D organizations have operated in a vacuum where technical decisions made during R&D were based entirely on the R&D portion of the plan, with little regard for what happens after production begins. Today, industrial firms are adopting the life-cycle costing approach that has been developed and used by military organizations. Simply stated, LCC requires that decisions made during the R&D process be evaluated against the total life-cycle cost of the system. As an example, the R&D group has two possible design configurations for a new product. Both design configurations will require the same budget for R&D and the same costs for manufacturing. However, the maintenance and support costs may be substantially greater for one of the products. If these downstream costs are not considered in the R&D phase, large unanticipated expenses may result at a point where no alternatives exist.

Life-cycle costs are the total cost to the organization for the ownership and acquisition of the product over its full life. This includes the cost of R&D, production, operation, support, and, where applicable, disposal. A typical breakdown description might include:

• R&D costs: The cost of feasibility studies; cost-benefit analyses; system analyses; detail design and development; fabrication, assembly, and test of engineering models; initial product evaluation; and associated documentation.

• Production cost: The cost of fabrication, assembly, and testing of production models; operation and maintenance of the production capability; and associated internal logistic support requirements, including test and support equipment development, spare/repair parts provisioning, technical data development, training, and entry of items into inventory.

• Construction cost: The cost of new manufacturing facilities or upgrading existing structures to accommodate production and operation of support requirements.

• Operation and maintenance cost: The cost of sustaining operational personnel and maintenance support; spare/repair parts and related inventories; test and support equipment maintenance; transportation and handling; facilities, modifications, and technical data changes; and so on.

• Product retirement and phaseout cost: The cost of phasing the product out of inventory due to obsolescence or wearout, and subsequent equipment item recycling and reclamation as appropriate.

Life-cycle cost analysis is the systematic analytical process of evaluating various alternative courses of action early on in a project, with the objective of choosing the best way to employ scarce resources. Life-cycle cost is employed in the evaluation of alternative design configurations, alternative manufacturing methods, alternative support schemes, and so on. This process includes:

• Defining the problem (what information is needed)

• Defining the requirements of the cost model being used

• Collecting historical data-cost relationships

• Developing estimate and test results Successful application of LCC will:

• Provide downstream resource impact visibility

• Provide life-cycle cost management

• Influence R&D decision making

• Support downstream strategic budgeting

There are also several limitations to life-cycle cost analyses. They include:

• The assumption that the product, as known, has a finite life-cycle

• A high cost to perform, which may not be appropriate for low-cost/low-volume production

• A high sensitivity to changing requirements

Life-cycle costing requires that early estimates be made. The estimating method selected is based on the problem context (i.e., decisions to be made, required accuracy, complexity of the product, and the development status of the product) and the operational considerations (i.e., market introduction date, time available for analysis, and available resources).

The estimating methods available can be classified as follows:

• Informal estimating methods

• Judgment based on experience

• Rule-of-thumb method

• Formal estimating methods

• Detailed (from industrial engineering standards)

• Parametric

Table 14-14 shows the advantages/disadvantages of each method.

Figure 14-16 shows the various life-cycle phases for Department of Defense projects. At the end of the demonstration and validation phase (which is the completion of R&D) 85 percent of the decisions affecting the total life-cycle cost will have been made, and the cost reduction opportunity is limited to a maximum of 22 percent (excluding the effects of learning curve experiences). Figure 14-17 shows that, at the end of the R&D phase, 95 percent of the cumulative life-cycle cost is committed by the government. Figure 14-18 shows that, for every $12 that DoD puts into R&D, $28 are needed downstream for production and $60 for operation and support.

Life-cycle cost analysis is an integral part of strategic planning since today's decision will affect tomorrow's actions. Yet there are common errors made during life-cycle cost analyses:

• Loss or omission of data

• Lack of systematic structure

• Misinterpretation of data

• Wrong or misused techniques

• A concentration on insignificant facts

• Failure to assess uncertainty

• Failure to check work

• Estimating the wrong items

TABLE 14-14. ESTIMATING METHODS

Estimating Technique

Engineering estimates (empirical)

Parametric estimates and scaling (statistical)

Equipment/ subsystem analogy estimates (comparative)

Expert opinion

Application

Reprocurement

Production

Development

Production Development

Reprocurement

Production

Development

Program planning

All program phases

Advantages

• Most detailed technique

• Best inherent accuracy

• Provides best estimating base for future program change estimates

• Application is simple and low cost

• Statistical data base can provide expected values and prediction intervals

• Can be used for equipment or systems prior to detail design or program planning

• Relatively simple

• Emphasizes incremental program and product changes

• Good accuracy for similar systems

• Available when there are insufficient data, parametric cost relationships, or program/product definition

Disadvantages

• Requires detailed program and product definition

• Time-consuming and may be expensive

• Subject to engineering bias

• May overlook system integration costs

• Requires parametric cost relationships to be established

• Limited frequently to specific subsystems or functional hardware of systems

• Depends on quantity and quality of the data

• Limited by data and number of independent variables

• Requires analogous product and program data

• Limited to stable technology

• Narrow range of electronic applications

• May be limited to systems and equipment built by the same firm

• Increased product or program complexity can degrade estimates

• Estimate substantiation is not quantifiable

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STUDIES. RECOMMENDATIONS. AND ACCEPTANCE ©V, THE PMO

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Figure 14-16. Department of Defense life-cycle phases.

Figure 14-16. Department of Defense life-cycle phases.

Figure 14-17. Actions affecting life-cycle cost (LCC).

Figure 14-18. (A) Typical DoD system acquisition LCC profile; (B) typical communication system acquisition LCC profile.
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