development of product life-cycle cost analysis
TRANSCRIPT
DEVELOPMENT OF PRODUCT LIFE-CYCLE COST ANALYSIS TOOL
AHMED YUSSUF HUSSEIN
A project report submitted in partial fulfillment
of the requirements for the award of the degree of
Master of Engineering (Mechanical - Advanced Manufacturing Technology)
Faculty of Mechanical Engineering
Universiti Teknologi Malaysia
April, 2008
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To my beloved family
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ACKNOWLEGDEMENT
In the Name of Allah, the Most Beneficent, the Most Merciful. All praise and
thanks to Allah, lord of the universe and all that exists. Prayers and peace be upon His
prophet Mohammed, the last messenger for all humankind.
First, I would like to express my sincere gratitude and thanks to ALLAH. I am
deeply thankful to my parents for their continuous support and love throughout my study.
It is difficult to mention one person before the other. However, I undoubtedly
owe much to my project supervisor, Professor Dr. Awaluddin Mohamad Shaharoun, for
his condescending guidance and encouragement, intuitive suggestions and endless
endurance throughout the project. I am also highly indebted to my co-supervisors, Dr.
Muhammad Zameri Bin Mat Zaman, for his guidance, advices and motivation without his
continued support and interest, this thesis would not have been successful.
I would like to take this opportunity to express my sincere appreciation to Islamic
Development Bank (IDB) for giving me the scholarship opportunity. This scholarship
was of great assistance to me in my goal of attaining a masters degree. Also I would like
to thank my friends, colleagues and staff for enjoyable and enlightening period in UTM.
Many people contributed to this work, either directly or indirectly. Thanking
every one by name would take many pages. Therefore, for the people I did not mention in
this acknowledgment, from my heart ‘THANK YOU’.
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ABSTRACT
The main purpose of this project was to develop a life cycle cost analysis (LCCA)
tool which can be used by small and medium sized enterprises (SMEs) for the decision
making process when comparing different alternatives of their products. The tool is
expected to assist designers in making choices regarding the definition of product
characteristics, integrating a series of analysis, calculation, and decision-making tools in
the most appropriate manner in order to compare different alternatives of their product.
LCCA appears to be a useful approach to a comprehensive assessment of economic,
environmental and social impacts of the life cycle of a product and aids SMEs to meet
environmental requirements adopted in nations around the world. The tool plays a
primary role in this specific context due to the fact that not only production costs, but also
those costs incurred during use and disposal are greatly conditioned by the initial design
choices. Due to the differences exist in the cost structure of different products under
evaluation, it is difficult to generalize the model; However, by making some modification
to cost categories and by following the general LCCA framework developed, it is
possible to match the model to any application desired. The model is simplified for usage
in the form of ExcelTM in such away that the analyst can easily input data into tables and
generate outputs using Excel Charts. The decision is made based on the alternative with
lowest life cycle cost.
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ABSTRAK
Tujuan utama projek ini adalah bagi membina “life cycle cost analysis (LCCA) ”
kitar hidup analisis kos sebagi alat yang boleh digunakan oleh syarikat berskala kecil dan
sederhana, bagi membantu prosess membuat keputusan apabila perbandingan alternatif
terhadap penghasilan produk dilakukan. Alat ini dijangka dapat membantu jurutera di
dalam membuat pilihan berdasarkan definasi ciri produk, integrasi bebarapa siri analisa,
pengiraan dan alat pembuat keputusan dalam keadaan tersusun bagi membolehkan
pelbagai alternatif penghasilan produk dibandingkan. LCCA merupakan pendekatan yang
amat berguna dalam membuat penilaian menyeluruh terhadap ekonomi, alam sekitar dan
impak sosial terhadap kitar hidup produk serta membantu perusahaan kecil sederhana
bagi memenuhi kehendak alam sekitar yang telah diterima pakai di seluruh dunia. Alat ini
digunakan secara spesifik bukan hanya kos produksi malah kos yang terhasil daripada
penggunaan dan pelupusan dijana dengan menyeluruh pada pemulaan pemilihan
“design”. Oleh kerana wujud perbezaaan dalam struktur kos produk dibawah penilaian/
pembuatan ianya amat sukar untuk mengeneralisasi model tersebut. Walaubagaimanapun
melalui beberapa modifikasi dalam kategori kos dan melalui generalisasi rangka kerja
LCCA ianya membolehkan model tersebut disuaikan dengan aplikasi yang dikehendaki.
Model tersebut dipermudahkan penggunaannya dalam bentuk ExcelTM dimana input data
dimasukkan dengan mudah dan output dapat diterbitkan menggunakan carta Excel.
Seterusnya pemilihan dibuat berdasarkan alternatif yang memiliki nilaian semasa
terendah berdasarkan kitar hidupkos.
TABLE OF CONTENTS
CHAPTER TITILE PAGE
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
ABSTRAK vi
TABLE OF CONTENTS vii
LIST OF TABLES x
LIST OF FIGURES xi
LIST OF ABBREVIATIONS xii
1 INTRODUCTION 1
1.1 Background 1
1.2 Problem Statement 3
1.3 Objectives 5
1.4 Scope 5
1.5 Significance of study 6
1.6 Structure of the thesis 8
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2 LITERATURE REVIEW 10
2.1 Introduction 10
2.2 Cost analysis and the life cycle approach 11
2.3 Life Cycle Costing (LCC) 14
2.4 Product Life Cycle Cost Analysis 17
2.5 Review of LCCA models 18
2.6 Summary 24
3 METHODOLOGY 25
3.1 Introduction 25
3.2 General framework for LCCA 27
3.3 Preliminary Definitions 29
3.3.1 Definition of the problem 29
3.3.2 Identification of Feasible Alternatives 30
3.3.3 Development of Cost Breakdown Structure - (CBS) 30
3.4 Cost Valuation 31
3.4.1 Selection of cost model 31
3.4.2 Development of cost estimates 32
3.4.3 Development of Cost profiles 32
3.5 Result Analysis 34
3.5.1 Identification of high cost contributors 35
3.5.2 Accomplishment of sensitivity analysis 35
3.6 Decision making 36
3.7 Summary 36
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4 MODEL DEVELOPMENT 38
4.1 LCCA model 38
4.2 Cost breakdown structure – CBS 39
4.3 Cost Estimating 42
4.3.1 Total Product Cost (TC) 42
4.3.1.1 Research and development cost - CR 43
4.3.1.2 Production and construction cost - CP 47
4.3.1.3 Operation and support cost - CO 51
4.3.1.4 Retirement and disposal cost - CD 58
4.4 Software development 61
4.4.1 Model input 61
4.4.2 Evaluation of alternatives 64
4.4.3 High cost contributors 64
4.4.4 Sensitivity analysis 65
4.4.5 Application of LCCA model in automotive industry 65
4.4.5.1 Cost contribution 68
4.4.5.2 Evaluation of the two alternatives 69
4.4.5.3 Cost profiles 71
4.4.5.4 Decision making 72
4.4.5.5 Sensitivity analysis using scenario manager 73
4.4.6 Summary 74
5 DISCUSSION 75
6 CONCLUSIONS AND OPPORTUNITY FOR FURTHER STUDY 81
REFRENCES 84
APPENDIX A – INTEREST FACTOR TABLES 88-91
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LIST OF TABLES
TABLE NO. TITLE PAGE
2.1 Comparison of life cycle cost models 21
4.1 Cost breakdown structure - CBS 57
4.2 Evaluation of alternatives 58
4.3 Percentage of cost contribution 59
4.4 Sensitivity analysis 61
4.5 Cost breakdown structure of the two configurations 63
4.6 Evaluation of alternatives 66
4.7 Scenario summary 70
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LIST OF FIGURES
FIGURE NO. TITLE PAGE
1.1 Life cycle cost in various stages of product development 6
2.1 Product life cycle stages (marketing perspective) 11
2.2 Perception of life cycle: producer vs. consumer 12
2.4 Costs in product life cycle stages 17
3.1 Framework for life cycle cost analysis 25
4.1 Life cycle cost model configuration 37
4.2 Cost breakdown structure – CBS 39
4.3 Percentage of cost contribution 65
4.4 Development of life cycle cost profiles 68
4.5 Cost profiles of the two designs 69
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LIST OF ABBREVIATION
LCM - Life Cycle Management
LCCA - Life Cycle Cost Analysis
LCC - Life Cycle Costing
SMEs - Small and Medium Sized Enterprises
DFE - Design for Environment
ANN - Artificial Neural Network
ABC - Activity Based Costing
TCA - Total Cost Assessment
PLCCA - Product Life Cycle Cost Analysis
LCA - Life Cycle Assessment
CBS - Cost Breakdown Structure
TC - Total Cost
CR - Research and Development Cost
CP - Production and Construction Cost
CO - Operation and Maintenance Cost
CD - Retirement and Disposal Cost
ExcelTM - Excel Template
PV - Present Value
CHAPTER 1
INTRODUCTION
1.1 Background
Lack of environmental awareness has led us to mistakenly consider ourselves to
be outside the global ecosystem and, consequently, to satisfy our needs according to the
sole criterion of “the greatest efficiency at the lowest cost.” the resulting environmental
crises has shown how the eco-system has been seriously degraded by the use of modern
means of production, conceived without concern for either the environment or the
balanced use of resources. Above all, the widespread idea that profit and respect for the
environment are incompatible (a dangerous prejudice delaying a processes of recovery
that can no longer be postponed) is based on an inadequate vision of the problem
(Günther, 2007).
Any costs avoided by a production system in neglecting environmental issues will
fall, redoubled, onto the community. Clearly, industry must respect the elementary
condition of earning more than it spends, but it is crucial that profit is made while
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reducing environmental impacts to a minimum. This has increased the need for
sustainable development.
The main influencing factors include an expanding regulatory framework and
more stringent environmental protection standards. However, if a better match between
the corporate behavior and the principles of sustainable development is to be
achieved, businesses themselves will have to be active in seeking ways of
meeting social, environmental and economic objectives (Labuschange, 2005).
Manufacturers will have to assume a larger degree of responsibility for activities
related to the life cycle of their products after the purchasing and installation stage
(Westkaempfer, 2000).
Life cycle management (LCM) is an approach supporting sustainable
development and the most efficient possible use of resources. Based on the life cycle
concept the costs and benefits of strategic aims and choices can be understood and
justified in a comprehensive manner. LCM covers the entire life cycle of a product
with a view to maximizing value along the life cycle while meeting cost and
environmental requirements. Integral components of this value are, for example,
reliability, costs, manufacturability, operational capacity, usefulness, usability,
recycling capacity and other environmental aspects (Prasad, 1999).
One important part of LCM is life cycle cost analysis (LCCA). The objective of
this analysis is to optimize the manufacturing, maintenance and operation of a
product (e.g. manufacturing equipment) for the period of its usability based on
establishing all the important cost items over this period.
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This facilitates a quantified assessment of various product design alternatives,
comparison of cost items at various stages of the product life cycle and comparison
between the stages with a view to choosing the optimal alternative.
The cost items monitored include all costs incurred in relation to
manufacturing of a product until its disposal at the end of its life cycle. The items
should be structured so as to allow for identification of potential links between
various items with a view to establishing optimal life cycle costs. The structure of
cost items will always depend on the nature of the product and it should always
facilitate life cycle cost analysis. The purpose of estimating cost links is to express
cost items as a function of one or more independent variables. The final stage of the
calculation process is determination of a method for formulating life cycle costs.
Some would say that LCCA is to help engineers “think like MBAs but act like
engineers.” That is true, but LCCA is broader in sense. According to Emblemsvag
(2003), the main purpose of LCCA is to help organizations apply knowledge about past
performance and their gut feelings to future issues of costs and risks. This is done not
in the traditional sense of budgeting, but in meaningful predictions about future costs of
products, process, and their associated risks.
1.2 Statement of The Problem
The pressure for implementation of principles of sustainable development in
corporate decision-making processes is increasing continuously. Other aspects
concerning product life cycle management are also subject to this pressure.
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Life cycle cost analysis appears to be a useful approach to a comprehensive
assessment of economic, environmental and social impacts of the life cycle of a
product. It is necessary to realize the importance of costs throughout the full life
cycle of a product in order to adopt measures to optimize the product value in relation to
the financial resources used. Literature also increasingly emphasizes that rapid
technological change and shortened life cycles have made product life cycle cost analysis
critical to organizations (Ray and Schlie, 1993; Barfield et al., 1994; Murthy and
Blischke, 2000).
Despite this growing awareness of aspects related to LCCA, the use of this
method in Small & Medium-Sized Enterprises (SMEs) is still insufficient. There are a
number of reasons for the generally lower level of acceptance of the life cycle costing
methods. One of the major reasons is lack of motivation resulting, above all, from
insufficient trust in the outcomes and achievements of the methodology.
Therefore, it is important to overcome the current situation where preference
is given to assessing products based on manufacturing costs, and to short-term
effects, where the link between manufacturing and future costs is ignored and where
there is a lack of knowledge of the LCCA methods and their use.
This study will focus on the development of a user-friendly product life-
cycle cost analysis tool that will include all identifiable cost categories of product from
conception until disposal. The tool in the form of software is expected to assist SMEs
carry out LCCA in their product/process decision-making. With the help of this tool,
designers can substantially reduce the life-cycle cost of products by giving due
consideration to life-cycle implications of their design decisions. In this role, LCCA
becomes an operational instrument used to implement one of the basic strategies for
achieving sustainable development, the integrating economic and environmental
considerations in to the decision-making process (WCED, 1987).
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1.3 Objectives of the study
The primary objective is to develop a life-cycle cost analysis (LCCA) tool that
can assist designers in making choices regarding the definition of product characteristics,
integrating a series of analysis, calculation, and decision-making tools in the most
appropriate manner in order to compare different alternatives of their product.
A secondary objective is to simplify the usage of the tool in the form of simple
software so that minor modifications of the model can lead to many other applications.
1.4 Scope of the study
The project surveys several LCCA methodologies, product design considerations
until disposal are surveyed and a framework for the development of LCCA process is
developed, and to validate this framework in actual practice, simple software is
developed to enable different decisions to be considered with respect to their effect in the
life-cycle costing.
The purpose of the tool is to enable different design configurations (different
materials, different design, and different processes) to be compared not only from an
environmental compliance view but also from a cost perspective. The tool offers support
in the decision-making process at the early phases of the design process. The inclusion of
cost permits more informed business decisions and considerations to be undertaken by
the designer.
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1.5 Significance of the study
The importance of estimating and controlling costs during the design process,
with the aim of limiting the cost of producing a product, is now considered and
ineluctable factor in the development of an efficient product. Such products are able to
respond to a market demanding high standards of quality and ever-shorter development
times combined with contained costs (Weustink et al., 2000).
LCCA plays a primary role in this specific context due to the fact that not only
production costs, but also those costs incurred during use and disposal are greatly
conditioned by the initial design choices. By some assessments, more than half of the
total cost of a product’s life-cycle is determined by the concept design phase alone
(Fabrycky and Blanchard, 1991), and up to 85% can be considered fixed by the end of the
completed design phase (Dowlatshahi, 1992), although only a limited fraction of this cost
will have actually been spent on these phases of the development process.
The field of application of LCCA is particularly wide and includes evaluation and
comparison of alternative designs; assessment of economic viability of projects and
products; identification of cost drivers; and cost effective improvements; evaluation and
comparison of different approaches for replacement, rehabilitation, life extension, and
disposal; optimal allocation of available funds to activities in a process of product
development; and long term financial planning.
Figure 1.1 highlights an important paradox – the effectiveness of design choices
in controlling the costs of the life-cycle is greatest in the design preliminary phases of
product development, and decreases as the design level evolves. On the other hand, the
possibility of establishing a relation between design choices and costs is lower in the
preliminary phases of product development, and increases as the design as the design
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level evolves. This is a direct consequence of how adequate knowledge and information
about the design problem and the product under development is the end of the design
process.
Figure 1.1 Life Cycle Cost in various stages of product development
With this premises, LCCA becomes the assessment of all costs associated with
the life-cycle of a product “that are directly covered by the any one or more of the actors
in the product life-cycle (supplier, producer, user/consumer, end-of-life actors), with
complimentary inclusion of externalities that are anticipated to be internalized in the
decision-relevant future” (Hunkeler and Rebitzer, 2003).
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1.6 Structure of the thesis
This thesis is structured into six main chapters. Chapter 1 introduces the concept
of LCCA, problem statement, significance of study, scope and main objectives of this
project. Chapter 2 emphasis mainly on literature review regarding LCCA, application of
LCCA in product development, manufacturing cost strategies, and different LCCA
models. Chapter 3 defines the methodological framework of LCCA, chapter 4
emphasizes the development of analytical LCCA model and software development,
chapter 5 focuses on discussions related to the application of LCCA, and finally chapter 6
is conclusion and opportunities for further study.
CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
A thorough review of existing literature on a given subject matter creates a firm
foundation for advancing knowledge by identifying the areas where a plethora of research
already exists, while also uncovering areas where research is needed (Webster and
Watson, 2002). Hence, a systematic review of literature was conducted to obtain sources
pertaining to life-cycle costing and methods of LCCA. Details of what has been done on
the subject of LCCA will be discussed throughout this chapter.
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2.2 Cost Analysis and The Life-Cycle Approach
Cost analysis and assessment are two of the principle factors guiding the process
of product development, since they strictly condition the main decisional choices in a
clear-cut manner. From the earliest theorizing on design intervention, it has been
emphasized how the economic worthwhileness of a proposal (i.e., the property of making
the final product acquire sufficient value to repay the expenditure incurred in the
production phase) is one of the most rigid selection criteria (Asimow, 1962).
On entering the market, a product manufactured through processes of
transforming the resources employed must have increased in value such that it can be
produced and commercialized. From the earliest initial phases of needs analysis and their
translation into product concept, the design team must assess at least two different
typologies of economic validity, according to whether the viewpoint is that of the
manufacturer or of the consumer of the product.
Describing the product life-cycle may appear to be rather elementary; however,
experience has indicated that many different interpretations of “what constitutes the life
cycle” may exist (Blanchard, 1978). The interpretation of life-cycle of a product depends
on the perspective of the decision-maker. From the marketing perspective, the life-cycle
consists of four stages (introduction, growth, maturity, and decline) which are shown in
figure 2.1.
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Figure 2.1 Product life cycle stages (Marketing Perspective)
Figure 2.2 shows two different perceptions of producer and consumer. for a
manufacturer thinking in terms of production perspective, the life-cycle consists of five
stages (production conception, design, product and process development, production, and
logistics), on the other hand, when the product reaches the end-user (consumer
perspective), the life-cycle consists of five stages (purchase, operating, support,
maintenance, and Disposal) (Emblemsvag, 2003).
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The producer directly acquires the necessary raw materials, and workforce on the
open market, transforms them into product, and introduces the product onto the market.
By evaluating the costs of development, production, and distribution, and comparing
them with the market value of the product, it is possible to accurately quantify its
economic validity. Even more complex is the case where environmental performance
becomes one of the factors in play, the environmental performance of a product must be
evaluated over its entire life-cycle and is influenced by the interaction between the actors
involved.
The evaluation of economic efficiency from consumer’s view point is much more
complex and subjective. In fact, it depends not only on the cost of the product on the
market but also on the level of efficacy with which the product satisfies the needs that
generated it. Clearly, this kind of value is subjective in that it cannot be measured by the
market, but depends on the perceptions of the customer.
The most common economic models used in product design and development
originated in relation to the first necessity, that of assessing the economic validity of a
commodity during its definition and development; their primary aim is, therefore, to
evaluate the production costs corresponding to different design alternatives (Dieter, 2000;
Ulrich and Eppinger, 2000). These models are part of that approach to product analysis
which, developed in relation to the interests of the manufacturer, generally stop at
distribution without taking into consideration successive phases of the life cycle. In this
case, the life cycle is understood as the set of phases consisting of development,
production, and distribution, at most going so far as to consider product support services.
The assessment of product value as perceived by the consumer requires different
models that are able to relate the functionality of a product with its cost, in a way that
quantifies its capacity to meet the performance required per unit cost. This is the concept
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at the base of value engineering, a customer-oriented approach to the whole design
process formulated according to a view of the life cycle extended, of necessity, to include
the phase of product use (Ullman, 2003)
2.3 Life-Cycle Costing (LCC)
The first extension of cost analysis beyond the production phase dates back to
mid-1960s, when the term “Life-Cycle Costing” was first coined (LMI, 1965). In its
original form, the analysis of life-cycle costs was heavily conditioned by the context in
which it was developed, that of defense procurement (i.e., the planning and acquisition of
large pieces of military equipment and material characterized by their great expense and
particularly long useful life) (kinch, 1992). This area is particularly susceptible to the
problem of establishing the right balance between the cost of acquisition and the cost of
utilization, considering that the latter, consisting of operating and maintenance costs, is
usually much greater than the former; Figure 2.3 explains this issue.
Under this stimulus, life cycle costing (LCC) become widely used to evaluate the
advantage of developing and purchasing this particular type of material, which is
expensive and must be kept at maximum efficiency for a long period. It was, therefore,
understood as a technique for evaluating the comprehensive cost of a commodity – i.e.,
the sum of cost of purchase) (procurement cost) and operation (ownership cost) (Dhillon,
1989), where the latter includes all the costs incurred during the useful life of the
commodity itself.
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In the mid-1970s the technique of LCC also known as “Life Cycle Cost Analysis
(LCCA)”, by then well-accepted in the field of military procurement, began to spread
into the more general arena of industrial activity (Harvey, 1976). Thus the concept of
“product life-cycle” began to take form also in the context of economic analysis, and it
was immediately extended; the category of procurement cost was enlarged to include the
phases of research and development, evaluation and choice of solutions, and product
support. The category of ownership costs, in some cases, went so far as also include the
cost of disposal.
Figure 2.3 Cost of acquisition and utilization.
Therefore, there was a maturation of a “life-cycle thinking” approach, understood
as “a decision-making framework that encompasses the identification of all the revenues
and costs associated with a product or service as it moves time-wise through predictable
stages and phases of evolution” (shewchuk, 1992).
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There is no exact definition that has been agreed upon for LCC, this is mainly
due to different interpretations of what constitutes the life-cycle of the product; however,
the concept of LCC can be comprehended from the following definitions ;
"The life cycle cost of an item is the sum of all funds expended in support of the item from
its conception and fabrication through its operation to the end of its useful life, (White
and Ostwald, 1976, pg. 39)”.
Further definition by several researchers states that life-cycle costs comprise all
costs attributable to a product from conception to those customers incur throughout the
life of the product, including the costs of installation, operation, support, maintenance and
disposal (Shields and Young, 1991; Shank and Govindarajan, 1992; Artto, 1994; Barfield
et al., 1994; Foster and Gupta, 1994).
Asiedu and Gu (1998), defined LCCA as a framework for specifying the
estimated total incremental cost of developing, producing, using, and retiring a particular
item”. Another definition by Fabrycky and Blanchard (1991) States that Life cycles
costing (LCC) or life cycle cost analyses (LCCA) are the methodologies used to evaluate
all the costs associated with a product over its entire life cycle.
In light of the above definitions, Life Cycle Cost Analysis (LCCA) can be thought
as a technique to establish the total cost of product or systems from early design until
disposal. It is a structured approach which addresses all the elements of this cost and can
be used to produce a spend profile of the product over its anticipated life-span. The
results of an LCCA can be used to assist management in the decision-making process
when there is a choice of product.
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2.4 Product Life-Cycle Cost Analysis
Many traditional product designers make their design decisions based on a
product’s technical and functional features. From the designer’s point of view the most
important criteria for products are quality, durability, performance and conformance with
the customer’s specifications (Tomberg et al., 2002). Recently, additional criteria have
become important in the decision-making process at the design stage; for example, most
of the developed countries have set new legislations which are planned to require
manufacturers to recover and recycle their products after its useful time.
Therefore, designers can substantially reduce the life-cycle cost of a product by
giving due consideration to life-cycle implications of their design decisions. The
estimation of the costs early in the design stage is important because they represent a
competitive factor, a differentiation in selecting a product.
Studies reported by many researchers in design suggest that the design of the
product influences between 70% and 85% of the total cost of a product Dowlatshahi
(1992). This is because design decisions that are made prior to manufacturing implicitly
define the majority of costs (Asiedu and Gu, 1998), as shown in Figure 2.4.
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Figure 2.4 Costs in Product life cycle stages
In this context, the economic competitiveness can only be achieved through the
life-cycle approach, and only by including the costs of the entire life-cycle among the
parameters of the design process it is possible to achieve an effective design for economic
feasibility (Fabrycky and Blanchard, 1991).
2.5 Review of LCCA models
The choice of cost model for the calculation of costs is fundamental to the entire
life cycle costing procedure. The model consists of a set of assumptions, rules, equations,
constants, and variables defining the mechanism of the system of monetary flows to be
18
examined. Given the proliferation of models for LCCA developed with the objective of
fully integrating cost analysis into product design, the literature contains complete studies
that provide an overview of the state of the art as well as comparative information about
characteristics and limitations of the various approaches (Asiedu and Gu, 1998; Kumaran
et al., 2001).
Most LCCA models are structured along three general lines: conceptual,
analytical, and heuristic (Kolarik, 1980; Gupta, 1983). Conceptual models consist of a set
of hypothesized relationships expressed in a qualitative framework. They are generally
very flexible, and can accommodate a wide range of systems. They require a minimum of
details and require little ability to quantify a system’s cost characteristics. Conceptual
models are limited when they come to analyses (Kolarik, 1980).
Analytical models are usually based on mathematical relationships which are
designed to describe a certain aspect of a system/product under certain
conditions/assumptions. These assumptions tend to restrict or limit the model’s ability to
reflect the actual system’s performance. Heuristic models are ill-structured analytical
models, usually employing an approach which produces a feasible and sufficient solution,
but does not guarantee that the solution is optimal (Gupta, 1983).
Complete and general procedures for LCCA began to be introduced from the
early 1990s (Greene and Shaw, 1990; Fabrycky and Blanchard, 1991). Over the past
decade the development of LCCA models has continued, providing a wide variety of
models, both a specific type (i.e., developed in relation to the need to evaluate the costs of
specific systems) and those of a more general nature (Dhillon, 1989).
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Some refer to particular fields of application e.g., the design of production
systems (Dahlen and Bolmsjo, 1996; Westkamper and von der Osten-sacken, 1998).
Others were developed to aid cost analysis expressly in the design phase, but taking into
consideration specific activities of a product’s life-cycle such as manufacturing
(Boothroyd, 1994), servicing (Gershenson and Ishii, 1993), purchasing and procurement
(Woodward, 1997), or retirement (Navin-Chandra, 1993; Ishii et al., 1994).
A model based on activity-based costing by Dimache et al. (2007) combines both
product and process aspects which are necessary for calculation. Finally the cost model is
integrated as a module within the DFE (Design for Environment) workbench software
tool. Alongside these models, an approximate LCCA method have been developed, an
approximate model based on Artificial Neural Network (ANN) for cost estimating has
been developed by Seo et al (2002).
Comparisons of the existing LCCA models conducted by Kumaran et al (2001)
demonstrate that no one of the existing LCCA methodologies addresses the
environmental costs of the environmental burdens caused by the product/service in its
entire life cycle, in the calculation of the total cost of the product/service.
Table 2.1 illustrates this fact while main emphasis has been given to features that
are related to eco-friendly design and manufacturing concept. The grades awarded in this
comparison are defined on the basis of the description and efficacy of a feature in a
particular model, and also the relative comparison with the same feature in the other
models. Grade ``A’’ or ``NA’’ denotes the availability of any feature. The most efficient
feature is awarded an ``E’’ grade and an optimally efficient feature is awarded a ``G’’
grade.
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The allocation of grades purely reflects the authors’ own view on the basis of their
review. More emphasis has been given to features that are related to eco-friendly design
and manufacturing concept. The models reviewed are:
(1) LCCA model of Fabrycky and Blanchard (1991);
(2) LCCA model of Woodward (1997);
(3) LCCA model of Dahlen and Bolmsjo (1996);
(4) Activity-based costing (ABC) model (Bras and Emblemsvag, 1996);
(5) Economic input-output LCA model (Cobas et al., 1996);
(6) Design to cost model (Eversheim et al., 1998);
(7) PLCCA to manufacturing system (WestkamperandOsten-Sacken, 1998);
(8) Total cost assessment (TCA) model (PPRC, 1997).
Guidance et al (2006) stated that none of the existing models has ever evolved to
become or been accepted as a standard reference model, for a diverse reasons:
• Substantial differences in the nature of the problem motivating the analysis,
• Different typologies of products and system under analysis, and
• The existence of different systems of data collection.
Work done by Zhang and Kendall (2001) shows that one of the significant
barriers to using LCCA models is data gathering from organizations to meet requirements
of a life cycle costing model. This results from a highly distributed heterogeneous
environment with a huge number of information sources. When data-processing systems
are distributed in various formats, manufacturers have to search them separately and
manually integrate information from flat files, relational databases, and remote supplier
parts catalogs. Due to the explosion in the amount of information, it is more complex for
collectors to understand customer needs, develop a product to meet these needs, and
bring that product to market quickly and at fair value.
21
Table 2.1 Comparison of Life Cycle Cost Models
22
23
2.6 Summary
This chapter explains the historical development of life-cycle cost analysis from
its early use in the military applications to a more broader design approach. life-cycle
cost analysis originated as an instrument for the assessment and reduction of costs in
much broader contexts than that of product development. It has become a valid aid in the
management of the activities of manufacturing companies and, more generally, of all the
typologies of organizations that handle and transform resources. On the other hand, the
importance of cost estimation and control during the design process with the aim of
recasting the costs involved in the various phase of a product’s life-cycle is today an
inescapable factor that must be taken into account in the development of an efficient
product able to succeed in a highly competitive market.
Most of the LCCA models reviewed in literature were developed mainly for
military applications and were not intended for use in the early stages of product
development, while others were meant to solve specific problems. Literature also states
that a wider implementation of the life cycle costing methodology is still being
hampered by a lack of reliable information. Data on life cycle performance are often
missing for many components and systems (data on maintenance, lifespan, replacement
regimes, performance and time aspects of operation, etc.).
Therefore, the need to develop a life cycle cost analysis tool that will include all
costs of product from conception until disposal was realized important. The tool which is
simplified for different usages and demands is expected to help designers to reduce life-
cycle cost of a product in the early stage of the product development.
CHAPTER 3
METHODOLOGY
3.1 Introduction
From the literature retrieved in Chapter 2, it is evident that the use of Life Cycle
Cost Analysis in small and medium sized Enterprises (SMEs) is still insufficient.
Hampered by lack of experts and user friendly tools. As a result, this research was
conducted in attempt to increase this area of knowledge by developing a user-friendly
tool to assist SMEs perform LCCA for their product/process decision-making.
The project execution flowchart is shown in Figure 3.1. The initial step was
model development were all identifiable cost elements are addressed and existing models
in literature were incorporated into single more detailed LCCA model. A case study was
conducted to test model functionality and result is compared with the base system. After
successful result have been achieved, the software development stage began using MS
ExcelTM .
25
The Excel model developed is based on the cost elements developed in the
analytical models retrieved from literature.
Figure 3.1 Project execution flowchart
26
The software is tested with the same data tested in the analytical model. When the
software result were found to be similar with the analytical one, it was proven for use and
further development.
A complete documentation of how to use the model and the type of data needed
for the model input have been developed. Finally full report is submitted combining all
the steps of project execution, discussions, and future improvement of the model.
3.2 General framework for LCCA
The methodological framework of LCCA has evolved from simpler forms (such
as those developed for military systems) to more general forms. The advantage of the
former is that they are relatively inexpensive and rapid to use, but they are not adequate
for the development of radically new systems (Dhillon, 1989). Selecting a proper
framework is essential for the determination of the total cost of a product, pertaining to its
entire life cycle.
LCCA may be accomplished in addressing a wide variety of problems at different
stages of the product-life cycle. In any event, the accomplishment of LCCA is iterative,
ongoing, and must be “tailored” to the specific application. Regardless of the application,
however, there are a series of general steps that are usually followed , even though the
depth of coverage will vary.
27
Figure 3.2 shows LCCA framework inspired by the proposals made in more
general terms by authors (Fabrycky and Blanchard, 1991).
28
3.3 Preliminary Definitions
The preliminary definition is the first phase of LCCA. It includes the definition of
the problem necessitating the application of LCCA, identification of the possible
alternatives to be analyzed, and the development of the structure for allocating the costs
(cost breakdown structure - CBS).
3.3.1 Definition of the Problem
The initial step constitutes the clarification of objectives, defining the issues of
concern, and bounding the problem such that it can be studied in an efficient and timely
manner. The detailed definition of the problem is necessary for the analysis to be
structured correctly, which requires a clear identification of the subject of the analysis
itself.
In essence, there may be a requirement for a life-cycle cost analysis in evaluating
alternative technologies as part of feasibility study leading to a system design approach,
alternative manufacturing approaches, alternative distribution and transportation
methods, operation and utilization scenarios, servicing and maintenance strategies,
different production approaches, etc.). The analyst needs to define the problem, and
describe the approach to be followed in resolving the problem.
29
3.3.2 Identification of Feasible Alternatives
Critical in the accomplishment of any LCCA is the identification of feasible
alternatives and the projection of each selected alternative in the context of the entire life
cycle. The point to be made here is that life cycle cost (and not R & D cost or production
cost only) constitutes the evaluation criterion for selecting a preferred approach. Each
decision has life-cycle cost implications. For instance; an equipment packaging
configuration will directly effect the test equipment and spare parts required for the
follow-on sustaining support of that equipment; product reliability will effect both
production requirements and maintenance and logistics support policies; production
utilization will effect design requirements; and so on.
3.3.3 Development of Cost Breakdown Structure - (CBS)
Given the definition of alternative configurations and of the activities associated
with them, a structure of cost allocation and collection is developed, which must allow
the classification of the different cost typologies, relating them to the main life cycle
activities. There is no set method for breaking down cost as long as the method used can
be tailored to the specific application. The depth of composition of the Cost Breakdown
Structure (CBS) depends on the purpose of the analysis to be performed. Is essential in
performing LCCA, and is intended to aid in providing overall cost visibility. The cost
categories will vary somewhat in terms of depth of coverage, depending on the type of
system being evaluated. However, it is important that all identifiable cost be addressed in
the CBS.
30
It is often difficult to determine the method by which the costs are derived for the
various categories. One should not only know what specific cost segments are included,
but how each factor is handled and the relationships between the various costs in any
given category.
3.4 Cost Valuation
The criteria employed in the evaluation process may vary considerably depending
on the stated problem. The choice of calculation method and model is one of the key
steps in the whole procedure, since models that are not adequate for the purposes of the
investigation may be insensitive to the problem set as the objective. The cost estimation
must be made in strict relationship with cost breakdown structure and cost estimating
relationships.
Finally, the development of cost profiles is determinant in the comparison of the
various alternatives under consideration, since they quantify the influence of the
alternative over the entire life-cycle through future cost projections.
3.4.1 Selection of Cost Model
After defining the cost breakdown structure, it is necessary to develop a model (or
series of models) to facilitate the life-cycle economic evaluation process.
31
The model may be a simple series of parameter relationships or a complex set of
computer subroutines, depending on the phases of the system life-cycle in which the
model is used and the nature of the problem at hand.
3.4.2 Development of Cost Estimates
A cost estimate is an opinion based on analysis and judgment of the cost of the
product, system, or structure. This opinion may be arrived at in either a formal or an
informal manner by several methods, all of which assume that experience is a good basis
for predicting the future. In many cases, the relationship between past experience and
future outcome is fairly direct and obvious; in other cases it is unclear, because the
proposed product or system differs in some significant way from its predecessors.
The techniques used for cost estimating range from intuition at one extreme to
detailed mathematical analysis at the other (Fabrycky and Blanchard, 1991).
3.4.3 Development of Cost profiles
With the product life cycle defined and cost estimating approaches established, it
is now appropriate to develop a cost profile (or cost projection) illustrating the
distribution of costs over the life cycle. In developing cost profile, there are different
approaches that may be followed.
32
The following are suggested by (Fabrycky and Blanchard, 1991):
1. Identify all activities throughout the life cycle that will generate costs of
one type or another.
2. Relate each activity identified in step 1 to a specific cost category the cost
breakdown structure (CBS).
3. Establish the appropriate cost factors in constant dollars for each activity
in the CBS, where constant dollars reflect the general purchasing power of
constant dollars that will allow for a direct comparison of activity levels
for year to year prior to the introduction of inflationary cost factors,
changes in price levels, economic effects of contractual agreements with
suppliers, and so on, which often cause some confusion in the evaluation
of alternatives.
4. Within each cost category in the CBS, the individual cost elements are
projected into the future on a year-to-year basis over the life cycle as
applicable. The result should be a cost stream in constant dollars for the
activities that are included.
5. For each cost category in the CBS, and for each applicable year in the life
cycle, introduce the appropriate inflationary factors, economic effect of
learning curves, changes in price levels, time value of and so on. The
modified values constitute a new cost stream and reflect realistic costs as
they are anticipated for each year of the life cycle.
6. Summarize the individual cost streams by major categories in the CBS and
develop a top-level cost profile.
Referring to step 5, a typical profile might be presented in three different ways to include;
a) A discounted profile, using the time value of money concepts for the comparison
of two or more alternatives on an equivalent basis.
33
b) A budgetary profile using constant dollars to allow for the evaluation of a single
profile on year-to-year basis in terms of today’s dollars; and
c) A budgetary profile using inflationary factors, effects of learning curves, and so
on, to allow for the evaluation of a single profile in terms of possible resource or
budgetary constraint.
While the economic analysis effort requires the time value of money
considerations, a manager will often want to look at a profile presented in budgetary
terms prior to making a decision in selecting a specific alternative.
3.5 Result Analysis
This phase covers the procedures of analyzing the result (sensitivity analysis), and
identifies the most influential cost factor (high cost contributors).
The result of cost estimating phase must be evaluated in different ways. For
example; by identifying the main cost factors, it is possible to reveal the criticalities of
each alternative, indicating which factors may be modified to improve the overall
economic performance.
34
3.5.1 Identification of High Cost Contributors
Given the results of LCCA, the analyst may wish to identify those areas of
potential risk and where possible improvement can be introduced with the objective of
reducing the overall life-cycle cost. In other words, the analyst can review the initial
results of the analysis, identify the high cost areas determine possible causes, and make
recommendations for improvement leading to a lower overall life-cycle cost.
This process can be facilitated through an understanding of the input factors to the
cost categories in the CBS used in the analysis, as can be seen by reviewing the cost
estimating models in chapter 4.
3.5.2 Accomplishment of sensitivity analysis
When completing LCCA, there may be a few key parameters about which the
analyst is very uncertain due to inadequate input data, initial assumptions, pushing the
state-of-art, or any combination of factors. These basic questions are – how sensitive are
the results of analysis to variations of these uncertain parameters? Will these variation
ends to justify the selection of an alternative configuration not currently being
considered? How much variation of a given parameter is required to shift the decision
from selecting alternative A in lieu of alternative B?.
In accomplishing a sensitivity analysis, the analyst may wish to employ the model
using a “baseline” system configuration, and then return the model while varying
different key input parameters to determine the impact on the results.
35
The sensitivity analysis can be extremely beneficial to the decision maker, and
often conveys more information than any other single aspect of the overall life cycle cost
analysis process. The analyst can readily identify cause and effect relationships, is able to
predict trends, and is better prepared to respond to the “what if” questions.
3.6 Decision Making
The LCCA process concludes with the decision-making-process, choosing the
alternatives considered best, and defining the principle recommendation and actions for
improvement.
3.7 Summary
This chapter explains the methodology of this project and the formal procedure of
performing LCCA . LCCA can be accomplished during conceptual design when limited
input data are available and, of course, it can be accomplished later during detailed design
and development when the system configuration is fairly well defined. In any event, the
accomplishment of LCCA is iterative, ongoing, and must be “tailored” to the specific
application. Regardless of the applications, however, there are a series of general steps
that are usually followed, even though the depth of coverage may vary.
36
Accomplishing LCCA incorporates the steps described in Figure 3.2. The
problem necessitating the LCCA application must be well defined; followed by the
identification of all feasible alternatives; develop Cost Breakdown Structure (CBS) of
each alternative to be evaluated; estimate cost ( the cost estimation must be made in strict
relationship with cost breakdown structure); to evaluate each alternative cost profiles
must be developed for each alternative; identify high cost contributor, perform sensitivity
analysis of the high cost contributors and see the effect of its variation to the total life-
cycle cost, and finally recommend the preferred approach based on the outcome of the
LCCA.
CHAPTER 4
MODEL DEVELOPMENT
4.1 LCCA Model
In addressing the depth analysis approach with the desired model design features
in mind, experience indicates that a series of models (or single model with a series of
sub-routines) is required (Woodward, 1978). LCCA itself constitutes a compilation of a
variety of cost factors representing many different types of activities. This point is
illustrated further in Figure 4.1, where the general life-cycle cost model is divided in to
four sub-models. The summation of these models will give the total life-cycle cost of a
product.
For the purpose of this research, we adopted the analytical models developed in a
more general terms by Fabrycky and Blanchard (1991) to our life-cycle cost model. The
model is characterized by the following phases;
38
1. Research and development cost
2. Production and construction model
3. Operation and maintenance model
4. Retirement and disposal model
4.2 Cost breakdown structure - CBS
In accomplishment of a LCCA, one needs to develop a cost breakdown structure
(CBS), or cost tree, to facilitate the initial allocation of costs (top-down) and the
subsequent collection of costs on a functional basis (bottom-up). The CBS shown in
Figure 4.2 represent the various elements of cost that when combined, represent total life-
cycle cost.
39
The categories identified indicate cost collection points which can be summarized
upward into broader categories and/or can be collected for different program functions or
system elements.
The intent is to incorporate a high degree of flexibility in order to provide the
necessary visibility for cost allocation, cost measurement, and cost control. This CBS can
be applied to a variety of programs; however, the depth of coverage may vary from
program to program depending on the type of system being evaluated.
Detailed descriptions of each cost category are mathematically modeled in the
following sections.
40
41
4.3 Cost Estimating
Cost estimates is based on determining the functional relationships between cost
variations and the factors on which these depend (product characteristics). These
relationships are expressed using mathematical functions primarily obtained through the
statistical evaluation of previous design experiences; they allow the evaluation of the
costs of the product or activity associated with various important parameters expressing
measurable attributes.
Analytical method is more appropriate for an LCCA at the stage of product
concept development and makes it possible to directly relate technical and economical
parameters.
4.3.1 Total Product Cost (TC)
This includes all future life-cycle costs associated with the research and
development, production and construction, operation and maintenance, and retirement of
the system or product. The cost breakdown structure of each cost category is illustrated in
figure 4.2.
Mathematically,
TC = [CR+ CP + CO + CD] …………………………… (1)
42
Where,
CR = Research and development cost
CP = Production and construction cost
CO = Operation and maintenance cost
CD = Retirement and disposal cost.
4.3.1.1 Research and Development Cost - CR
Includes all costs associated with product management, product planning, product
research, engineering design, design documentation, product software, and product test
and evaluation. These costs are basically nonrecurring.
Or,
CR = [CRM + CRP + CRR + CRE + CRD + CRS + CRT] ……………………… (2)
I. Product life cycle management cost - CRM
Cost of all management activities throughout the product life cycle applicable to
product planning, product research, product design, production/construction, test and
evaluation, operation and logistics support, and product retirement.
Or,
CRM = ∑=
N
i
i1
CRM
CRMi = cost of specific activity “i”
43
N = number of activities.
II. Product planning cost - CRP
Covers preliminary and detailed market analysis, feasibility studies, development
of operational and program proposals, development of program plans and specifications,
development of financial plans, etc.
Or,
CRP = ∑=
N
i
i1
CRP
CRPi = cost of specific planning activity “i”
N = number of activities.
III. Product research cost – CRR
Includes all costs associated with applied research, test models, and research
laboratory support (i.e., manpower, materials, and facilities).
Or,
CRR = ∑=
N
i
i1
CRR
CRRi = cost of specific research activity “i”
N = number of activities
44
IV. Engineering design cost - CRE
This includes all conceptual design, preliminary design, and detailed design effort
associated with the development and/or modification of a system, process, or product.
Specific areas include systems engineering; design engineering (electrical, mechanical,
structural, chemical, layout and drafting); reliability and maintainability engineering;
human factors and safety; functional analysis and allocation; logistics support analysis;
components engineering; producibility; and so on. Also, this category covers design
support (e.g., computer-aided design capability, procurement activities, etc.) and formal
design review functions.
Or,
CRE = ∑=
N
i
i1
CRE
CRE = cost of specific design activity “i”
N = number of activities
V. Design documentation cost – CRD
This category covers the cost of preparation printing, publication, distribution,
and storage of all data and documentation associated with CRR, CRD, and CRT. Specific
elements include R and D reports; design data (drawings, parts list, specifications,
layouts); Analysis; test plans, test procedures, and reports; preliminary operational,
installation and maintenance procedures; and design-related supporting documentation.
Program proposals and plans are included in CRP.
Or,
CRD = ∑=
N
i
i1
CRD
CRDi = cost of data item “i”
45
N = number of data items
VI. Product software cost - CRS
All initial development (requirements, procedures, layout, logic flows, etc),
modification, and production of software are included in this category. This covers both
recurring and nonrecurring costs.
Or,
CRS = [CRSD+ CRSM + CRSP]
Where,
CRSD = software development
CRSM = software modification
CRSP = software production
VII. System test and evaluation cost – CRT
This category includes fabrication, assembly, tests and evaluation of engineering
breadboards, engineering models and pre-production prototype models (in support of
product design—CRE). Specifically, this constitutes fabrication and assembly of hardware
and software; material procurement and handling; instrumentation; quality control and
inspection; logistics support (personnel, training, supply support, test and support
equipment, facilities, etc); data collection and analysis and evaluation plans, procedures,
and reports are included in CRD. Recurring production tests are included in CP.
Or,
46
CRT = [CRTA*NRT + CRTB*NRT +∑=
N
i
i1
CRTT ]
Where,
CRTA = cost of engineering model fabrication and assembly labor
CRTB = cost of engineering model material
CRTTi = cost of test operations and support associated with specific test “i”
NRT = Number of engineering models
N = number of identifiable tests
4.3.1.2 Production and Construction Cost - CP
This category includes all recurring and nonrecurring costs associated with
industrial engineering, product manufacturing, construction of new facilities, and initial
logistics support.
CP = [CPI + CPM + CPC + CPQ + CPL] …………………………. (3)
I. Industrial engineering and operations analysis cost - CPI
Includes all recurring and nonrecurring costs associated with the initial
engineering and sustaining engineering functions of manufacturing and construction.
Specifically, this constitutes: (1) plant engineering (e.g., design of production and storage
facilities, utility requirements, capital equipment needs, material handling provisions,
etc); (2) manufacturing engineering (e.g., make or buy decisions, process design, design
47
of special tools/fixtures/test equipment, man-machine functions, etc.); (3) methods
engineering (e.g., work methods, job skill requirements, standards, design of subassembly
and assembly operations, etc.);(4) Production control operations (e.g., production lot
quantities and batch sizes, economic order quantities and inventory levels, work-order
[processing and assignment); and (5) sustaining engineering support throughout the
production/construction phase.
Or,
CPI = [CPIP + CPIM + CPIE + CPIC + CPIS]
Where,
CPIP = Cost of plant engineering
CPIM = Cost of manufacturing engineering
CPIE = Cost of methods engineering
CPIC = Cost of production control
CPIS = Cost of sustaining engineering
II. Manufacturing cost – CPM
This can be further categorized as;
(1) Recurring manufacturing cost – fabrication and assembly labor cost, material
and inventory cost, inspection and test cost, product rework cost (as required),
packing and initial transportation cost, and direct engineering support cost.
(2) Nonrecurring manufacturing cost – labor and material costs associated with the
installation and support of factory tools, fixtures, and test equipment. Design
costs are included in CPIM.
Or,
CPM = [CPMR + CPMN]
Where,
CPMR = Recurring manufacturing cost
48
CPMN = Non recurring manufacturing cost
III. Construction cost - CPC
This category covers:
(1) Manufacturing facilities which support the functions described in CPI and CPM
initial acquisition and sustaining maintenance costs are included herein.
(2) Special test facilities necessary to cover unique and peculiar test and evaluation
requirements (above and beyond available facilities for engineering and
manufacturing test as covered in CRT and CPM). Initial acquisition and sustaining
maintenance costs are included herein.
(3) Special facilities required for the day-to-day operation of large systems/products
by the consumer or user. Acquisition costs are included herein and sustaining
costs are covered in COOF.
(4) Special facilities required for the sustaining support of maintenance need of the
system throughout its programmed life cycle (e.g., repair, rework, periodic
calibration, overhaul, modification, etc.). Recurring sustaining costs are covered
in COLM.
(5) Special facilities required for training consumer or user personnel in the operation
and maintenance of the system/product (e.g., large simulator). Sustaining costs are
covered in COOT and COLT.
Special warehousing required for system/product storage and distribution. Sustaining
costs are covered in COLW.
Or,
CPC = [CPCP + CPCE + CPCC + CPCM+ CPCT + CPCW]
CPCP = Cost of manufacturing facilities
CPCE = cost of special cost facilities
49
CPCC = acquisition cost of consumer facilities (system operations)
CPCM = acquisition cost of maintenance facilities
CPCT = acquisition cost of training facilities
CPCW = acquisition cost of inventory warehouses
IV. Quality Control Cost - CPQ
CPQ = [CPAQ + ∑=
N
i
CPQC1
+∑=
N
i
CPQS1
]
Where,
CPQA = Quality assurance cost
CPQC = Cost of qualification
CPQS = Cost of production sampling test “i”
V. Initial logistic support cost - CPL
CPL = [CPLC + CPLS + CPLT + CPLH + CPLD + CPLP + CPLE]
Where,
CPLC = initial customer service cost
CPLS = initial supply support cost
CPLT = initial test and support equipment cost
CPLH = initial transportation and handling cost
CPLD = initial technical data cost
CPLP = initial training cost
CPLE = initial training equipment cost
50
4.3.1.3 Operation and support cost - CO
This category includes all costs associated with product distribution, product
operational use (by the consumer), and the sustaining life cycle logistics support of the
product in the field.
Or,
CO = [COO + COD + COL] …………………………. (4)
I. Product operation cost – COO
COO = [COOP + COOT + COOF]
Where,
COOP = operating or user personnel cost
COOT = cost of operation training
COOF = cost of operational facilities
i. Operating or user personnel cost - COOP
COOP = (COPP) (QOP) (TO) (NOP) * (% Allocation)
Where,
COPP = cost of operator labor QOP = quantity of operators per system
TO = hours of system operation
51
NOP = number of operating system
ii. Operator training cost - COOT
COOT = [(COTT) (QOT) (TT) + (COTS) * (% Allocation)]
Where,
COTT = cost of operator training ($/student-week)
QOT = quantity of student operators
TT = Duration of training (weeks)
COTS = cost of training equipment and facility support
iii. Operational facilities cost (COOF)
COOF = [(COFS + COFU) (NOF) * (% Allocation)]
Where,
COFS = cost of operational facility support ($/site)
COFU = cost of utilities ($/site)
NOF = number of operational sites
II. Product distribution cost - COD
COD = [CODM + CODT + CODI]
Where,
52
CODM = cost marketing and sales
CODT = cost of transportation and traffic management
CODI = cost of inventory in warehouses
III. Sustaining logistic support – COL
COL = [COLC + COLW + COLM + COLS + COLT + COLE + COLN + COLD + COLK]
Customer service cost – COLC
COLC = COLA + COLB
Where,
COLA = cost of unscheduled or corrective maintenance
COLB = cost of scheduled or preventive maintenance
i. Corrective maintenance cost – COLA
COLA = [(COUL) (MMHU) (QMAU) + (QMAU) (COUM) + (QMAU) * (COUD)] (NMS)
Where,
COUL = unscheduled maintenance labor cost ($/MMHU)
MMHU = unscheduled maintenance man-hours per maintenance action
QMAU = quantity of unscheduled maintenance actions QMAU = (TO) (λ)
COUM = cost of material handling per unscheduled maintenance action
COUD = cost of documentation per unscheduled maintenance action
NMS =number of maintenance sites
TO = hours of system operation
53
λ = product failure rate in failures/hour
ii. Preventive maintenance cost - COLB
COLB = [(COSL) (MMHS) (QMAS) + (QMAS) * (COSM) + (QMAS) (COSD)] (NMS)
Where,
COSL = scheduled maintenance labor cost ($/MMSH)
MMHS = scheduled maintenance man-hours per maintenance action
QMAS = quantity of scheduled maintenance actions.
COSM = cost of material handling per scheduled maintenance action
COSD = cost of documentation per scheduled maintenance action
NMS = number of maintenance sites
iii. Warehouse facilities cost – COLW
COLW = [(COWS) + (COWU) (NOW)] (% Allocation)
Where,
COWS = cost of warehouse facility support ($/warehouse)
COWU = cost of utilities ($/warehouse)
NOW = number of warehouses
iv. Maintenance facilities and training facilities cost – COLM
COLM = (COMM) (NOM) + (COMT) (NOT) * (% Allocation)
Where,
COMM = cost of maintenance facility support
54
NOM = number of maintenance facilities
COMT = cost of training facility support
NOT = number of maintenance training facilities
v. Supply support cost – COLS
COLS = [COSO + COSI + COSD + COSS + COSC]
Where,
COSO = cost of spare/repair parts at organizational level
COSI = cost of spare/repair parts at intermediate level
COSD =cost of spare/repair parts at depot level
COSS =cost of spare/repair parts at supplier
COSC = cost of consumables
COSO = ∑NMS
[(CA) (QA) + ∑ (CMi) (QMi) + ∑=1i
(CHi) (QHi)]
Where,
CA = average cost of material purchase order ($/order)
QA = quantity order ($/order)
CMi = cost of spare part “i”
QMi = quantity of “i” items demanded
CHi = cost of maintaining spare item “i” in the inventory ($/$ value of the
inventory)
QHi = quantity of “i” items in the inventory
NMS = number of maintenance sites.
COSI, COSD, COSS, and COSC are determined in a similar manner.
55
vi. Maintenance personnel training cost – COLT
COLT = (COTM) (QOM) (TT) + (COLL) (% Allocation)
Where,
COTM = cost of maintenance training ($/student week)
QOM = quantity of maintenance students
TT = direction of training (weeks)
COLL = cost of training equipment support
vii. Test and support equipment cost - COLE
COLE = [COEO + COEI + COED]
Where,
COEO = cost of maintenance of the test and support equipment at organizational level.
COEI = cost of maintenance of the test and support equipment at intermediate level
COED = cost of maintenance of the test and support equipment at dept and supplier level.
COEO = [COEU + COES]
COEU = cost of equipment unscheduled maintenance
COES = cost of maintenance of the test and support equipment at depot and supplier level
COEI and COED are derived in a similar manner.
viii. Transportation and handling cost – COLH
COLH = [(CT) (QT) + (CS) (QT) + CX]
56
Where,
CT = cost of transportation
QT = quantity of on-way shipments
CS = cost of packing
CX = cost of transportation and handling equipment maintenance
CT = [(W) (CTC)]
W= weight of item kg - will vary depending on whether reusable containers are
employed.
CTC = shipping cost $/kg – will vary with the distance in kilometers of one-way
shipment.
CS = (W) (CSC)
CSC = packing cost ($ /kg) – will vary depending on whether reusable containers are
employed.
x. Technical data cost – COLD
COLD = ∑=
N
i 1
COLDi
Where,
COLDi = cost of specific data item “i”
N = number of data items
xi. Product modifications - COLK
COLK = ∑=
N
i 1
COLKi
57
Where,
COLKi = cost of specific modifications “i”
N = number of product modifications.
4.3.1.4 Retirement and Disposal Cost - CD
Retirement and disposal costs consist of the following categories,
CD = [CDC + CDA + CDR + CDE + CDS + CDD] ………………….. (4)
Where,
CDC = cost of product collection
CDA = cost of product disassembly
CDM = cost of remanufacturing
CDR = cost of recycling
CDS = cost of disposal
CDD = cost of documentation
I. Cost of Collection – CDC
Cost of collection includes all costs associated with the collection of the product
after its useful life.
58
II. Cost of Disassembly – CDA
The product is taken apart without destroying any parts or components. Some
products may undergo only this process, which occurs if the reusable parts are sold (the
product loop is closed) whereas the rest is recycled
III. Cost of Remanufacture – CDM
This category covers costs related to remanufacturing of the product. This is an
industrial process that restores worn products to like-new condition. A retired product is
first completely disassembled, and its usable parts are then cleaned, refurbished, and put
into inventory. Finally, a new product is reassembled from both old and new parts,
relating a unit equal in performance to the original or a currently available alternative. In
contrast, a repaired or rebuilt product usually retains its identity, and only those parts that
have failed or are badly worn are replaced. Remanufacturing is therefore a systematic
way of closing the product loop.
IV. Cost of Recycling – CDR
As name implies, this includes all costs associated with the recycling of the
product. In this process, material is reprocessed into “new” raw material. This is the same
as closing the material loop. Recycling is perhaps the most common strategy to closing
the materials loop, but is the least effective one in the sense that it is the most wasteful
strategy (except disposal)
59
V. Cost of Disposal – CDS
All cost associated with disposal are listed under this category. The last resort of
the product is the disposal, which ideally should not happen at all. In fact, countries like
America, a lot of resources are transformed into nonproductive solids and gases.
VI. Cost of documentation – CDD
This category covers the cost associated with the documentation and recording of
all costs under retirement and disposal cost, this covers CDC, CDM, CDR, CDA and CRS.
60
4.4 Software Development
In order to make the model easy for use, a simple ExcelTM software have been
developed that will facilitate the analyst job when performing LCCA. The software
contains input data collection sheets and alternative evaluation worksheet. How to use the
model is explained in the outline worksheet.
4.4.1 Model Input
In general, the Excel model uses the following inputs;
Input data
� Estimated costs
� Assumptions
Parameters
� discount rate
� useful life/ analysis period
Cost inputs typical of those generated by the functional departments such as
(research and development, production and construction, operation and maintenance,
retirement and disposal). Assumption can be made based on the cost estimates and
relevant to the problem at hand.
61
Discount rate refers to the rate of change of true value of money over time,
considering fluctuations in both investment interest rates and the rate of inflation.
Individual cost projections for each alternative must be discounted to the present value.
LCCA is done using the basic multi-year discounting formula:
where ,
• PV = present value at time zero (base year)
• r = discount rate
• t = time (number of year)
• Cost = equals the cost in year t
Analysis period refers to time frame that is sufficiently long to reflect differences
among different strategy alternatives. It is necessary to select an analysis period over
which the alternatives are compared.
The CBS assumed for the purpose of this study is presented in Table 4.1 (also
refer to Figure 4.2). Although not all cost categories may be relevant or significant in
terms of the magnitude of cost as a function of total life-cycle cost, this CBS does serve
as a good starting point. Initially, all costs must be considered, with the subsequent
objective of concentrating on those cost categories reflecting the high contributors.
In the previous section, the cost estimating relationships of the CBS have been
developed in more details.
t
N
ttCost
rPV ∑
=
+=
0 )1(
1
62
Table 4.1 Cost Breakdown Structure Each product/system alternative should be calculated the same way using this table
Cost by Program
Year**
Cost Category* Category 1 2 3 Total Cost $
Research & Development Cost - CR
1. Product Management CRM
2. Product Planning CRP
3. Product Research CRR
4. Design Documentation CRD
5. Product Software CRS
6. Engineering Design CRE
7. Product Test & Evaluation CRT
Subtotal
Production & Construction Cost - Cp
1. Industrial Engineering and Operation Analysis Cost CPI
2. Manufacturing cost CPM
3. Construction cost CPC
4. Quality Control Cost CPQ
5. Initial logistic support cost CPL
Subtotal
Operation & Maintenance Cost - Co
1. Product operation cost COO
2. Operator training cost COOT
3. Operational facilities cost COOF
4. Operating or user personnel cost COOP
5. Product distribution cost COD
7. Preventive maintenance cost COLB
10. Maintenance personnel training cost COLT
11. Test and support equipment cost COLE
12. Transportation and handling cost COLH
Subtotal
Retirement & Disposal Cost -CD
1.Cost of Collection CDC
2.Cost of Disassembly CDA
3.Cost of Remanufacture CDM
4.Cost of Recycling CDR
5.Cost of Disposal CDS
6.Cost of documentation CDD
Subtotal
Grand total
* Depends on your product cost categories
** Depends on Product Life Cycle Years
63
4.4.2 Evaluation of Alternatives
With the product CBS defined and cost estimating approaches established, it is
appropriate to apply the resultant data to the product life cycle using Table 4.2. When
evaluating two or more alternatives on a relative basis, the individual cost projections for
each alternative must be discounted to the present value.
TABLE 4.2 EVALUATION OF ALTERNATIVES
Each alternative Present cost should be calculated the
same way using this table
Product Activity* Cost
Category Cost by Program Year**
Total Actual
Cost
1 2 3
Research and development CR
Production and construction CP
Operation and support Co
Retirement and disposal CD
Total actual cost TC
Discount Factor %
Total present value cost PV
Cumulative Product Cost PC
* Depends on your product cost categories
** Depends on Product Life Cycle Years
4.4.3 High Cost Contributors
Given the results of LCCA, the analyst may wish to identify those areas of
potential risk and where possible improvement can be introduced with the objective of
64
reducing the overall life-cycle cost. this process can be facilitated through an understand
of the input factors to the cost categories in the CBS used in the analysis.
4.4.4 Sensitivity Analysis
The analyst should select the high cost contributors (those which contribute more
than 10% of the total cost); determine the cause and effect relationships; and identify the
various input data factors that directly impact cost. The model has a built in sensitivity
analysis, where iterative process is used to change one variable at a time while holding
the rest constant.
4.4.5 Application of LCCA Model In Automotive Industry
Relative to applications in the system or product life cycle, a problem oriented
example where life cycle cost analysis is appropriate to support decision making process
for automotive manufacturers is noted. Specifically, life cycle cost analysis should be
employed in the evaluation of,
a) Alternative system/product operational, utilization, and environmental profiles.
b) Alternative system maintenance concepts and logistics support policies
c) Alternative product design configurations, such as Design for (Recycling, Reuse,
& Remanufacturing )
65
d) Alternative material selection, such as ( steel or aluminum) in a car body.
e) Alternative procurement sources and the selection of a supplier for a given item
f) Alternative production approaches.
g) Alternative product distribution channels.
h) Alternative product disposal and recycling methods and so on.
A typical example of the CBS comparing two different design configurations with
their percentage of cost contribution of an automotive component design is presented in
Table 4.3. The life-cycle of the system is assumed to be 13 years.
Table 4.3 – Cost Breakdown Structure of The Two Configurations
Cost Category Category Design "A"
Cost $
% of
Total
Design "B"
Cost $ % of Total
Research & Development Cost -
CR
1. Product Management CRM
573,392.0
10.8
533,091.0
9.3
2. Product Planning CRP
92,748.0
1.7
87,345.0
1.5
3. Product Research CRR
4. Design Documentation CRD
106,841.0
2.0
174,587.0
3.0
5. Product Software CRS
6. Engineering Design CRE
532,959.0
10.0
466,133.0
8.1
7. Product Test & Evaluation CRT
132,614.0
2.5
136,398.0
2.4
Subtotal
1,438,554.0
27.1
1,397,554.0
24.4
Production & Construction Cost -
Cp
66
1. Industrial Engineering and
Operation Analysis Cost CPI
136,847.0
2.6
121,786.0
2.1
2. Manufacturing cost CPM
1,301,796.0
24.5
1,398,080.0
24.4
3. Construction cost CPC
195,954.0
3.7
210,876.0
3.7
4. Quality Control Cost CPQ
153,527.0
2.9
149,989.0
2.6
5. Initial logistic support cost CPL
437,185.0
8.2
434,578.0
7.6
Subtotal
2,225,309.0
41.9
2,315,309.0
40.4
Operation & Maintenance Cost -
Co
1. Product operation COO
2. Operator training COOT
3. Operational facilities COOF
4. Operating or user personnel COOP
52,092.0
1.0
50,191.0
0.9
5. Product distribution COD
549,170.0
10.3
620,098.0
10.8
6. Sustaining logistic support COL
7. Preventive maintenance COLB
268,653.0
5.1
378,453.0
6.6
8. Supply support COLS
616,532.0
11.6
776,908.0
13.6
9. Warehouse facilities COLW
10. Maintenance personnel
training COLT
18,898.0
0.4
27,986.0
0.5
11. Test and support equipment COLE
74,674.0
1.4
74,146.0
1.3
12. Transportation and handling COLH
11,150.0
0.2
15,487.0
0.3
Subtotal
1,591,169.0
29.9
1,943,269.0
33.9
Retirement & Disposal Cost -CD
1.Cost of Collection CDC
8,000.0
0.2
8,000.0
0.1
2.Cost of Disassembly CDA
15,000.0
0.3
18,000.0
0.3
3.Cost of Remanufacture CDM
17,000.0
0.3
26,000.0
0.5
67
4.Cost of Recycling CDR
11,000.0
0.2
15,000.0
0.3
5.Cost of Disposal CDS
4,000.0
0.1
4,000.0
0.1
6.Cost of documentation CDD
5,000.0
0.1
5,000.0
0.1
Subtotal
60,000.0
1.1
76,000.0
1.3
Grand total
5,315,032.0
100.0
5,732,132.0
100.0
4.4.5.1 Cost contribution
Figure 4.3 reflects the output of Table 4.3 above, where constant dollar estimates
are summarized under the major cost categories in the CBS. A comparison of costs in
design “A” and “B” can be made in terms of the percent contribution of each major
category to the total.
(a) (b)
Figure 4.3 Percentage of cost contribution
68
4.4.5.2 Evaluation of the two alternatives
The two design configuration “A” & “B” in Table 4.4 discounted to 10 % are
presented in Table 2. Present value calculations can be simplified using standard interest
tables in appendix A and by multiplying the future sum by the appropriate factor.
TABLE- 4.4 EVALUATION OF
ALTERNATIVES
Each alternative Present cost
should be calculated the same way
using this table
Product Activity* Cost
Category Cost by Program Year** (US$ Dollars)
Design A 1 2 3 4 5
Research and development CR
434,294.00
408,019.00
596,241.00
Production and construction CP
217,348.00
680,254.00
678,386.00
649,321.00
Operation and support Co
62,888.00
138,383.00
160,827.00
Retirement and disposal CD
Total actual cost TC
434,294.00
625,367.00
1,339,383.00
816,769.00
810,148.00
Discount Factor 10%
0.91
0.83
0.75
0.68
0.62
Total present cost PV
394,812.73
516,832.23
1,006,298.27
557,864.22
503,038.17
Cumulative Product Cost PC
394,812.73
911,644.96
1,917,943.23
2,475,807.45
2,978,845.62
Design B
Research and development CR
404,294.00
497,019.00
496,241.00
Production and construction CP
297,348.00
650,254.00
698,386.00
669,321.00
Operation and support Co
82,888.00
148,383.00
190,827.00
Retirement and disposal CD
Total actual cost C
404,294.00
794,367.00
1,229,383.00
846,769.00
860,148.00
69
Continued …..
Discount Factor 10%
0.91
0.83
0.75
0.68
0.62
Total present cost PV
367,540.00
656,501.65
923,653.64
578,354.62
534,084.23
Cumulative Product Cost PC
367,540.00
1,024,041.65
1,947,695.30
2,526,049.92
3,060,134.15
Total Actual
Cost ($)
6 7 8 9 10 11 12 13
1,438,554.00
2,225,309.00
170,870.00
190,916.00
223,985.00
247,206.00
131,575.00
137,144.00
120,384.00
6,991.00
1,591,169.00
60,000.00
60,000.00
170,870.00
190,916.00
223,985.00
247,206.00
131,575.00
137,144.00
120,384.00
66,991.00
5,315,032.00
0.56
0.51
0.47
0.42
0.39
0.35
0.32
0.29
96,451.66
97,970.10
104,490.66
104,839.48
50,727.86
48,068.14
38,358.05
19,404.91
3,539,156.46
3,075,297.28
3,173,267.37
3,277,758.03
3,382,597.50
3,433,325.36
3,481,393.50
3,519,751.55
3,539,156.46
35,166,788.29
1,397,554.00
2,315,309.00
209,870.00
230,916.00
253,985.00
287,206.00
191,575.00
177,144.00
160,384.00
10,091.00
1,943,269.00
76,000.00
76,000.00
209,870.00
230,916.00
253,985.00
287,206.00
191,575.00
177,144.00
160,384.00
86,091.00
5,732,132.00
70
4.4.5.3 Cost Profiles
The profiles in Figure 4.4 represents the cost streams of different activities of the
two designs projected over the life cycle years. This is a budgetary estimate covering
future resource needs of design configurations “A” and “B”.
(a) (b)
Figure 4.4 Development of life cycle cost profiles
0.56 0.51 0.47 0.42 0.39 0.35 0.32 0.29
118,466.14
118,496.42
118,485.88
121,803.38
73,860.46
62,087.89
51,103.29
24,937.50
3,749,375.10
3,178,600.30
3,297,096.72
3,415,582.59
3,537,385.97
3,611,246.43
3,673,334.32
3,724,437.60
3,749,375.10
37,112,520.05
71
4.4.5.4 Decision Making
Referring to Figure 4.5, the results of this analysis support design “A” as the
preferred configuration on the basis of present equivalent life-cycle cost.
Design “A” assume a slight advantage; i.e., a difference of approximately US$
210,218.65 with a 10% discount rate.
Figure 4.5 Cost profiles of the two designs
72
4.4.5.5 Sensitivity Analysis using scenario manager
Sensitivity analysis is performed using scenario manager in Excel. This is a
what-if model that includes variable cells linked together by one or more formulas. For
example, How sensitive is the result of life-cycle cost to variation of interest rate. This is
shown in the scenario report in Table 4.5.
Table.4.5-Scenario
Summary
Current
Values: rate 5%
baseline
rate 10% rate 15% rate 20% rate 25% rate 35%
Changing
Cells:
rate 10% 5% 10% 15% 20% 25% 35%
Result
Cells:
rate 10% 5% 10% 15% 20% 25% 35%
LCC-A
3,539,156.46
4,282,240.35
3,539,156.46
2,985,484.10
2,560,748.13
2,226,904.39
1,740,519.84
LCC-B
3,749,375.10
4,572,035.94
3,749,375.10
3,143,955.26
2,684,312.18
2,326,107.73
1,809,179.12
Notes: Current Values column represents values of changing
cells at
time Scenario Summary Report was created.
Changing cells for each
Scenario are
highlighted in gray.
Base line rate= 10%
73
4.5 Summary
A life-cycle cost analysis may be accomplished in addressing a wide variety of
problems at different stages of the system/product life cycle. It is applicable in the initial
structuring of system requirements in the evaluation of design alternatives, and in the
development of manufacturing approaches. It can be effectively utilized in assessing an
existing system capability already in being by identifying high-cost contributors and
costly problem areas.
Accomplishment of LCCA incorporates the steps developed in chapter 3. A cost
breakdown structure is developed (refer to Figure 4.2), cost generating variables and
factors are identified, and costs are summarized year by year. Finally, cost profiles are
developed, sensitivity analysis is performed, and the best configuration is selected based
on the outcome of the analysis.
A simple software is developed using ExcelTM to facilitate the use of LCCA. The
procedure of using the software can be easily understood from the example given,
illustrating various tables and figures. Necessary information of how to use the model is
provided with the software overview worksheet.
CHAPTER 5
DISCUSSION
The main purpose of this project was to develop a life cycle cost analysis (LCCA)
tool that can be used by small and medium sized enterprises (SMEs) for the decision
making process when comparing different alternatives of their products. LCCA appears
to be a useful approach to a comprehensive assessment of economic, environmental and
social impacts of the life-cycle of a product and helps SMEs to meet environmental
requirements adopted in nations around the world by choosing the lowest life cycle cost.
Among many of the alternatives regarding their products include, alternative
system/product operational, utilization, and environmental profiles; alternative system
maintenance concepts and logistics support policies; alternative product design
configurations, such as Design for (Recycling, Reuse, & Remanufacturing ); alternative
material selection, such as ( steel or aluminum) in a car body; alternative procurement
sources and the selection of a supplier for a given item; alternative production
approaches; alternative product distribution channels; alternative product disposal and
recycling methods and so on.
75
LCCA may be accomplished in addressing a wide variety of problems at different
stages of the product life cycle. In any event, the accomplishment of LCCA is iterative,
ongoing, and must be “tailored” to the specific application. Regardless of the application,
however, there are a series of general steps that are usually followed , even though the
depth of coverage will vary.
First of all, the problem necessitating the LCCA application must be well defined;
followed by the identification of all feasible alternatives; then develop Cost Breakdown
Structure (CBS) of each alternative to be evaluated; estimate cost, the cost estimation
must be made in strict relationship with cost breakdown structure; to evaluate each
alternative cost profiles must be developed for each alternative; identify high cost
contributor, perform sensitivity analysis of the high cost contributors and see the effect of
its variation to the total life-cycle cost, and finally recommend the preferred approach
based on the outcome of the LCCA.
The model incorporates four models which have been collected from literature
namely, research & development, production & construction, operation & maintenance,
and retirement & disposal. Due to the natural differences exist in different
system/product, it is impossible to generalize the model; However, by making some
modification to cost categories and by following the steps developed, it is possible to
match the model to any application desired.
The acquisition of the right type of input data in a timely manner is one of the
most important steps in the overall LCCA process. However, lack of reliable information
and data on life cycle performance which are often missing for many components and
systems (data on maintenance, lifespan, replacement regimes, performance and time
aspects of operation, recycling, remanufacturing, disposal etc) is one of the reasons
hampering the implementation of LCCA.
76
It is worth mentioning that proper data collection for performing LCCA is
difficult if not impossible for academic projects, and hence the cost figures shown are
collected from documented case studies for validation purpose. The objective here is to
convey the overall approach used in the LCCA model.
The model is simplified for usage in the form of ExcelTM in such away the analyst
can easily input data into tables and generate outputs using Excel Charts. The software
contains input data collection sheets, alternative evaluation tables, cost contribution
sheets, and sensitivity analysis tables.
The example shown in Chapter 4, illustrates the application of LCCA in
automotive industry to support a design decision where two design configurations are
being evaluated. The objective was to select the design configuration that will fulfill the
lowest life cycle cost (LCC).
The CBS of two different design configurations are presented in Table 4.3. The
categories identified indicate cost collection points which can be summarized upward
into broader categories and/or can be collected for different program functions or system
elements. The intent is to incorporate a high degree of flexibility in order to provide the
necessary visibility for cost allocation, cost measurement, and cost control. This cost
breakdown structure can be applied to a variety of programs; however, the depth of
coverage may vary depending on the emphasis desired.
The evaluation itself address two candidate systems, each of which meets the
specified performance and effectiveness requirements and fall with the allocated budget.
However, each configuration exhibits different performance and effectives and the
objective is to select the best in terms of Life Cycle Cost.
77
In evaluation of alternatives a similar profile may be developed for each project
being considered, and the various alternative projects in question are then reviewed in
terms of selecting a preferred approach. The profiles in Figure 4.3 represents the cost
streams of different activities of the two designs “A” and “B” projected over the life
cycle years. This is a budgetary estimate covering future resource needs of design
configurations “A” and “B”.
Figure 4.4 reflects the output of table 4.3 above, where constant dollar estimates
are summarized under the major cost categories in the CBS. A comparison of costs in
design “A” and “B” cane be made in terms of the percent contribution of each major
category to the total. Categories where the percent contribution is relatively high should
be broken down into the different sub categories included therein, and high cost areas
should be investigated further in order to determine the causes. The breakout of costs in
this fashion not only allows for a comparison of different activities for a given
system/product configuration, but also facilitates the direct comparison with other
systems where costs are presented in a like manner.
When reviewing different profiles the analyst should not only look at the
quantitative life cycle cost figures of merit developed by summing the costs reported
through the CBS (refer to Table 4.3), but the analyst should also address the time impact
of costs i.e. time value of money. The individual cost projections for each alternative
must be discounted to the present value. Example of the two design configuration “A” &
“B” of Table 4.3 discounted with 10 % discount factor are presented in Table 4.4.
Present value calculations can be simplified using standard interest tables in (Appendix
A) and by multiplying the future sum by the appropriate factor.
Referring to Figure 4.4, the results of this analysis support design “A” as the
preferred configuration on the basis of life cycle cost. Note that the research and
78
development (R & D) cost is higher for design “A”; however, the overall life cycle cost is
lower due to a significantly lower operation and maintenance (O & M) cost. This would
tend to indicate that the equipment design for reliability, relative to Design “A”, is
somewhat better. Although this increased reliability results in higher R & D, the
anticipated quantity of maintenance actions is lower resulting in lower O & M costs. The
reliability characteristics in equipment design have a tremendous effect on life cycle.
When completing life cycle cost analysis, there may be a few key parameters
about which the analyst is very uncertain due to inadequate input data, initial
assumptions, pushing the state-of-art, or any combination of factors. In view of the
possible inaccuracies associated with the input data, the analyst may wish to perform a
sensitivity analysis to determine the effects of input parameter variations on the life cycle
cost analysis output. The analyst should determine how much variation can be tolerated
before the decision shifts in favor of design “B”. The analyst should select the high cost
contributors (those which contribute more than 10% of the total cost); determine the
cause and effect relationships; and identify the various input data factors that directly
impact cost.
The model has a built in sensitivity analysis where iterative process is used to
change one variable at a time while holding the rest constant, this is done using scenario
manager in Excel. This is a what-if model that includes variable cells linked together by
one or more formulas. For example, How sensitive is the result of life-cycle cost to
variation of interest rate which is independent variable. The result is shown in the
scenario report in Table 4.5, the result still favors design “A” as the preferred
configuration due to its lower LCC.
While the tool assists SMEs meet environmental legislations by manufacturing
products that satisfy economic and environmental needs, it also supports the decision
making process when buying equipments were emphasize is not given to initial
79
purchasing price but the overall life cycle cost. This was the primary use of LCCA for
military equipment procurement such as airplane, because the support and maintenance
cost is high compared to initial price.
CHAPTER 6
CONCLUSIONS AND OPPORTUNITY FOR FURTHER STUDY
Literature increasingly emphasizes that rapid technological change and shortened
life cycles have made product life cycle cost analysis critical to organizations (Ray and
Schlie, 1993; Barfield et al., 1994; Murthy and Blischke, 2000). Paying attention to
economic and environmental challenges, life cycle cost analysis is expected to assist
manufacturing firms;
• To assess better the effectiveness of planning by comparing actual with budgeted
life cycle costs as well as the distribution of those costs (Clinton and Graves,
1999).
• To enhance their capacity to make better pricing decisions (Adamany and
Gonsalves, 1994).
• To improve the assessment of product profitability (Hansen and Mowen, 1992).
• To aid in the design of more environmentally desirable products (Kreuze and
Newell, 1994; Madu et al., 2002).
• To focus on post-sale factors that have become a larger percentage of life cycle
costs, including warranty, cost of parts, service and maintenance, as well as being
increasingly important to customers in their purchasing decisions (Shields and
81
Young, 1991; Murthy and Blischke, 2000), and many others.
The fact that LCCA is based on the life-cycle approach means that this instrument
has a primary role in precisely the design context; it is particularly appropriate in elation
to life cycle design, with which it has a common basis. Production costs as well as those
incurred in the phases of use and disposal are, in fact, strongly conditioned by the first
design choices, and this renders LCCA a valuable instrument for managing conflicts and
identifying the most effective trade-off strategies and interventions.
This study presents a simplified LCCA tool that can assist SMEs in the decision-
making process when comparing different design alternatives, different material
alternatives, different manufacturing approaches, and different support policies, etc of
their products. ExcelTM is developed in such a way that minor modifications of the
model can lead to many other applications.
There are some areas where this study did not cover but necessary for efficient
LCCA tool. Specifically, future work should be employed in the following areas;
(a) Cost estimates are not incorporated within the model, and therefore requires
separate calculations using the equations developed. Hence, further work is
necessary to develop built-in equations that can perform estimates automatically.
(b) A detailed cost description of End-of-Life cost categories was not presented in
this study due to luck of data and information regarding the factors involved in
their estimates. Future work is necessary to identify a detailed CBS of retirement
and disposal costs and their estimating equations, so that cost related to recycling
and remanufacturing of a product can be calculated easily.
(c) Even though LCCA provide us information about the alternative with the lowest
overall life-cycle cost, but it fails to provide information regarding the
environmental impacts on selecting the alternative. Nowadays, separate tool
82
called life cycle assessment (LCA) is used to perform such analysis. Therefore,
future work should be focused on integrating the LCCA with the available Life
Cycle Assessment (LCA) tools. This will give further insight to both economic as
well environmental impacts of the design decision.
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APPENDIX A
INTEREST FACTOR TABLES
Present Value of $1 to Be Paid in the FuturePresent Value of $1 to Be Paid in the FuturePresent Value of $1 to Be Paid in the FuturePresent Value of $1 to Be Paid in the Future
Years 3.00% 3.50% 4.00% 4.50% Years 5.00% 5.50% 6.00% 6.50%
1 $0.97 $0.97 $0.96 $0.96 1 $0.95 $0.95 $0.94 $0.94
2 $0.94 $0.93 $0.92 $0.92 2 $0.91 $0.90 $0.89 $0.88
3 $0.92 $0.90 $0.89 $0.88 3 $0.86 $0.85 $0.84 $0.83
4 $0.89 $0.87 $0.85 $0.84 4 $0.82 $0.81 $0.79 $0.78
5 $0.86 $0.84 $0.82 $0.80 5 $0.78 $0.77 $0.75 $0.73
6 $0.84 $0.81 $0.79 $0.77 6 $0.75 $0.73 $0.70 $0.69
7 $0.81 $0.79 $0.76 $0.73 7 $0.71 $0.69 $0.67 $0.64
8 $0.79 $0.76 $0.73 $0.70 8 $0.68 $0.65 $0.63 $0.60
9 $0.77 $0.73 $0.70 $0.67 9 $0.64 $0.62 $0.59 $0.57
10 $0.74 $0.71 $0.68 $0.64 10 $0.61 $0.59 $0.56 $0.53
11 $0.72 $0.68 $0.65 $0.62 11 $0.58 $0.55 $0.53 $0.50
12 $0.70 $0.66 $0.62 $0.59 12 $0.56 $0.53 $0.50 $0.47
13 $0.68 $0.64 $0.60 $0.56 13 $0.53 $0.50 $0.47 $0.44
14 $0.66 $0.62 $0.58 $0.54 14 $0.51 $0.47 $0.44 $0.41
15 $0.64 $0.60 $0.56 $0.52 15 $0.48 $0.45 $0.42 $0.39
16 $0.62 $0.58 $0.53 $0.49 16 $0.46 $0.42 $0.39 $0.37
17 $0.61 $0.56 $0.51 $0.47 17 $0.44 $0.40 $0.37 $0.34
18 $0.59 $0.54 $0.49 $0.45 18 $0.42 $0.38 $0.35 $0.32
88
19 $0.57 $0.52 $0.47 $0.43 19 $0.40 $0.36 $0.33 $0.30
20 $0.55 $0.50 $0.46 $0.41 20 $0.38 $0.34 $0.31 $0.28
21 $0.54 $0.49 $0.44 $0.40 21 $0.36 $0.32 $0.29 $0.27
22 $0.52 $0.47 $0.42 $0.38 22 $0.34 $0.31 $0.28 $0.25
23 $0.51 $0.45 $0.41 $0.36 23 $0.33 $0.29 $0.26 $0.23
24 $0.49 $0.44 $0.39 $0.35 24 $0.31 $0.28 $0.25 $0.22
25 $0.48 $0.42 $0.38 $0.33 25 $0.30 $0.26 $0.23 $0.21
Years 7.00% 7.50% 8.00% 8.50% Years 9.00% 9.50% 10.00% 10.50%
1 $0.93 $0.93 $0.93 $0.92 1 $0.92 $0.91 $0.91 $0.90
2 $0.87 $0.87 $0.86 $0.85 2 $0.84 $0.83 $0.83 $0.82
3 $0.82 $0.80 $0.79 $0.78 3 $0.77 $0.76 $0.75 $0.74
4 $0.76 $0.75 $0.74 $0.72 4 $0.71 $0.70 $0.68 $0.67
5 $0.71 $0.70 $0.68 $0.67 5 $0.65 $0.64 $0.62 $0.61
6 $0.67 $0.65 $0.63 $0.61 6 $0.60 $0.58 $0.56 $0.55
7 $0.62 $0.60 $0.58 $0.56 7 $0.55 $0.53 $0.51 $0.50
8 $0.58 $0.56 $0.54 $0.52 8 $0.50 $0.48 $0.47 $0.45
9 $0.54 $0.52 $0.50 $0.48 9 $0.46 $0.44 $0.42 $0.41
10 $0.51 $0.49 $0.46 $0.44 10 $0.42 $0.40 $0.39 $0.37
11 $0.48 $0.45 $0.43 $0.41 11 $0.39 $0.37 $0.35 $0.33
12 $0.44 $0.42 $0.40 $0.38 12 $0.36 $0.34 $0.32 $0.30
13 $0.41 $0.39 $0.37 $0.35 13 $0.33 $0.31 $0.29 $0.27
14 $0.39 $0.36 $0.34 $0.32 14 $0.30 $0.28 $0.26 $0.25
15 $0.36 $0.34 $0.32 $0.29 15 $0.27 $0.26 $0.24 $0.22
16 $0.34 $0.31 $0.29 $0.27 16 $0.25 $0.23 $0.22 $0.20
17 $0.32 $0.29 $0.27 $0.25 17 $0.23 $0.21 $0.20 $0.18
18 $0.30 $0.27 $0.25 $0.23 18 $0.21 $0.20 $0.18 $0.17
19 $0.28 $0.25 $0.23 $0.21 19 $0.19 $0.18 $0.16 $0.15
20 $0.26 $0.24 $0.21 $0.20 20 $0.18 $0.16 $0.15 $0.14
21 $0.24 $0.22 $0.20 $0.18 21 $0.16 $0.15 $0.14 $0.12
22 $0.23 $0.20 $0.18 $0.17 22 $0.15 $0.14 $0.12 $0.11
23 $0.21 $0.19 $0.17 $0.15 23 $0.14 $0.12 $0.11 $0.10
24 $0.20 $0.18 $0.16 $0.14 24 $0.13 $0.11 $0.10 $0.09
25 $0.18 $0.16 $0.15 $0.13 25 $0.12 $0.10 $0.09 $0.08
89
Years 11.00% 11.50% 12.00% 12.50% Years 13.00% 13.50% 14.00% 14.50%
1 $0.90 $0.90 $0.89 $0.89 1 $0.88 $0.88 $0.88 $0.87
2 $0.81 $0.80 $0.80 $0.79 2 $0.78 $0.78 $0.77 $0.76
3 $0.73 $0.72 $0.71 $0.70 3 $0.69 $0.68 $0.67 $0.67
4 $0.66 $0.65 $0.64 $0.62 4 $0.61 $0.60 $0.59 $0.58
5 $0.59 $0.58 $0.57 $0.55 5 $0.54 $0.53 $0.52 $0.51
6 $0.53 $0.52 $0.51 $0.49 6 $0.48 $0.47 $0.46 $0.44
7 $0.48 $0.47 $0.45 $0.44 7 $0.43 $0.41 $0.40 $0.39
8 $0.43 $0.42 $0.40 $0.39 8 $0.38 $0.36 $0.35 $0.34
9 $0.39 $0.38 $0.36 $0.35 9 $0.33 $0.32 $0.31 $0.30
10 $0.35 $0.34 $0.32 $0.31 10 $0.29 $0.28 $0.27 $0.26
11 $0.32 $0.30 $0.29 $0.27 11 $0.26 $0.25 $0.24 $0.23
12 $0.29 $0.27 $0.26 $0.24 12 $0.23 $0.22 $0.21 $0.20
13 $0.26 $0.24 $0.23 $0.22 13 $0.20 $0.19 $0.18 $0.17
14 $0.23 $0.22 $0.20 $0.19 14 $0.18 $0.17 $0.16 $0.15
15 $0.21 $0.20 $0.18 $0.17 15 $0.16 $0.15 $0.14 $0.13
16 $0.19 $0.18 $0.16 $0.15 16 $0.14 $0.13 $0.12 $0.11
17 $0.17 $0.16 $0.15 $0.14 17 $0.13 $0.12 $0.11 $0.10
18 $0.15 $0.14 $0.13 $0.12 18 $0.11 $0.10 $0.09 $0.09
19 $0.14 $0.13 $0.12 $0.11 19 $0.10 $0.09 $0.08 $0.08
20 $0.12 $0.11 $0.10 $0.09 20 $0.09 $0.08 $0.07 $0.07
21 $0.11 $0.10 $0.09 $0.08 21 $0.08 $0.07 $0.06 $0.06
22 $0.10 $0.09 $0.08 $0.07 22 $0.07 $0.06 $0.06 $0.05
23 $0.09 $0.08 $0.07 $0.07 23 $0.06 $0.05 $0.05 $0.04
24 $0.08 $0.07 $0.07 $0.06 24 $0.05 $0.05 $0.04 $0.04
25 $0.07 $0.07 $0.06 $0.05
25 $0.05 $0.04 $0.04 $0.03
Years 15.00%
1 $0.87
2 $0.76
3 $0.66
4 $0.57
5 $0.50
6 $0.43
7 $0.38
8 $0.33
90
9 $0.28
10 $0.25
11 $0.21
12 $0.19
13 $0.16
14 $0.14
15 $0.12
16 $0.11
17 $0.09
18 $0.08
19 $0.07
20 $0.06
21 $0.05
22 $0.05
23 $0.04
24 $0.03
25 $0.03