Life Cycle cost analysis

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Management Studies 2 Life Cycle Costing: 

1 Management Studies 2 Life Cycle Costing Prepared by Andrew Spowage & J Dominy

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2 2 Introduction to LCC LCC phases LCC models LCC implementation Overview │

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3 Introduction │ What is LCC? At the start of any project it is important to understand the costs involved. Traditional methods simply look at start-up costs, cash flow and profit (or loss). With more complicated projects, it is necessary to understand the likely casts and cash flow throughout the life of the project. This allows the financial managers to; Understand when the project will break-even What are the likely costs and returns during the life of the project Estimate the likely life of the project.

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4 4 A technique to establish the total cost of ownership It is a structured approach that addresses all the cost elements It can be used to produce a spend profile of the product or service over its anticipated life-span Introduction │ What is LCC?

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5 5 Life Cycle Costing (LCC) is not new: US government records dating back to 1933 The Building Research Institute Conference “Methods of Building Cost Analysis” in 1961 The Logistics Management Institute published report in 1965 for DoD US and subsequently the publication of guidelines for LCC acquisition Introduction │ Historically

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6 6 You will also ear of it referred to as:- Through Life Costing Life Cycle Costing Whole Life Costing Cradle To Grave Womb To Tomb All contain the same basic philosophies Introduction │ Nomenclature

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7 7 Acquisition Cost Training Cost Special Test Equipment Cost Repair Cost Facilities Cost Transportation and Handling Cost Supply Support Inventory and Distribution Cost Disposal Cost Technical Data Post WHAT IS THE REAL COST OF OUR EQUIPMENT ? Introduction │ What is LCC?

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8 Introduction │ Fundamental Principle cost Increasing cost of acquisition cost of acquisition

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9 Introduction │ Fundamental Principle cost Increasing cost of acquisition cost of acquisition operational costs

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10 Introduction │ Fundamental Principle cost Increasing cost of acquisition cost of acquisition operational costs total LCC Min. LCC

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11 11 The visible costs of any purchase represents only a small proportion of the total cost of ownership There are 4 major benefits of LCC analysis: Evaluation of competing options in purchasing; Improved awareness of total costs; More accurate forecasting of cost profiles; and Performance trade-off against cost Introduction │ Why is it important?

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12 12 With LCC all major costs are established in advance All of the owning and operating expenses throughout a machine’s working life are considered LCC can reduce worries about the costs of machine repairs, downtime, and lack of availability Procurement based on LCC can reduce total costs It is useful in making decisions associated with equipment replacement, budgeting and planning Introduction │ Why is it important?

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13 13 Would you consider the purchase of an automobile solely based on its list price? Or would you also consider: Reliability Depreciation Maintenance costs Fuel cost Introduction │ Why is it important?

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14 14 The accuracy of LCC analysis diminishes as it predicts further into the future LCC is time consuming LCC is an expensive concept, not appropriate for all applications The assumption is that the product, as known, has a finite life-cycle The accuracy of data is often doubtful It has a high sensitivity to changing requirements Introduction │ Disadvantages

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15 15 Introduction to LCC LCC phases LCC models LCC implementation Overview │

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16 LCC V2 ©Andrew Spowage 2007 16 LCC Phases │

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17 17 Acquisition Operation Disposal Design Procurement Manufacturing Operation Training Maintenance Dismantling Recycling Disposal LCC Phases │Elements Delivery Installation Reconfiguring

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18 18 LCC is based on the premise that: to arrive at a meaningful purchasing decisions full account must be taken of each available option All significant expenditure of resources likely to arise must be addressed Explicit consideration must be given to all relevant costs for each of the options from initial consideration through to disposal LCC Phases │Importance

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19 19 Introduction to LCC LCC phases LCC models LCC implementation Overview │

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20 20 No single generic model Different model for different system due to uniqueness of cost data LCC Models │

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21 21 Typical aims of Life Cycle Cost Modeling? To identify the total cost of alternative means of solving production problems To achieve our cost, schedule and performance objectives To estimate the cost impact of various designs and support options LCC Models │ Aims

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22 22 To compute the life cycle costs of a system, the following straightforward equation is frequently used LCC = Kaq + Ko + Kd Where, LCC - Life Cycle Cost Kaq - Cost of Acquisition Phase Ko - The cost of operation Phase Kd - The cost of disposal LCC Models │

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23 23 Consider the following to avoid failure: - Guidelines Common Errors Implementation │

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24 24 Loss or omission of data Lack of systematic structure Misinterpretation of data Wrong or misused techniques A concentration on insignificant facts Failure to access uncertainty Failure to check work Estimating the wrong items Implementation │Common errors

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25 25 Project Environment Technological Industrial disruption Work scope Weather Configuration control Politics Reliability Administration Productivity Market forces Contracting philosophy Demand Example of project uncertainties Concept of unpredictability : It is a common belief that there are so many “unforeseeable or Unquantifiable” parameters it is impossible to conduct adequate LCC. Implementation │Barriers

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26 An Example; The running costs of a car Case 1 – simple running costs per mile.

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27 Case 2 – including vehicle depreciation

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28 28 True LCC can only be determined after a system or equipment has been withdrawn from service LCC can be used in many applications in an organization: Purchasing Developing new products Optimal time for withdrawal When making trade-offs and evaluate various alternatives LCC should be a dynamic tool used by engineering or logistics management to assess the progress of each phase The sooner an LCC modeling tool is used, the faster it will have an impact on the logistic lifecycle In Conclusion │