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COMPARISON OF TWO ARTiLLERY WEAPON
SYSTEM BY USING LIFE CYCLE COST
TECHNIQUE
by
OLCAY KÜÇÜKTEPE
A THESIS
SUBMITTED TO THE DEPARTMENT OF BUSINESS
ADMINISTRATION OF BILKENT UNIVERSITY
IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF
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I c e r t i f y t hat I have r ead t his t h e s i s and in my o p i n i o n it is f ul l y a d e q u a t e , in s c o p e and in q u a l i t y , as a t h e s i s for the d e g r e e o f M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n .
e . c- ' :^ (
As s oc. Prof. Er dal EREL
I c e r t i f y t hat 1 have read this t hes i s and in my o p i n i o n it is f ul l y a d e q u a t e , in s c o p e and in q u a l i t y , as a t hes i s for the d e g r e e o f M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n .
As soc. Prof. Can MUGAN
i c e r t i f y t hat I have r ead t hi s t h e s i s and in m y ^ p i n i o n it is f ul l y a d e q u a t e , in s c o p e and in q u a l i t y , as a t h e s i s for the d e g r e e o f M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n .
Ya v u z G U N A L A Y
BiLKENT UNIVERSITY Abstract
COMPARISON OF ARTILLERY WEAPON SYSTEM BY USING LIFE CYCLE COST
TECHNIQUE by
OLCAY KUQUKTEPE
A d v i s o r : Assoc. Prof. Can $ i mg a - Mu g a n D e p a r t m e n t o f B u s i n e s s A d m i n i s t r a t i o n
Thi s t h e s i s p r e s e n t s the use o f l ife c y c l e cos t t e c h n i q u e . By u s i n g t hi s t e c h n i q u e , t wo d i f f e r e n t a r t i l l e r y w e a p o n s y s t e ms is c o m p a r e d on cos t base. One o f the s y s t e ms is c a l l e d S P 2 0 0 0 or Mo d e r n S e l f - P r o p e l l e d Gun and d e s i g n , and will be p r o d u c e d in T u r k e y ; and the o t h e r s y s t e m is c a l l e d M109 P a l a d i n , mai n a r t i l l e r y s y s t e m in t he U S army.
Mai n p u r p o s e o f the s t udy is to show the d i s a d v a n t a g e s o f t he s e l e c t i o n s y s t e m t h a t d e p e n d s on t he i ni t i al cos t only. The mai n cost i t e ms o c c u r a f t e r s ome p e r i o d o f t he life o f t he s ys t em. M a i n t e n a n c e or the o p e r a t i o n c os t o f t he s y s t e ms will be t he maj o r cos t i tem in t he l ife o f the s ys t e m. T h e r e f o r e the life cycl e cos t t e c h n i q u e is one o f the t o o l s for e s t i m a t i n g the t r ue cos t o f the s y s t e m b e f o r e t he c o s t s oc cur . In t hi s t h e s i s , the d e f i n i t i o n and the h i s t o r y and t he
i m p r o v e m e n t o f t he t e c h n i q u e are g i v e n , and a model is p r e s e n t e d for l ife c y c l e cos t c a l c u l a t i o n . By u s i n g t hi s model t he life cycl e cos t o f t wo s y s t e ms are c a l c u l a t e d ; and b a s e d on t hi s c a l c u l a t i o n a c o m p a r i s o n o f the s y s t e m is do n e on the cos t base.
ÖZET T o p ç u Si l ah S i s t e m l e r i n i n Ö m ü r D e v i r Ma l i y e t Yö n t e mi K u l l a n ı l a r a k K a r ş ı l a ş t ı r ı l m a s ı A Ol c a y K Ü Ç Ü K T E P E B İ L K E N T Ü N İ V E R S İ T E S İ Y ü k s e k Li s an s Tezi , İ ş l e t m e F a k ü l t e s i Tez Da n ı ş ma n ı : Do ç . Dr . Can Ş ı m g a - M u g a n T e m mu z 2 0 0 0 , 77 Sayf a Ya p ı l a n bu ç a l ı ş m a ile iki t o p ç u si l ah s i s t e m i n i n ö mü r d e vi r m a l i y e t y ö n t e mi k u l l a n ı l a r a k k a r ş ı l a ş t ı r ı l m a s ı esas a l ı n mı ş t ı r . K a r ş ı l a ş t ı r m a d a s a d e c e m a l i y e t l e r d i k k a t e a l ı n mı ş ol up si l ah e t k i n l i k l e r i n i n b e n z e r o l d u ğ u kabul e d i l mi ş t i r . Bu s i s t e m l e r d e n ilki SP 2 0 0 0 ve ya M o d e r n K u n d a ğ ı Mo t o r l u Top o l a r a k t a n ı m l a n a n ve ü l k e m i z d e t a s a r l a n ı p ü r e t i mi p l a n l a n a n bi r s i s t e md i r . Di ğ e r s i s t e m ise A m e r i k a B i r l e ş i k D e v l e t l e r i n i n ana t o p ç u s i l ahı ol an M1 0 9 P a l a d i n ' d i r . Bu ç a l ı ş m a n ı n e s as amacı h a l e n k u l l a n ı l a n ve sat ı n a l ma m a l i y e t l e r i d i k k a t e a l ı n a r a k y a p ı l a n s eçi m y ö n t e m i n i n d e z a v a n t a j l a r ı n ı o r t a y a k o y m a k t ı r . Çü n k ü y a p ı l a n i n c e l e m e l e r d e esas m a l i y e t f a k t ö r l e r i n i n s i s t e m l e r i n bir süre k u l l a n ı m ı s o n u c u n d a o r t a y a ç ı k t ı ğ ı b e l i r l e n m i ş t i r . B u n l a r d a n b a z ı l a r ı i ş l e t me ve b a k ı m
m a l i y e t l e r i d i r . B u n d a n dol a y ı ö m ü r de v i r m a l i y e t y ö n t e m i ,
m a l i y e t l e r o r t a y a ç ı k m a d a n g e r ç e k m a l i y e t l e r i t a h mi n e t me d e
k u l l a n ı l a n y ö n t e m l e r d e n bir t a ne s i o l a r a k k u l l a n ı l m a k t a d ı r . Bu
ç a l ı ş m a d a ö mü r d e v i r m a l i y e t i n i n t a n ı mı , t ar i hi ve g e l i ş i mi
a n l a t ı l m a k t a ve ö mü r d e v i r m a l i y e t i n i n h e s a p l a n m a s ı n d a k u l l a n ı l a n bir model o r t a y a k o n u l m a k t a d ı r . Bu model k u l l a n ı l a r a k t o p ç u silah s i s t e m l e r i n i n m a l i y e t l e r i h e s a p l a n a r a k m u k a y e s e l e r i m a l i y e t l e r es as a l ı n a r a k y a p ı l m ı ş t ı r .
Abstract... i
Ö zet... iii
Table of Contents...v
List of Figures...vii
Chapter 1: Purpose of the Study... 1
Chapter 2: Literature Review... 3
Introduction of Life Cycle Costing...3
Methods...11
Models... 15
Implementation of LCC in Different Areas... 23
Chapter 3: The Model...26
Chapter 4; Application of the Model... 42
Modern Self-Propelled Gun (SP2000)... 42
M l09 Paladin...51
Chapter 5: Sensitivity Analysis...56
Chapter 6: Conclusion...61
References...64
Appendices... 68
Appendix A ; Failure Rate of SP2000... 69
Appendix B ; Net Present Value Calculations for SP2000... 70
Appendix C: Production Cost of SP2000... 71
Appendix D: Data Used in Calculations of SP2000... 72
Appendix E: Failure Rate of Ml 0 9 ... 73
Appendix F: Net Present Value Calculations for M l0 9 ... 74 TABLE OF CONTENTS
Appendix G: Data Used in Calculations of M109... 75 Appendix H: Cost Allocation Table for Two system... 76 Appendix I : Effect of Interest Rates on NP Vs ... 77
LIST OF FIGURES Number Page 1. Cos t C a l c u l a t i o n Wo r k Fl ow 18 2. We i b u l l D i s t r i b u t i o n o f S P 2 0 0 0 49 3. We i b u l l D i s t r i b u t i o n o f M109 53 4 . S u m m a r y o f Co s t A l l o c a t i o n o f Bo t h S y s t e ms 54 5 . Ef f e c t o f i n t e r e s t r at e 58 6. Br e a k - e ven a n a l y s i s 60 7. R e s u l t s o f S e n s i t i v i t y A n a l y s i s 60
Chapter I
P U R P O S E OF THE ST UD Y
The aim o f this s t udy is fi r st to appl y " Life Cy c l e Cost " M e t h o d o l o g y i nto a ne wl y d e s i g n e d a r t i l l e r y w e a p o n s ys t e m in T u r k i s h Land F o r c e s and M1 0 9 P a l a d i n , a U S made a r t i l l e r y w e a p o n s y s t e m and s e c o n d l y to make a c o m p a r i s o n b e t w e e n them. The r e a s o n o f u s i n g such a m e t h o d o l o g y ma i n l y d e p e n d s on the c u r r e n t a c q u i s i t i o n or p r o d u c t i o n d e c i s i o n me t h o d . In t his me t h o d t he i ni t i al cos t o f t he w e a p o n s ys t e m and g e n e r a l o p e r a t i o n c os t s are c o n s i d e r e d as t he real cost o f the w e a p o n s ys t e m, but wi t h t he Li f e Cy c l e C o s t i n g m e t h o d o l o g y wh i c h is e s p e c i a l l y used in t he Un i t e d S t a t e s D e p a r t m e n t o f D e f e n s e ( DoD ) s i nce the mid 1970s, the d e p a r t m e n t s h o u l d c o n s i d e r t he cos t o f w e a p o n s y s t e m f r om the
b e g i n n i n g o f t he a c q u i s i t i o n p r o c e s s or the r e s e a r c h and
d e v e l o p m e n t p h a s e o f p r o d u c t i o n unt i l t he d i s p o s a l p h a s e o f t he
w e a p o n s y s t e m f r om t he i n v e n t o r y . By the help o f t hi s
m e t h o d o l o g y mai n ai m is to m i n i m i z e t he t ot al cos t o f o w n e r s h i p o f the w e a p o n s ys t e m. On t he o t h e r hand t o d a y ' s new we a p o n s y s t e ms
ha ve v e r y hi gh i ni t i a l c os t s and al so hi gh o p e r a t i n g and
e s t i m a t e the f u t u r e c o s t s o f the s y s t e m for m i n i m i z i n g t h e s e cost b e f o r e o c c u r r i n g f or the d e p a r t m e n t .
In t hi s st udy, t he t ot al cost o f t he a r t i l l e r y w e a p o n s y s t e ms was
c a l c u l a t e d by u s i n g the Life Cy c l e Cos t t e c h n i q u e . In the
c a l c u l a t i o n o f one o f t he s y s t e ms c a l l e d SP 2 0 0 0 or M o d e r n S e l f - P r o p e l l e d Gun, t he cos t o f r e s e a r c h and d e v e l o p m e n t and cos t o f p r o d u c t i o n was c a l c u l a t e d by u s i n g t he o r i g i n a l dat a t ake n f r om the f a c t o r y and t he o p e r a t i o n , m a i n t e n a n c e and l o g i s t i c a l s u p p o r t cost was e s t i m a t e d by u s i n g t he model t h a t is p r e s e n t e d in t hi s s t udy for a p e r i o d o f 30 year s. Al so in t he M1 0 9 P a l a d i n s ys t e m i n s t e a d o f t he r e s e a r c h and d e v e l o p m e n t and p r o d u c t i o n cost , a c q u i s i t i o n cos t wi l l be u s e d in t he c a l c u l a t i o n s . By u s i n g t hi s a p p r o a c h it is p l a n n e d to g e n e r a t e a model t h at will be used in t he T u r k i s h Land F o r c e s for f i n d i n g t he To t a l O w n e r s h i p c os t o f a new w e a p o n s ys t em.
In t he a c q u i s i t i o n o f a new w e a p o n s y s t e m t hat has a hi gh cost . The A r me d f o r c e s s h o u l d c o n s i d e r not onl y t he cos t o f a c q u i s i t i o n but al s o the c os t o f w h o l e life o f t he s y s t e m s i nce it has a l i mi t e d b u d g e t . In s e l e c t i o n o f the w e a p o n s y s t e m t hat wi l l be p u r c h a s e d or d e v e l o p e d , t he d e c i s i o n wi l l be mo r e a c c u r a t e in use o f Li f e Cyc l e C o s t i n g t e c h n i q u e s , t han c o n s i d e r i n g t he i ni t i al cos t only.
R E V I E W OF L I T E R A T U R E
a) I n t r o d u c t i o n O f Li f e Cy c l e C o s t i n g
The d e f i n i t i o n o f Life Cy c l e Co s t gi ven by Dal e:
"Life C y c l e C o s t i n g is a m a t h e m a t i c a l me t h o d used to form or s u p p o r t a d e c i s i o n and is u s u a l l y e m p l o y e d wh e n d e l i b e r a t i n g on a s e l e c t i o n o f o p t i o n s . It is an a u d i t a b l e f i n a n c i a l r a n k i n g s ys t e m for m u t u a l l y e x c l u s i v e a l t e r n a t i v e s wh i c h can be us ed to p r o m o t e the d e s i r a b l e and e l i m i n a t e t he u n d e s i r a b l e in f i n a n c i a l e n v i r o n m e n t . " ( Dal e, 1993, pp. 1 ) A n o t h e r d e f i n i t i o n is gi v en by Dh i l l o n : C hapter 11
"The sum o f all c o s t s i n c u r r e d d u r i n g the life t i me o f an i tem, i . e. . The t o t a l p r o c u r e m e n t and o w n e r s h i p c o s t s . "
( D h i l l i o n , 1989, pp.3 )
Al s o p r o c u r e m e n t cost d e f i n e d as "the t o t a l o f i n v e s t m e n t or a c q u i s i t i o n c o s t s ( r e c u r r i n g and n o n - r e c u r r i n g ) " and o w n e r s h i p cost is d e f i n e d as; " The sum o f all t he c o s t s o t h e r t han t he p r o c u r e m e n t c os t d u r i n g t he l ife t i me o f an i t em". ( D h i l l i o n , 1989, pp.3 )
So t hat Li f e C y c l e C o s t i n g is a m e t h o d o l o g y for c a l c u l a t i n g all t he c o s t s for an i tem not onl y in t he a c q u i s i t i o n p h a s e but also f or t he w h o l e l ife o f t he item. T h e s e c o s t s c o n s i s t o f R e s e a r c h and
D e v e l o p m e n t c os t , p r o d u c t i o n , a c q u i s i t i o n , o p e r a t i o n and
m a i n t e n a n c e c os t s , s u p p o r t and d i s p o s a l c o s t s o f the item.
The mai n i dea o f u s i n g t he Li f e Cy c l e Co s t was c r e a t e d in the 1960s. Thi s d e p e n d s on t he r a p i d i m p r o v e m e n t o f t he w e a p o n s y s t e m and c o n t i n u o u s i n n o v a t i o n s in t e c h n o l o g y and d e p e n d i n g on t h e s e t wo , the cos t o f o p e r a t i o n ; m a i n t e n a n c e and s u p p o r t c os t s i n c r e a s e u p - t o very hi gh l evel at t he same t i me the a c q u i s i t i o n cost o f a w e a p o n s y s t e m i n c r e a s e u p - t o high a mo u n t .
As Ki nc h st at ed:
" Th e r e are t h r e e mai n r e a s o n s o f u s i n g Life Cyc l e C o s t i n g in t he d e f e n s e i n d u s t r y . Fi r s t o f all a c q u i s i t i o n cost o f the s y s t e m is t oo high. Such t h a t t o d a y one o f t he w e a p o n s y s t e ms t h a t are used in t he air f o r c e s , has an a v e r a g e cos t o f h u n d r e d s o f mi l l i o n d o l l a r s . The s e c o n d r e a s o n is t he l i f e o f s y s t e m i n c r e a s e d to mor e t han 25 ye ar s . In t he 1940 and 1950s a new t y p e o f an a i r c r a f t b e g a n to fly e v e r y t h r e e y e a r s or so. But t o d a y the p l a n n e d life o f a n e w w e a p o n s y s t e m is at l east 25 y e a r s , so t hat the p r o d u c e r s h oul d ma k e t he s y s t e m mor e d u r a b l e a g a i n s t the y e a r s and al so t hey
s h o u l d use mor e c o m p l i c a t e d s u b - s y s t e m in t he w e a p o n s . And all o f t h e s e made the i ni t i al cost o f a c q u i s i t i o n very high. The t hi r d r e a s o n mo s t l y d e p e n d s on the f i r st two. Us i ng h i ghl y c o m p l i c a t e d s u b - s y s t e m and h a v i n g l ong life, t he cost o f o p e r a t i o n , m a i n t e n a n c e and s u p p o r t have a big p r o p o r t i o n in t he t o t a l cos t o f a s ys t em. In t he y e a r 1989-1 990 it was e s t i m a t e d t hat the m a i n t e n a n c e c os t s o f the d e f e n s e s y s t e m in t he Un i t ed Ki n g d o m e x c e e d e d £l b i l l i o n . " ( Ki n c h , 1993, p p . 8 7 ) D e p e n d i n g on the t h e s e r e a s o n s DoD in t he Un i t e d St at es wa n t e d the L o g i s t i c s M a n a g e m e n t I n s t i t u t e ( LMI ) in W a s h i n g t o n to p r e p a r e a r e p o r t in 1965 wh i c h has a t i t l e o f Life Cy c l e C o s t i n g in E q u i p m e n t P r o c u r e m e n t . This is t he fi r st s t udy on t he s u b j e c t o f Li f e Cy c l e Co s t i n g . In the y e a r 1969, s ever al s t u d i e s we r e p u b l i s h e d on the u s e o f Li f e Cy c l e C o s t i n g in t he m i l i t a r y as wel l as in t he c i v i l i a n s e ct or . ( C h a k o u r , 1969; K a u f m a n n , 1969) Al so in t he same y e a r U.S D e p a r t m e n t o f D e f e n s e w a n t e d t he
LMI to p r e p a r e a n o t h e r r e p o r t a b o u t the Life Cy c l e C o s t i n g in
S y s t e m A c q u i s i t i o n . Af t e r t hi s r e p o r t t hr ee g u i d e l i n e s we r e
p u b l i s h e d by the U.S D e p a r t m e n t o f De f e n s e . Th es e were:
3 - Li f e Cy c l e C o s t i n g G u i d e for Sy s t em A c q u i s i t i o n ( 1973) .
T h e s e g u i d e s we r e i m p o r t a n t in t he h i s t o r y o f t he Life Cy c l e
C o s t i n g , b e c a u s e a f t e r t hi s g u i d e r e l e a s e d Do D e s t a b l i s h e d the
r e q u i r e m e n t for the Life Cy c l e Cos t p r o c u r e m e n t for w e a p o n s ys t em a c q u i s i t i o n . A c c o r d i n g to B . S . D h i l l o n " S i n c e 1974, many st a t e s in t he Un i t e d St a t e s have p a s s e d l e g i s l a t i o n m a k i n g Li f e Cy c l e Cos t a n a l y s i s m a n d a t o r y in t he p l a n n i n g , d e s i g n , and c o n s t r u c t i o n o f s t a t e b u i l d i n g s " ( D h i l l i o n , 1989, p p . l ) . Al so in 1978 U.S C o n g r e s s e s t a b l i s h e d t he Na t i o n a l E n e r g y C o n s e r v a t i o n P o l i c y Act. A c c o r d i n g to t his act ever y new f e d e r a l c o n s t r u c t i o n s h o u l d use Life C y c l e Co s t e f f e c t i v e l y in t he U n i t e d St a t e s , and t h i s l e g i s l a t i o n ma d e t he c o n c e p t o f Li f e Cy c l e C o s t i n g v e r y p o p u l a r . Af t e r 1969 t h e r e are man y p u b l i c a t i o n s ma d e in t he s u b j e c t o f Li f e C y c l e Co s t i n g . To d a y , mo s t o f the c o n s t r u c t i o n f i r ms , d e f e n s e c o n t r a c t o r s , c o m p a n i e s t h a t p r o d u c e s c o s t l y p r o d u c t s use Li f e Cy c l e Cos t a n a l y s i s m e t h o d s in t h e i r b u s i n e s s . As m e n t i o n e d b e f o r e , s ome o f t h e m us e t hi s m e t h o d b e c a u s e o f the l e g i s l a t i o n and r e q u i r e m e n t s
and s ome o f t hem use t hi s me t h o d for r e d u c i n g t he cos t o f t h ei r fi rm.
The need o f Life Cy c l e C o s t i n g d e p e n d s on s e ver a l f a c t o r s , t h e s e f a c t o r s ;
" Ri s i n g I n f l a t i o n , B u d g e t L i m i t a t i o n s , I n c r e a s e d cost
e f f e c t i v e n e s s a w a r e n e s s a mo n g u s e r s . C o m p e t i t i o n , Co s t l y
p r o d u c t s ! e. g. . C o m m e r c i a l a i r c r a f t s , m i l i t a r y s y s t e ms ) . I n c r e a s i n g m a i n t e n a n c e cos t " ( D h i l l i o n , 1 9 8 9 , p p . 3 0 )
The mai n i dea in LCC is to c a l c u l a t e t he all t he e s t i m a b l e cost for a p r o d u c t , not onl y a c q u i s i t i o n cos t o f it. F a b r y c k y and B l a n c h a r d e x p l a i n t hi s p r o b l e m as:
" Tot a l s ys t e m cos t is of t en not v i s i b l e , p a r t i c u l a r l y t h o s e c os t s a s s o c i a t e d wi t h s y s t e m o p e r a t i o n and s u p p o r t . The cos t v i s i b i l i t y p r o b l e m can be r e l a t e d to the i c e b e r g e f f e c t . One mu s t a d d r e s s not onl y s y s t e m a c q u i s i t i o n cost , but o t h e r c o s t s as wel l . " ( F a b r y c k y and B l a n c h a r d , 1 9 9 1 ,pp. 123)
Li f e Cy c l e Cos t can be used for d i f f e r e n t p u r p o s e s , such as, c o m p a r i n g c o m p e t i n g p r o j e c t s , l o n g - r a n g e p l a n n i n g and b u d g e t i n g ,
s e l e c t i n g a m o n g c o m p e t i n g b i d d e r s , c o n t r o l l i n g and o n g o i n g
r e p l a c e m e n t o f a g i n g e q u i p m e n t . F a b r y c k y and B l a n c h a r d g i v e some LCC a p p l i c a t i o n a r e as , " A l t e r n a t i v e s y s t e m / p r o d u c t o p e r a t i o n a l s c e n a r i o s and u t i l i z a t i o n a p p r o a c h e s ; a l t e r n a t i v e s ys t e m m a i n t e n a n c e c o n c e p t s and l o g i s t i c s u p p o r t p o l i c i e s ; a l t e r n a t i v e s y s t e m / p r o d u c t de s i gn c o n f i g u r a t i o n s i n v o l v i n g t e c h n o l o g y a p p l i c a t i o n s , e q u i p m e n t p a c k a g i n g s c h e me s , d i a g n o s t i c r o u t i n e s , b u i l t - i n t es t v e r s u s e x t e r n a l t es t , manua l f u n c t i o n s v e r s u s a u t o m a t i c f u n c t i o n s . .; A l t e r n a t i v e s u p p l i e r s o u r c e s for a g i v e n i t em; a l t e r n a t i v e p r o d u c t i o n a p p r o a c h e s , such as c o n t i n u o u s v e r s u s d i s c o n t i n u o u s p r o d u c t i o n , q u a n t i t y o f p r o d u c t i o n l i nes, . . ; a l t e r n a t i v e p r o d u c t d i s t r i b u t i o n c h a n n e l s , t r a n s p o r t a t i o n and h a n d l i n g me t h o d s , w a r e h o u s e l o c a t i o n s ; a l t e r n a t i v e l o g i s t i c s u p p o r t pl ans , such as c u s t o m e r s e r v i c e l e v e l s , s u s t a i n i n g s u p p l y s u p p o r t l evel s , . ; a l t e r n a t i v e p r o d u c t d i s p o s a l and r e c y c l i n g m e t h o d s ; a l t e r n a t i v e m a n a g e m e n t p o l i c i e s and t h e i r i m p a c t on t he s y s t e m" , ( F a b r y c k y and B l a n c h a r d , 1 9 9 1 ,pp. 130)
T h e r e are s e v e r a l a r e a s for LCC c o n c e p t s and t h e r e are many
a d v a n t a g e s o f u s i n g LCC in t h e s e ar eas . A s h w o r t h d e f i n e s t he a d v a n t a g e s o f u s i n g Li f e Cy c l e C o s t i n g as,"
• Life Cy c l e C o s t i n g is a w h o l e or t otal cost a p p r o a c h u n d e r t a k e n in the a c q u i s i t i o n o f any c a p i t a l - c o s t p r o j e c t or asset , r a t h e r t han me r e l y c o n c e n t r a t i n g on t he i ni t i al c ap i t a l cos t al one.
• Life Cyc l e C o s t i n g a l l o w s for an e f f e c t i v e c h o i c e to be
ma d e b e t w e e n c o m p e t i n g p r o p o s a l s o f a s t a t e d o b j e c t i v e . The m e t h o d will t a k e into a c c o u n t the c a p i t a l , r e p a i r s , r u n n i n g and
r e p l a c e m e n t c os t s , and e x p r e s s e s t h e s e in c o n s i s t e n t and
c o m p a r a b l e t er ms . It can a l l o w for d i f f e r e n t s o l u t i o n s and d i f f e r e n t v a r i a b l e s i n v o l v e d and set up h y p o t h e s e s to t es t the c o n f i d e n c e o f t he r e s u l t s a c h i e v e d .
• Li f e Cyc l e C o s t i n g is an a s s e t m a n a g e m e n t tool t hat will
a l l o w t he o p e r a t i n g c o s t s o f p r e m i s e s to e v a l u a t e d at f r e q u e n t i n t e r v a l s
• Life Cy c l e C o s t i n g will e n a b l e t h o s e a r e a s o f b u i l d i n g s to
be i d e n t i f i e d as a r e s u l t o f c h a n g e s in w o r k i n g p r a c t i c e s , such as h o u r s o f o p e r a t i o n , i n t r o d u c t i o n o f new pl ant or m a c h i n e r y , use o f m a i n t e n a n c e a n a l y s i s " ( A s h w o r t h , 1 9 9 3 , pp. 122)
Mos t o f t he t i me the a n a l y s t s use LCC m e t h o d o l o g y in d i f f e r e n t s y s t e ms . T h e s e s y s t e ms or p r o d u c t s have a l ong l ife and hi gh p r o d u c t i o n and o p e r a t i o n cost s. The mai n p r o b l e m in this
m e t h o d o l o g y is to d e f i n e the p a r t s o f t he cost . In a big p r o j e c t most o f t he v a r i a b l e s are not vi s i bl e. Thus t he mai n p r o b l e m is to find r e l e v a n t da t a for t he s ys t em. Mo s t o f t he t i me the s ys t em is a new one t hat has no past da t a for the c a l c u l a t i o n o f LCC. So f i n d i n g r e l e v a n t da t a for the c a l c u l a t i o n is t he mai n p r o b l e m in t his c o n c e p t . Al so t h e r e are some o t h e r p r o b l e m s in t hi s m e t h o d o l o g y . A s h w o r t h t r i e s to e x p l a i n t h e s e p r o b l e m s in his st udy, "
• Li f e e x p e c t a n c y ; d e f i n i n g the life o f a s y s t e m is ma i n l y a
p r o b l e m , no one can p r e d i c t the f u t u r e i n n o v a t i o n s in t h a t area.
• Da t a d i f f i c u l t i e s ; the l ack o f a p p r o p r i a t e , r e l e v a n t and
r e l i a b l e h i s t o r i c a l cos t i n f o r m a t i o n and da t a for t he s ys t em.
• T e c h n o l o g i c a l c h a n g e ; it is d i f f i c u l t to f o r e c a s t wi t h any d e g r e e o f a c c u r a c y t he p o s s i b l e c h a n g e s in t e c h n o l o g y , m a t e r i a l s and n e e d s • F a s h i o n c h a n g e s ; s ame as t he t e c h n o l o g y t hi s f o r e c a s t i n g t h i s c h a n g e s is ver y d i f f i c u l t so Li f e C y c l e Co s t a n a l y s i s c o n s i d e r s on t he s t a t u s quo • Co s t and v a l u e c h a n g e s ; t he e f f e c t o f i n f l a t i o n on the a n a l y s i s
• Po l i c y and d e c i s i o n ma k i n g c h a n g e s ; one o f the most i m p o r t a n t Li f e Cy c l e C o s t i n g v a r i a b l e s is t he f u t u r e use and m a i n t e n a n c e p o l i c y o f the p r o j e c t by t he owner .
• A c c u r a c y ; on o f the mai n c r i t e r i a in any e s t i m a t e is its
a c c u r a c y or r e l i a b i l i t y " ( A s h w o r t h , 1 9 9 3 , pp. 1 27-1 30)
The q u e s t i o n in t he LCC is what t ype o f cost s houl d be c o n s i d e r e d in the c a l c u l a t i o n s . Thi s a l wa y s c h a n g e s but g e n e r a l l y the a n a l y s t g r o u p s h o u l d c o n s i d e r t he cost d e p e n d i n g on the p h a s e o f t he p r o j e c t . In one o f t he b o o k s S . J . Ki r k and A.J . D e l l ' i s o l a m e n t i o n t h e s e cost;
" D u r i n g its e c o n o m i c l ife an i tem is s u b j e c t to p u r c h a s e , use, r e p a i r , m a i n t e n a n c e , p e r h a p s m o d i f i c a t i o n , and f i n a l l y d i s p o s a l . T h e s e p r o c e s s c o m p r i s e t he life c y c l e o f t he i t em, and the cos t o f
t h e s e p r o c e s s e s ma k e up Li f e Cy c l e Cos t , or t otal cost o f
o w n e r s h i p , o f t he i t em. " ( Ki r k and D e l l ' i s o l a , 1995, p p . 2 7 )
b) M e t h o d s
The m e t h o d s or t e c h n i q u e s for f i n d i n g t he LCC o f an item
mo s t l y d e p e n d s on t he a n a l y s t but main i dea in t h es e me t h o d s to
f i nd t he mo s t a v a i l a b l e a l t e r n a t i v e s for the s ys t e m. Gr i f f i n
" Ther e are t wo b r o a d me t h o d s t hat can be a d o p t e d for this m o d e l i n g and c a l c u l a t i o n p r o c e s s whi c h can be s u m m a r i z e d as t op- do wn or b o t t o m - u p . The b o t t o m - u p mo d e l s use e x p l i c i t e n g i n e e r i n g , p r o g r a m and s u p p o r t e l e me n t s and a c t i v i t i e s to c r e a t e a high
f i d e l i t y model o f t he life c y c l e and t hen p h a s i n g and all
i n t e r r e l a t i o n s h i p s o f the e l e m e n t s wi t h one a n o t h e r . Th es e mo d e l s t end to c o n c e n t r a t e in most det ai l on the o p e r a t i o n and s u p p o r t o f t he s y s t e m. T o p - d o w n or p a r a m e t r i c LCCA mo d e l s t ake a d i f f e r e n t a p p r o a c h and are p a r t i c u l a r l y u s e f u l in e a r l i e r p h a s e o f the p r o j e c t s . " ( G r i f f i n , 1 9 9 3 , pp. 145)
Th e r e are s ever al me t h o d s for f i n d i n g t he LCC.
i) One is s i mp l e p a y b a c k p e r i o d me t h o d , h o w e v e r t his one is
not so c o mm o n and t he r es u l t o f t hi s me t h o d is not well s u i t e d for t he a n a l y s i s . B e c a u s e o f t he n a t u r e o f the me t h o d , the a n a l y s t c o n s i d e r s onl y the n u m b e r o f y e a r s t hat the p r o j e c t c o v e r s the i n v e s t m e n t . So the a n a l y s t t ake c ar e o f p r o j e c t s t hat t end to c over t h e m s e l v e s q u i c k l y . But t hi s me t h o d r e q u i r e s s ome r e v e n u e s in o r d e r to c o v e r its i n v e s t m e n t . So t hat it is not a v a i l a b l e for n o n p r o f i t p r o j e c t s such as g o v e r n m e n t p r o j e c t s , w e a p o n s y s t e ms , s ome u t i l i t y p r o j e c t s , etc. O f c o u r s e t he me t h o d is well u n d e r s t o o d by the m a n a g e r s o f the p r o j e c t s b e c a u s e c a l c u l a t i o n s are s i mp l e and the
r e s u l t o f t hi s m e t h o d g i v e s t he n u m b e r o f the i n v e s t m e n t c o v e r i n g year s . One o f t he f o r m u l a t i o n a b o u t s i mp l e p a y b a c k is gi v e n in the
b o o k o f Ca p i t a l I n v e s t me n t An a l y s i s For E n g i n e e r i n g And
M a n a g e m e n t as.
Investments
Net Cash Flow( Revenues - Disbursements)
( C a n a d a , S u l l i v a n and Wh i t e, 1 9 9 6 , pp. 1 02)
F a b r y c k y and B l a n c h a r d gi ve a n o t h e r f o r m u l a t i o n in t h e i r book. In t hi s f o r m u l a t i o n t hey a p p l i e d an i n t e r e s t r at e in f i n d i n g t he pay b a c k per i o d . And the r e s u l t is g i v e n as,
N 0 < 2 F O + i ) t=() Wh e r e t he s m a l l e s t v a l u e o f n t hat s a t i s f i e s t he e x p r e s s i o n a b o v e is t he p a y b a c k per i o d . In t hi s c a l c u l a t i o n a n a l y s t c a l c u l a t e s t he p e r i o d by u s i n g i n t e r p o l a t i o n , and f i n a l l y f i nds t he p a y b a c k p e r i o d o f t he p r o j e c t . ( F a b r y c k y and B l a n c h a r d , 1991, p p . 59- 60)
ii) The s e c o n d me t h o d and mo s t p r e f e r r e d one is net p r e s e n t
v a l u e me t h o d and its d e r i v a t i o n s such as a n n u i t y and u n i f o r m s e r i e s
p a y me n t . In t hi s m e t h o d all the c o s t s t hat will o c c u r in the f ut ur e
s h o u l d be c a l c u l a t e d and t hen t he p r e s e n t v a l ue o f t hi s c os t s houl d be f ound by u s i n g t he net p r e s e n t v a l u e f o r m u l a t i o n s . Mai n i dea in
t hi s m e t h o d is c a l c u l a t i n g all t he cost o f t he s ys t e m in its full life and c o n v e r t i n g t he v a l u e i nto t o d a y ’s a mo u n t by u s i n g the i n t e r e s t r a t e t hat a n a l y s t d e c i d e s . Thi s is t he mos t a p p l i c a b l e way o f c a l c u l a t i n g t he LCC. T h e r e are s e ver a l f o r m u l a s for this me t h o d and the b a s i c p r e s e n t v a l u e f o r m u l a is g i v e n bel ow:
N
PV = X ( - Ct -)
t=o (1 + n)
Wh e r e S r e f e r s to the sum o f s e r i e s and Cj r ef e r s to the net
cash f l ow o f t he s y s t e m for the wh o l e l ife at t i me t. Th er e are s e v e r a l d e r i v a t i o n s o f this f o r m u l a and t he a n a l y s t s h o u l d use the one mo s t p r o p e r l y fit for the c a l c u l a t i o n o f the LCC.
iii) The t hi r d me t h o d is i n t e r n a l or e x t e r n a l r a t e o f r e t u r n
me t h o d . By u s i n g t his me t h o d t he r a t e o f t he s y s t e m r e t u r n coul d be c a l c u l a t e d . And by c o m p a r i n g wi t h t he i n t e r e s t r at e the e f f i c i e n c y o f t he s y s t e m can be f ound. Bas i c c o n c e p t in t hi s me t h o d is to find the r a t e t hat ma k e s t he net p r e s e n t v a l ue o f t he t ot al cos t o f t he s y s t e m to the zer o. Af t e r f i n d i n g t he r a t e r o f the r e t u r n t he a n a l y s t s h o u l d c o m p a r e t he r e s u l t wi t h the o p p o r t u n i t y cos t o f c ap i t a l in o r d e r to d e c i d e w h e t h e r t he p r o j e c t is a c c e p t a b l e or not.
Al s o t he a n a l y s t can us e d i f f e r e n t me t h o d s t hat d e p e n d on the s y s t e m s p e c i f i c a t i o n s but the g e n e r a l r ul e is to c o n v e r t the cost into
t o d a y ' s v a l u e by u s i n g net p r e s e n t v a l u e me t h o d s , and t hen de c i d e w h e t h e r t he s y s t e m is a p p l i c a b l e or not.
c) Mo d e l s
For c a l c u l a t i n g the LCC o f t he s y s t e m, one o f the me t h o d s can be us e d, but me t h o d s are not the onl y r e q u i r e m e n t o f LCC. The a n a l y s t s h o u l d c o n s t r u c t a model for LCC. To bui l d a s t r u c t u r e o f a model is ver y c r i t i c a l poi nt for the a n a l y s t b e c a u s e e ver y c a l c u l a t i o n and e s t i m a t i o n d e p e n d s on t hi s model . Dhi l l o n gi v es s e ver a l d i f f e r e n t mo d e l s in his book. In t hi s s t udy the a u t h o r s u m m a r i z e s t w e n t y - t h r e e mo d e l s in d i f f e r e n t areas. An e x a m p l e o f the mo d e l s t h a t is g i v e n by D h i l l o n ;
" Thi s model was d e v e l o p e d by t he Un i t e d St a t e s Navy for m a j o r w e a p o n s y s t e ms . The Li f e C y c l e Cos t is made up o f five m a j o r c o m p o n e n t s : r e s e a r c h and d e v e l o p m e n t cos t ( RDC) , o p e r a t i n g and s u p p o r t cos t ( OS C) , a s s o c i a t e d s y s t e m s cost ( AS C) , i n v e s t m e n t c os t ( I C) , and t e r m i n a t i o n cost (TC) . M a t h e m a t i c a l l y t he Life Cy c l e Co s t is e x p r e s s e d as f ol l o ws ;
L , , = R D C \ OSC ^ASC-\-IC ^ TC "
In t hi s model e v er y i t em has s ome sub c o m p o n e n t s so t hat the t ot al Life Cy c l e Cos t can be c a l c u l a t e d by u s i n g such model s . But in ever y mo d el t he c o m p o n e n t s and t he sub c o m p o n e n t s d i f f e r fr om s y s t e m to s ys t e m In e v er y c a l c u l a t i o n o f the Life Cyc l e Cost o f a s ys t e m t he a n a l y s t s h o u l d c o n s i d e r the e v e r y sub c o m p o n e n t s o f the m a j o r c o m p o n e n t . And t his ma i n l y d e p e n d s on the wor k and cost br eak d o wn s t r u c t u r e o f the s ys t em. For ever y s ys t em t he wor k
b r e a k d o w n s t r u c t u r e s h o ws d i f f e r e n t t ypes . Al so some
m o d i f i c a t i o n s o f t he same s ys t e m can ha ve d i f f e r e n t wor k
b r e a k d o w n s t r u c t u r e s . B e c a u s e t ype o f t he w o r k s or the e l e me n t s o f the w o r k s have d i f f e r e n t s p e c i f i c a t i o n s , and d e p e n d i n g on t his s i t u a t i o n t he cos t e l e m e n t s have d i f f e r e n t p a t t e r n s . So the st eps in c a l c u l a t i o n o f Li f e Cy c l e Cost can be s u m m a r i z e d l i ke t his;
• C o n s t r u c t a c os t s t r u c t u r e t hat r e f l e c t s e v e r y pa r t o f the
l ife c y c l e o f a s ys t e m,
• Fi nd r e l e v a n t dat a for the cost s t r u c t u r e ,
• Ma k e r e l a t i o n s h i p s b e t w e e n t he pas t dat a and the
r e q u i r e m e n t for t he new s ys t e m,
• F o r m u l a t e a model d e p e n d i n g on the cos t s t r u c t u r e ,
• Ma k e v a l i d a t i o n and a n a l y s i s o f the model
In t his a p p r o a c h the model s houl d c o n s i s t o f ever y s e p a r a t e i t em o f the c os t s t r u c t u r e ,
U.S Ar my us es LCC a n a l y s i s p r o c e d u r e in ever y p h a s e o f a c q u i s i t i o n o f w e a p o n s y s t e ms . In t h e i r m e t h o d o l o g y t hey us e six st eps for m a k i n g cos t a n a l y s i s T h e s e are m e n t i o n e d in t he manual
p r e p a r e d by t he Ar my Cos t And E c o n o m i c A n a l y s i s Ce n t e r . The
s t e ps are
"Set up d e f i n i t i o n s , g r o u n d r ul es and a s s u m p t i o n s / c o n s t r a i n t s , se l e c t the cos t s t r u c t u r e , c o mp i l e t he da t a bas e, p r e p a r e the cost e s t i m a t e , t es t the t ot a l cos t e s t i m a t e , and p r e p a r e d o c u m e n t a t i o n " (US Ar my C&E A n a l y s i s Ce n t e r , 1997, p p . 3 2 )
The w o r k f l ow o f cos t c a l c u l a t i o n is d e s c r i b e d in the manual and s h o wn in F i g u r e 1:
^ t a b I í s h ' o u n d ^ 1 c s a n d ► s u m p I i o n s Develop cost element s t i u c t i i r e & W B S C o ni p i l e d a t a b a s e C E R s Models D a l a / C E R s LCC E s t i m a t e s C o s t D r i v e r s P r e p a r e c o s t e s t i m a t e s /'or e a c h e l e m e n t T e s t t o t a l s y s t e m estimate P r e p a r e D o c u m e n t a t i o n • bv n g i n e e r i n g • A n a 1 o g y • P a r a m e t r i c • E xp ei T o p i n i o n • Reasonableness • S e n s i t i v i t y a n a l y s i s • C o s t - R i s k a s s e s s m e n t
Figure l: Cos t cal cu lat io n workf low
A f t e r c o n s t r u c t i n g a cost b r e a k d o w n s t r u c t u r e o f a s ys t em the s e c o n d st ep s h o u l d be e s t i m a t i n g or c a l c u l a t i n g the c o s t s o f e ver y pa r t o f t he s t r u c t u r e . N. M de V a s c o n c e l l o s Jr. And M Y o s h i m u r a s t a t e t hi s s i t u a t i o n in t h e i r study;
"In g e n e r a l , t h e r e are t wo c a t e g o r i e s o f cos t e s t i ma t i n g : the
t o p - d o w n a p p r o a c h ( p a r a m e t r i c ) and the b o t t o m - u p a p p r o a c h
( e n g i n e e r i n g a p p r o a c h ) . The t o p - d o w n a p p r o a c h us e s h i s t o r i c a l dat a f r o m p r e v i o u s s y s t e m and f o r e c a s t s the cos t o f a new s ys t em bas ed
on c os t d e t e r m i n i n g v a r i a b l e s , . The b o t t o m s - u p a p p r o a c h
r e q u i r e s e s t i m a t i o n o f ma t e r i a l n e e d e d f or the s y s t e m, l abor hour , s u p p o r t e q u i p m e n t , m a i n t e n a n c e , etc. Th es e t wo a p p r o a c h e s are u s u a l l y u s e d in d i f f e r e n t s t a g e s o f t he p u r c h a s i n g p l a n n i n g s y s t e m, wh e r e t o p - d o w n a p p r o a c h is u s e d in ear l y s t age and t he b o t t o m s - u p
a p p r o a c h is us e d in the l at er st a ge. " ( V a s c o n c e l l o s and Y o s h i m u r a , 1999)
Al so in ever y sub l evel o f t he b r e a k d o w n s t r u c t u r e the a n a l y s t s h o u l d d e f i n e t he way o f c a l c u l a t i n g the cos t o f sub e l e me n t s , so in t he LCC c o n c e p t e v e r y a c t i v i t y t hat t akes p a r t s in the life o f the s y s t e m s h o u l d be c o n s i d e r e d as a s e p a r a t e p r o b l e m and s h o u l d be c a l c u l a t e d a c c o r d i n g l y . So the a n a l y s t s h o u l d be f a m i l i a r wi t h the s y s t e m and s h o u l d d e f i n e the s p e c i f i c cos t e l e me n t s o f the s ys t em in e v er y phas e. As a r es u l t t he i m p o r t a n t i s s ue t u r n s to be d e f i n i n g t he c os t b r e a k d o w n
S t r u c t u r e o f t he s y s t e m in LCC c a l c u l a t i o n ; In t hat part o f the s u b j e c t , t h e r e are s o me g e n e r a l g u i d e l i n e s t h at are p u b l i s h e d by se v e r a l a u t h o r i t i e s . In t h e i r b o o k F a b r y c k y and B l a n c h a r d gi ve a g e n e r a l cos t b r e a k d o w n s t r u c t u r e f o r ma t , "Tot al s y s t e m cost 1.R e s e a r c h and d e v e l o p m e n t A. P r o g r a m M a n a g e m e n t B. A d v a n c e d R&D C. E n g i n e e r i n g De s i g n
System en gineerin g • E l e c t r i c a l e n g i n e e r i n g M e c h a n i c a l de s i g n • Re l i a b i l i t y M a i n t a i n a b i l i t y • Huma n f a c t o r s • P r o d u c i b i l t y L o g i s t i c s u p p o r t a n a l y s i s D. E q u i p m e n t D e v e l o p m e n t and t es t E n g i n e e r i n g mo d e l s • Tes t and e v a l u a t i o n E. E n g i n e e r i n g Da t a 2. I n v e s t m e n t A. P r o d u c t i o n P r o d u c t i o n e n g i n e e r i n g • T o o l s and t es t e q u i p m e n t F a b r i c a t i o n
• A s s e m b l y • I n s p e c t i o n and t est • Q u a l i t y c o n t r o l • I n v e n t o r y • P a c k i n g and s h i p p i n g B, C o n s t r u c t i o n • P r o d u c t i o n f a c i l i t i e s • Tes t f a c i l i t i e s • O p e r a t i o n a l f a c i l i t i e s • M a i n t e n a n c e f a c i l i t i e s C. I ni t i al L o g i s t i c S u p p o r t % • P r o g r a m m a n a g e m e n t • P r o v i s i o n i n g • I ni t i al s p a r e / r e p a i r p a r t s • I ni t i al i n v e n t o r y m a n a g e m e n t • T e c h n i c a l da t a p r e p a r a t i o n • I n i t i a l t r a i n i n g and t r a i n i n g e q u i p m e n t
Tes t and s u p p o r t e q u i p m e n t a c q u i s i t i o n Fi r s t d e s t i n a t i o n t r a n s p o r t a t i o n 3. O p e r a t i o n s and M a i n t e n a n c e A. O p e r a t i o n s O p e r a t i n g p e r s o n n e l O p e r a t o r t r a i n i n g O p e r a t i o n a l f a c i l i t i e s S u p p o r t and h a n d l i n g e q u i p m e n t B. M a i n t e n a n c e M a i n t e n a n c e p e r s o n n e l and s u p p o r t S p a r e / r e p a i r p a r t s • Tes t and s u p p o r t e q u i p m e n t m a i n t e n a n c e T r a n s p o r t a t i o n and h a n d l i n g • M a i n t e n a n c e t r a i n i n g M a i n t e n a n c e f a c i l i t i e s • T e c h n i c a l d a t a
4. S y s t e m P h a s e - o u t and Di s p o s a l " ( F a b r y c k y and B l a n c h a r d , 1991, pp. 333)
T h e r e are d i f f e r e n t cost s t r u c t u r e s in t he l i t e r a t u r e but t hi s one is the mo s t g e n e r a l cos t b r e a k d o w n s t r u c t u r e . But ever y s y s t e m or
e q u i p m e n t has d i f f e r e n t cost s t r u c t u r e . So the a n a l y s t s houl d
c o n s t r u c t his own s t r u c t u r e d e p e n d i n g on the s ys t e m s p e c i f i c a t i o n s . Al so in e v e r y part o f t he cost s t r u c t u r e the a n a l y s t can find some d i f f i c u l t i e s in t he c a l c u l a t i o n o f t he cost. One o f t hem o c c u r s in the m a i n t e n a n c e cos t o f the s ys t em. In bot h a p p r o a c h e s , t o p - d o w n and b o t t o m s - u p , t he a n a l y s t can f i nd r e l e v a n t dat a for the s c h e d u l e d m a i n t e n a n c e o f t he s y s t e m, or make some e s t i m a t i o n d e p e n d i n g on t he p a s t da t a for the s y s t e m m a i n t e n a n c e cost. The l ab o r hour o f m a i n t e n a n c e p e r s o n n e l or the s p a r e / r e p a i r p a r t s or m a i n t e n a n c e e q u i p m e n t cos t can be f ound in t he p a s t da t a or can be e s t i m a t e d by u s i n g t h e s e da t a , but u n e x p e c t e d m a i n t e n a n c e c o s t s are not a part o f t he p a s t data. So t he a n a l y s t s houl d c o n s i d e r t h e s e c i r c u m s t a n c e s .
a) I m p l e m e n t a t i o n O f Li f e Cyc l e C o s t i n g In D i f f e r e n t Ar eas
G. G He g d e , in his st udy, c o n c e n t r a t e s on the f a i l u r e cost o f
s y s t e m s and d e p e n d i n g on f a i l u r e c os t d e f i n i t i o n he made, he t ried to find Li f e Cy c l e Cos t o f a d u r a b l e g o o d s in d i f f e r e n t a p p r o a c h e s .
He s t a t e s t hat by u s i n g s ome d e n s i t y f u n c t i o n the f a i l u r e cost o f a
s y s t e m can be e s t i ma t e d . Al so t h e s e c i r c u m s t a n c e s c h a n g e
a c c o r d i n g to the t ype o f the p r o d u c t . And he e x p l a i n s t hi s s i t u a t i o n in f o u r d i f f e r e n t cases. In one case, the s y s t e m has n o n - l i n e a r f a i l u r e cost s t r u c t u r e and by u s i n g e x p o n e n t i a l d e n s i t y f u n c t i o n he e s t i m a t e s the cost o f f ai l ur e. Al so, in t his s t udy t he a u t h o r t ake s i nt o c o n s i d e r a t i o n o f o p p o r t u n i t y cos t o f not u s i ng the s ys t em. So in t hi s a p p r o a c h c a l c u l a t i o n o f LCC o f a s y s t e m mo s t l y d e p e n d s on the f a i l u r e r at e o f t he s y s t e m ( H e d g e , 1994)
J a me s V. C a r n a h a n and C h a r l e s Ma r s h use such c o n c e p t s in t h e i r s t udy o f u n d e r g r o u n d heat d i s t r i b u t i o n s y s t e ms Life Cy c l e Co s t a n a l y s i s . In t his s t udy t hey s t a t e d t hat i ni t i al cos t and o p e r a t i n g c o s t s c o u l d be e a s i l y c a l c u l a t e d by t he help o f past data. But f i n d i n g f a i l u r e r at e s o f t he s y s t e m s is mu c h mor e c o mp l e x t han the o t h e r s are. They us e d a s u r v e y t hat is c o n d u c t e d by t he US Ar my C o n s t r u c t i o n E n g i n e e r i n g R e s e a r c h L a b o r a t o r y , and P o i s s o n
d i s t r i b u t i o n in t h e i r model and use Li f e Cy c l e Cost a n a l y s i s to
c o m p a r e the d i f f e r e n t u n d e r g r o u n d heat d i s t r i b u t i o n s ys t e ms .
( C a r n a h a n and Ma r s h , 1998)
A f i f Ha s a n al s o used t his c o n c e p t in o r d e r to o p t i mi z e i n s u l a t i o n t h i c k n e s s for b u i l d i n g s in his s t udy and c o mp a r e d t he
e f f e c t o f d i f f e r e n t t h i c k n e s s for b u i l d i n g in h e a t i n g and i ni t i al cost a s p e c t s by u s i n g LCC. ( Ha s a n , 1999)
Dan K r a l s s o n and his c o l l e a g u e s use Life Cyc l e Cost e s t i m a t e s in the 400 kV s u b s t a t i o n L a y o u t s and t hey c o mp a r e the t wo
d i f f e r e n t s y s t e ms Af t er f i n d i n g all t he e l e m e n t s o f the s y s t e ms
t hey use LCC o f d i f f e r e n t s y s t e ms and t h e n c o m p a r e the r e s u l t s o f t he e f f i c i e n c y o f t he s y s t e ms . In t h e i r s t udy t hey e m p h a s i z e d t hat not onl y t he i n v e s t m e n t and o p e r a t i o n cos t is i mp o r t a n t but al so the m a i n t e n a n c e and o u t a g e c os t s for the wh o l e l ife o f t he s ys t e m s h o u l d be c a l c u l a t e d in o r d e r to r ea ch a r e l e v a n t r es ul t . ( K r a l s s o n , 1997)
N. M de V a s c o n c e l l o s and M . Y o s h i m u r a set a Life Cy c l e Cost model for a c q u i s i t i o n o f a u t o m a t e d s y s t e ms . In t hat s t udy t hey d e f i n e an a c t i v e life c y c l e a c t i v i t i e s o f a u t o m a t e d s y s t e ms and t hen t hey f o r m u l a t e t he Li f e Cy c l e Cos t o f a u t o m a t e d s y s t e ms in t h e i r st udy. T h e i r cos t s t r u c t u r e c o n s i s t s o f e v er y mi n o r cost e l e me n t s o f t h e s e s y s t e ms . As a r e s u l t , t h e i r a p p r o a c h is mor e val i d t han t o d a y ’s c os t c a l c u l a t i o n me t h o d s as t hey us e the c o m p a r i s o n o f cost
c a l c u l a t i o n o f d i f f e r e n t sys t e ms . ( V a s c o n c e l l o s and Yo s i mu r a ,
C h a p t e r III
THE MODEL
In t hi s st udy, t wo d i f f e r e n t t ype o f s e l f - p r o p e l l e d gun Li f e Cy c l e Cost will be c a l c u l a t e d and af t er t han a c o m p a r i s o n will be ma d e d e p e n d i n g on the Li f e Cyc l e Cost s . So t hat the model s houl d be s a me for bot h o f t he g uns in o r d e r to make c o m p a r i s o n in the s ame base. Bu t in the fi r st s a mp l e , SP 2 0 0 0 , all t he r e s e a r c h and d e v e l o p m e n t and p r o d u c t i o n cost will be c a l c u l a t e d in t he model
but in the s e co n d s a mp l e , M1 0 9 A6 P a l a d i n , i n s t e a d o f r e s e a r c h
and d e v e l o p m e n t and p r o d u c t i o n cost , the a c q u i s i t i o n cost o f the s a m p l e will be us ed in the model . In t hi s s t udy t he model ma i n l y b a s e d on t he F a b r y c k y and B l a n c h a r d s a mp l e Li f e Cy c l e Cos t model in t h e i r b o o k Life Cy c l e Cos t and e c o n o m i c a n a l y s i s . ( p p . 3 3 4 - 3 4 9 )
The model f o l l o w s ,
Tot a l s y s t e m Life Cy c l e Cost ( C )
N
(C) - X[Cn -h Cpi + Coi -b Copi]
i=l
( 3 . 1 )
Cr= r e s e a r c h and d e v e l o p m e n t cost
Co= cos t o f o p e r a t i o n and m a i n t e n a n c e
Co p = cost o f d i s p o s a l
a) R e s e a r c h and D e v e l o p m e n t Cost ( Cr )
Cr = Cr pm + Cr r d + Cr ed + Crdt ( 3. 2)
This cos t item c o n s i s t s o f f e a s i b i l i t y s t u d i e s , r e s e a r e h and
d e v e l o p m e n t a c t i v i t i e s , e n g i n e e r i n g de s i g n , t es t o f e n g i n e e r i n g
p r o t o t y p e mo d e l s and all o t h e r a s s o c i a t e d d o e u m e n t a t i o n , also
c o v e r s all r e l a t e d p r o g r a m m a n a g e m e n t f u n c t i o n s . T h e s e ki nd o f c o s t s are n o n - r e c u r r i n g cos t s for the sys t em.
C r p m = P r o g r a m M a n a g e m e n t Cos t
This cos t o r i e n t e d a c t i v i t y a p p l i c a b l e to c o n c e p t u a l s t udi es , r e s e a r c h , e n g i n e e r i n g d e s i g n , e q u i p m e n t d e v e l o p m e n t and t es t and r e l a t e d d o c u m e n t a t i o n . T h e s e cos t s c o v e r t he p r o g r a m m a n a g e r and st af f , m a r k e t i n g , c o n t r a c t s , p r o c u r e m e n t , l o g i s t i c s m a n a g e m e n t , v i s i t s o f r e l a t e d f a c t o r y and r e s e a r c h c e n t e r s and etc
N
Crpm = ^C rp m i i=l
C r r d = A d v a n c e d r e s e a r c h and d e v e l o p m e n t cos t
The cos t o f a d v a n c e d r e s e a r c h and d e v e l o p m e n t i n c l u d e s c o n c e p t u a l s t u d i e s c o n d u c t e d to d e t e r mi n e and j u s t i f y a need for a s p e c i f i c r e q u i r e m e n t .
N
Crrd = ^Crrdi i=l
(3.4)
Where Crrd^. refers to the specific activity i and N refers to the number of the act ivi ties
Cr ed = E n g i n e e r i n g d e s i g n cost
All i ni t i al d e s i g n f a c i l i t i e s a s s o c i a t e d wi t h s ys t e m d e f i n i t i o n and e q u i p m e n t are c a l c u l a t e d in t h i s cos t item. Some s p e c i f i c ar eas such as s y s t e m e n g i n e e r i n g , d e s i g n e n g i n e e r i n g , r e l i a b i l i t y and m a i n t a i n a b i l i t y - e n g i n e e r i n g etc are i n c l u d e d in t hi s cost.
N
Cred = ^ C re d i i=l
( 3,5 )
Where Crpm^. r efe r s to the s p e c ific activity i and N refe rs to the
Cr dt = E q u i p m e n t d e v e l o p m e n t and t es t cost
The cos t o f f a b r i c a t i o n a s s e mb l y , t es t and e v a l u a t i o n o f e n g i n e e r i n g p r o t o t y p e mo d e l s are i n c l u d e d in t hi s item.
N
Crdt = [Crdwi + Crdmi + ^ Crdtk k=l
( 3. 6)
Where i refers to the number o f prot ot ypes and k refers to the test act ivi ties and N refers to the number of tests.
C r d w = cos t o f p r o t o t y p e or model p r o d u c t i o n and a s s e m b l y labor.
C r d m= cos t o f ma t e r i a l t hat is used in the p r o t o t y p e
C r d t = cos t o f t es t f a c i l i t i e s and s u p p o r t a c t i o n s in the p r o t o t y p e
b) P r o d u c t i o n cos t
All c o s t s a s s o c i a t e d wi t h t he a c q u i s i t i o n o f new s y s t e ms / e q u i p m e n t t h a t is ne e d e d for t he p r o d u c t i o n o f t he s ys t em. The
Where Cred^. r efe r s to the sp ec ific design activity i and N
a c q u i s i t i o n cos t o f t he s y s t e m s / e q u i p m e n t t hat is p u r c h a s e d b e f o r e is not c o n s i d e r e d as a cost o f t he new s ys t em. The cos t o f o p e r a t i o n o f t he o l d e r s y s t e m can t ake as a cost for t he new sys t em.
Cp = [ Cpm + Cpc + Cpl ]
( 3.7 )
Cpm = Sys t em p r o d u c t i o n cost
Thi s cost c o v e r s all r e c u r r i n g and n o n r e c u r r i n g cos t that r e l a t e d to t he p r o d u c t i o n and t est o f s y s t e ms
Cpm = [ Cpn + Cpr ] ( 3. 8)
Cpn ^ N o n r e c u r r i n g c os t s
N o n r e c u r r i n g c os t s i n c l u d e all f i xed n o n r e c u r r i n g cost a s s o c i a t e d wi t h t he p r o d u c t i o n and t es t o f o p e r a t i o n a l sys t em.
Cpn =[ Cpnp + Cp n t + Cpnq + C p n m + Cp n q a ]
( 3.9 )
Cpnp = P r o d u c t i o n e n g i n e e r i n g cost
Cp n t = T o o l s and f a c t o r y t es t e q u i p m e n t c os t s
Cpnm =producti on management cost
C p n q a = c o s t o f q u a l i f i c a t i o n t e s t s
Cpr = R e c u r r i n g cost
This item c o v e r s all r e c u r r i n g p r o d u c t i o n c os t s t hat i n c l u d e f a b r i c a t i o n , s u b a s s e m b l y and a s s e m b l y , ma t e r i a l and i n v e n t o r y c o n t r o l , i n s p e c t i o n and t es t , p a c k i n g and s h i ppi ng.
Cpr = [ Cpr m + Cprl + Cpr p + Cpri + Cpr t ]
( 3. 10 )
c p r m = p r o d u c t i o n e n g i n e e r i n g s u p p o r t cost
Cprl = P r o d u c t i o n and a s s e m b l y l ab o r cost
C p r p = P r o d u c t i o n ma t e r i a l and i n v e n t o r y cost
Cpri = i n s p e c t i o n and t es t cost
Cpr t = i ni t i al t r a n s p o r t a t i o n cost
Cpc = C o n s t r u c t i o n cost
Thi s c o s t s c o v e r all i ni t i al a c q u i s i t i o n c o s t s a s s o c i a t e d wi t h p r o d u c t i o n , t est , o p e r a t i o n a l and m a i n t e n a n c e f a c i l i t i e s and u t i l i t i e s .
Cpc - [ Cpc m + Cpc t + Cpca + Cp c ma + [Cpcl + Cpcb + C p c u + C p c c ] ] ( 3 . 1 1 ) Cpcm = P r o d u c t i o n f a c i l i t i e s cost Cpct =Tes t f a c i l i t i e s cost Cpc a = O p e r a t i o n a l f a c i l i t i e s a c q u i s i t i o n cost C p c ma = M a i n t e n a n c e f a c i l i t i e s a c q u i s i t i o n cost Cpcl ^ C o n s t r u c t i o n l abor cost Cpcb ^ C o n s t r u c t i o n mat er i a l cost Cpcu = Co s t o f u t i l i t i e s Cpc c =Ca p i t a l e q u i p m e n t cost Cpl = I n i t i a l l o g i s t i c s u p p o r t cost All i n t e g r a t e d l o g i s t i c s u p p o r t p l a n n i n g and c o n t r o l f u n c t i o n s are r e l a t e d to the d e v e l o p m e n t o f s ys t e m s u p p o r t r e q u i r e m e n t s and t r a n s i t i o n o f such r e q u i r e m e n t s from the s u p p l i e r s to the a p p l i c a b l e o p e r a t i o n a l site.
Cpl = [ Cp l m + Cpl p + Cpl s +Cpl i +Cpl d + Cpl t + Cpl a +Cpl h ] ( 3.12 )
Cpi p = C o s t o f p r o v i s i o n i n g Cpl s ^ I n i t i a l s p a r e / r e p a i r part ma t e r i a l cost Cpii ^ I n i t i a l i n v e n t o r y m a n a g e m e n t cost Cpl d = C o s t o f t e c h n i c a l da t a p r e p a r a t i o n Cpl t = C o s t o f i ni t i al t r a i n i n g and t r a i n i n g e q u i p m e n t Cpl a = A c q u i s i t i o n cost o f o p e r a t i o n a l t es t and s u p p o r t e q u i p m e n t Cpl h =I n i t i a l t r a n s p o r t a t i o n and h a n d l i n g c) O p e r a t i o n s and m a i n t e n a n c e cost
This cos t i n c l u d e s all c o s t s a s s o c i a t e d wi t h t he o p e r a t i o n and m a i n t e n a n c e s u p p o r t o f the s y s t e m t h r o u g h o u t its life cycl e.
Cplm ^ Lo g i s t i c program management cost
Co = [ Coo + Com ] ( 3.13 )
Co o = O p e r a t i o n s cost
All cos t r e l a t e d to the o p e r a t i o n o f the s ys t e m t h r o u g h o u t its life cycl e. In t hi s cost i tem e v er y cos t e x c e p t ma i n t e n a n c e c os t can be used as o p e r a t i o n a l .
Coo = [ Co o p + C o o f + Co o e ]
( 3. 14 )
Co o p = O p e r a t i n g p e r s o n n e l cost
Thi s i tem c o v e r s the cost o f o p e r a t i n g p e r s o n n e l t hat a l l o c a t e d for the s ys t em. In t hi s cost item e v er y p a y me n t to t he o p e r a t i n g p e r s o n n e l s houl d be c o v e r e d such as f r i n g e b e n e f i t s , s a l a r i e s , c l o t h i n g a l l o w a n c e etc.
C o o f = O p e r a t i o n a l f a c i l i t i e s cost
This i tem c o v e r the an n u a l r e c u r r i n g cos t t hat is r e l a t e d
to the o c c u p a n c y and m a i n t e n a n c e o f t he f ac i l i t i e s . The
m a i n t e n a n c e cos t o f f a c i l i t i e s c o v e r s t he r e p a i r , pai nt , o f o p e r a t i o n a l f a c i l i t i e s t h r o u g h o u t the life cycl e o f the sys t em.
Co o e = S u p p o r t and h a n d l i n g e q u i p m e n t cost
In t hi s i tem all an n u a l r e c u r r i n g u s a g e and m a i n t e n a n c e c os t for t h e s e i t e ms t h a t are r e q u i r e d to s u p p o r t s ys t em
o p e r a t i o n s t h r o u g h o u t the life c y c l e o f the s ys t em.
Co o e = [ Co o o + C0 0C + Coop]
Co o o = C o s t o f o p e r a t i o n
Co o c = C o s t o f e q u i p m e n t c o r r e c t i v e m a i n t e n a n c e
Co o p =Co s t o f e q u i p m e n t p r e v e n t i v e m a i n t e n a n c e
Com = M a i n t e n a n c e cost
7 he m a i n t e n a n c e cost o f t he sys t em can be d i v i d e d into t wo part s ; one is t he s c h e d u l e d m a i n t e n a n c e and that can be al so d i v i d e d i nto t wo p r e v e n t i v e and c o r r e c t i v e m a i n t e n a n c e , and u n e x p e c t e d or f a i l u r e m a i n t e n a n c e cost.
For s c h e d u l e d m a i n t e n a n c e t he dat a can be o b t a i n e d f r om the r e l a t e d d e p a r t m e n t and the cos t can be e s t i m a t e d a c c o r d i n g l y and the model for the s c h e d u l e d m a i n t e n a n c e cost
is w r i t t e n bel ow. But for u n e x p e c t e d m a i n t e n a n c e cost t her e
are no r e l e v a n t data. B e c a u s e no one has such an i n f o r m a t i o n t hat how many v e h i c l e s or s ys t e m will fail in s p e c i f i c t ime p e r i o d , so t hat in t hi s model a p r o b a b i l i s t i c a p p r o a c h is used in o r d e r to s p e ci f y the n u mb e r o f t he s ys t e m f ai l ed in a pe r i od o f t ime. And t hen t he m a i n t e n a n c e cos t e s t i ma t e d d e p e n d on the n u m b e r o f fail t hat is f ound by t he p r o b a b i l i s t i c a l l y .
T h e r e are s o me d i s t r i b u t i o n s t hat are used to find the f a i l u r e r at e o f a sys t em. One o f t hem and wi d e l y used is
e x p o n e n t i a l d i s t r i b u t i o n . And the o t h e r is Wei b u l l d i s t r i b u t i o n . The mai n d i f f e r e n c e is t he t i me o f f ai l ur e. Lel an d Bl ank d e s c r i b e s t he d i f f e r e n c e o f t wo d i s t r i b u t i o n s in his book as:
" The e x p o n e n t i a l is c o mm o n l y a p p l i e d in r e l i a b i l i t y p r o b l e m s wh e r e it is h y p o t h e s i z e d t hat the f a i l u r e rat e X is c o n s t a n t o ve r the e n t i r e life o f an item. The p d f g i v e s the i n s t a n t a n e o u s p r o b a b i l i t y o f f ai l ur e at any gi v e n t i me t>0.
Then t he c d f F( t ) = 1- e ’^^ is used to c o mp u t e the
p r o b a b i l i t y o f f a i l u r e p r i o r to t" ( Bl an k , 1980, pp. 291) .
And " Wei bul l d i s t r i b u t i o n is of t en us e d for r e l i a b i l i t y a n a l y s i s wh e r e t he t i me to f ai l ur e is not c o n s t a n t . " ( Bl ank, 1980, p p . 2 9 6 )
A c c o r d i n g to this d e f i n i t i o n s in t hi s model t he Wei bul l d i s t r i b u t i o n wi l l be u s e d for c a l c u l a t i n g the f a i l u r e r at e o f the w e a p o n s y s t e ms . B e c a u s e the f a i l u r e t i me is not k nown and not c o n s t a n t . I f t he e x p o n e n t i a l d i s t r i b u t i o n is used in t he model t hen an a r b i t r a r y f a i l u r e t i me s h o u l d be us ed, and this is not a d e s i r e d s i t u a t i o n in t he model .
We i b u l l d i s t r i b u t i o n has a p r o b a b i l i t y d e n s i t y f u n c t i o n ( p d f ) o f ;
f ( x ,a ,P ) == a / 3*^ X * e
( 3 . 1 6 ) And c u m u l a t i v e d i s t r i b u t i o n f u n c t i o n ( c d f ) ;
F ( x , a , P )= 1 - e - ( x / p ) a
( 3. 17 )
In t h e s e f o r mu l a a is scal e p a r a m e t e r and 3 is s hape p a r a m e t e r . And t h es e p a r a m e t e r s de f i ne the d i s t r i b u t i o n .
In t his s t udy t he cost o f u n e x p e c t e d m a i n t e n a n c e will be
e s t i m a t e d by u s i n g We i b u l l d i s t r i b u t i o n . By u s i n g We i b u l l
D i s t r i b u t i o n the f a i l u r e r at e o f the s ys t e m was e s t i ma t e d d e p e n d i n g on the pas t dat a o f t he s i mi l a r we a p o n sys t em. In t hi s s t udy 160 d i f f e r e n t a r t i l l e r y w e a p o n s ys t e m wer e e x a m i n e d and t h e i r f a i l u r e r at e s we r e c a l c u l a t e d in y e a r l y base. And a c c o r d i n g to t his c a l c u l a t i o n s , the f a i l u r e rat e o f the new s y s t e m s we r e e s t i m a t e d by u s i n g We i b u l l d i s t r i b u t i o n . Due to t h e s e f a i l u r e r at es the u n e x p e c t e d m a i n t e n a n c e cos t will be
c a l c u l a t e d in t he st udy. Th er e are s ome a r t i c l e s in the
l i t e r a t u r e r e v i e w t hat used We i b u l l d i s t r i b u t i o n in e s t i m a t i n g the f a i l u r e rat es. One o f t hem is the s t udy o f Bai, Chun and
Cha, in t h e i r s t udy t hey use Wei b u l l d i s t r i b u t i o n in o r d e r to t es t the t i me c e n s o r e d Ramp. ( Bai , Chun and Cha, 1997)
A n o t h e r s t udy is made by H. Shore. In t hi s s t udy he t r i e d to d e f i n e a s p e c i f i c f a i l u r e r at e f u n c t i o n and a f t e r c o n s t r u c t i n g it he c h e c k e d his f u n c t i o n by u s i ng se ver a l d i s t r i b u t i o n s . One o f the d i s t r i b u t i o n s is We i b u l l d i s t r i b u t i o n and a f t e r this c o m p a r i s o n he e x p l a i n t hat the best fit f u n c t i o n is the We i b u l l d i s t r i b u t i o n for e s t i m a t i n g t he f a i l u r e r at e o f a sys t em. ( S h o r e , 1997)
Af t e r d e f i n i n g how to find t he u n e x p e c t e d m a i n t e n a n c e r at e, the model for t he m a i n t e n a n c e cos t o f the sys t em is s hown bel ow. M a i n t e n a n c e cos t o f the s y s t e m ( C o m ) = [ ( C o m s ) + ( C o m u ) ] + ( Co mx + C o m t + C o m f ) ( 3. 18 ) Co ms = cos t o f s c h e d u l e d m a i n t e n a n c e C o m u = c os t o f u n e x p e c t e d m a i n t e n a n c e C o mx = c os t o f s par e / r e p a i r p a r t s
C o m t = t r a n s p o r t a t i o n and h a n d l i n g cost Corns = [ ( Q p s ) ( M h p ) ( C o p p ) + ( Q p s ) ( C m h p ) + ( Q p s ) ( C d p ) ( N m s ) ] ( 3. 19 ) Qps = q u a n t i t y o f s c h e d u l e d m a i n t e n a n c e a c t i o n s Mh p = s c h e d u l e d m a i n t e n a n c e l a b o r hour s C o p p = l a b o r cost C m h p = cos t o f ma t e r i a l h a n d l i n g Cd p = cos t o f d o c u m e n t a t i o n Nms = n u m b e r o f m a i n t e n a n c e a r e as C o m u = [ ( Q c a ) ( M m h c ) ( C o c u ) + ( Q c a ) ( C m h u ) + ( Q c a ) ( C d u ) ( N m u ) ] ( 3. 20 ) Qua = q u a n t i t y o f u n e x p e c t e d m a i n t e n a n c e a c t i o n s M h m u = u n e x p e c t e d m a i n t e n a n c e l ab o r h o u r s C o c u = c os t o f l a b o r ( $ / M h m u ) C m h u = cos t o f ma t e r i a l h a n d l i n g
