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Logistics Systems EngineeringSystem Cost Analysis

NTUSY-521-N

SMUSYS 7340

Dr. Jerrell T. Stracener, SAE Fellow

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System Cost Analysis

• Definitions• Cardinal Principles• Scope of Life Cycle Cost (LCC)• LCC Model Structure & Analysis Flow• LCC Applications• LCC Phases• LCC Analysis• LCC Tracking

• Summary

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Definitions

• LCC: The total cost to the customer of acquisition and ownership of a system over its full life. It includes the cost of development, production, operation, support and where applicable, disposal.

• Cost Effectiveness: Consideration of performance, mission reliability, operational readiness (availability), etc., along with LCC to evaluate competing design or support approaches.

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Definitions

• Life Cycle Costing: An analytical study of a system’s live cycle cost- not an exact science.

• Design to Cost (DTC): Cost is a design parameter receiving consideration along with performance, schedule, etc. DTC is a management tool to integrate cost into the design process.

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Cardinal Principles

• Not an exact science - numerous estimations

• No right or wrong - reasonable or unreasonable

• No such thing as an LCC expert - too broad and deep

• Not a good budgeting tool - effective as comparison/trade-off tool

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Cardinal Principles

• Requires a project team approach - need specialized expertise

• Should be integral part of the design and support processes - DTLCC

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Scope of LCC

• LCC analysis can be applied on commercial as well as government programs

• Existing government programs require LCC analysis - increasing frequency is expected

• LCC analysis is applicable across all phases of a program - development, production and use

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Scope of LCC

• LCC analysis is applicable to software as well as hardware

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Typical LCC Model Structure

ACQUISITIONCOST

D & DCOST

NONRECURRINGINVESTMENT

COST

AcquisitionCost

Insert Model

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LCC Analysis Flow

Doctrines•Procurement•Operational•Maint./Support

SystemCharacteristics

StandardFactors

InputData

EstimatesCost

Model

Estimateof

LCC

BestEstimateof LCC

Sensitivity Analysis

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LCC Applications

• Customer:– Affordability studies - measure impact of a

system’s LCC on the system budget– Source selection - compare LCC among

competing systems (suppliers)– Design trade studies - influence design

aspects of systems that impact LCCEvaluate design alternativesEvaluate support alternativesEstablish reliability and maintainability

levels

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LCC Applications

• Customer (continue):– Repair level analysis– Warranty pricing and cost effectiveness

• Supplier– Identification of cost drivers for emphasis

during program - sensitivity– Comparison of competing design and support

approaches - ranking– Estimate of total LCC - tracking– Marketing tool - new and modified programs

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Life Cycle Costing in Sys. Acquisition

SAE RM&S Workshop-April, 1989

70%

85%

95%

By end of concept studies

By end of system def.

By end of full scale devlp.

Cu

mu

lati

ve

Perc

en

t of

LCC

100

0System Life Cycle

50

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LCC by Program Phase

Determinationof

Mission Need

•Conceptual Studies

•Investigation of Alternative Solutions

Phase IDemonstration

andValidation

Phase IIEngineering andManufacturingDevelopment

Phase 0Concept

Exploration andDefinition

Phase IIIProduction

andDeployment

Phase IVOperations

andSupport

•Identification/ Analysis of Major System Alternatives

•Competitive Demonstration

•Design and Test Selected System Alternative

•Design Tradeoffs

•Rate Production of System

•Warranty

•User Support

•Modifications/ Product Improvement

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Phased Lice Cycle Costs

D&V FSD

DevelopmentCosts

Acquisition Costs

•Production Items•Support Items

Acquisition Costs

Ownership Costs

Operational andSupport Costs (O&S)

Impact on•Force Structure Equipment/Personnel•Logistical Support SystemsConcept

An

nu

al C

ost

Life Cycle Phases

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LCC Analysis

• LCC Analysis Applications• Types of LCC Analyses• LCC Baseline Analysis• Operating and Support Costs• LCC Tradeoff Analysis

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LCC Analysis Applications

• Marketing Effort: conducted to demonstrate the cost advantage of a proposed system compared with existing equipment or competitors equipment

• Proposal Effort: Conducted per customer’s requirements and used as a customer evaluation tool

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LCC Analysis Applications

• Required Contractual Effort: Conducted per customer’s requirements and used to evaluate different alternatives or to monitor LCC as design matures

• General Program Support: conducted to assist internal management in deciding among alternative approaches to solving a problem or in evaluation the risk associated with particular decision

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Types of LCC Analyses

• Baseline LCC Analysis: Evaluates the life cycle cost for a particular system configuration for a given operational and maintenance environment

• Sensitivity Analysis: Determines the sensitivity of the output results ot key input parameters in order to identify ocst drivers which will require special controls and monitoring as well as improved model input accuracy

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Types of LCC Analyses

• Tradeoff Analysis: Evaluates different alternative approaches and selects a preferred candidate based upon a decision criterion such as cost, performance, availability or a weighted combination of these factors

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Types of LCC Analyses

• LCC Tracking: Monitors the life cycle cost of a system over an extended period of time, noting variances from an established baseline and from the previous estimate and relating these changes to hardware/software modifications, maintenance policy changes, scenario fluctuations or other factors

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LCC Baseline Analyses

• Sensitivity Analysis:– Pinpoints hardware/software, cost categories,

and input parameters with greatest impact on LCC - drivers

– Establishes thresholds for the drivers

• Reference point for subsequent LCC analysis

• Frequent drivers - from experience– Unit Production Cost (UPC) - The average cost

per unit for defined quantities

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LCC Baseline Analyses

• Frequent drivers-from experience (cont.)– Mean Time Between Failures (MTBF) - with

operating hours, estimates the expected number of failures per unit in a defined time frame

– Mean Time To Repair (MTTR) - with labor rate, estimates the active maintenance labor cost per failure - determined for each maintenance level

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Operating & Support Cost: 20 Year Distribution

0.0

0.2

0.4

0.6

0.8

1.0

Fuel 75%

Sch Maint 2%Trans 5%

Uns Maint 15%

Spares 3%

Operating & Support Cost Unscheduled Maintenance Cost

PartsConsumed

Labor RepairMatl

Elements of Cost

50%

40%

10%

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LCC Tradeoff Analysis

• Identifies preferred design/support candidate from LCC standpoint

• Provides ranking of candidates with respect to LCC - minimal emphasis on magnitude of LCC for each candidate (concentrate on difference(s))

• Through sensitivity analysis, identifies thresholds on input data drivers where ranking of candidates is changed

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LCC Tradeoff Analysis

• Evaluates other tradeoff criteria, i.e., performance, operational readiness and mission reliability, and combines these with LCC for overall cost-effectiveness figure of merit

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LCC Tracking

• Indicates trend of total system LCC every 6 months - compare with baseline estimate

• Provides feedback to design and support engineers - status against assigned goals

• Control of LCC drivers related to the hardware/software - must meet specs

• Definition of tradeoffs to balance LCC drivers to control total LCC - triggered by increasing LCC over previous estimate

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LCC Tracking

• Minimize importance of absolute magnitude of LCC estimate - trend is the key issue

• Provides interval estimates for LCC prediction purposes - cost-risk analysis

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Life Cycle Cost ForecastingMargin of Error

LCCUncertainty

LCC

Time - YearsSAE RM&S Workshop-April, 1989

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Relationship Between LCC and MTBF

Cost($)

MTBF (Hours)

Total Life Cycle Cost

Operating and Support Cost

Development and Acquisition Cost

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Conclusion

• LCC can be controlled on government and commercial programs through the diligent application of sound LCC Analysis Process

• DTLCC is a management tool to integrate LCC into the decision process

• DTLCC is not well defined and depends on ingenuity to make it work

• Tradeoffs are the cornerstones

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Conclusion

• Team concept is the vehicle for a successful DTLCC program - communication and cooperation

• Emphasis must be placed on the LCC drivers early in the design phase

• Cost must be traded off against performance to satisfy the true intent of DTLCC

• LCC Results must be related to the hardware/software to implement DTLCC

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Conclusion

• Design and support people must “Think LCC” continually if DTLCC is to be successful

• There must be a continual dialogue between customer and supplier for DTLCC to be successful - adequate time and funding