© 04/16/20011 Logistics Systems Engineering System Cost Analysis, Part II NTU SY-521-N SMU SYS 7340...

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Logistics Systems EngineeringSystem Cost Analysis, Part II

NTUSY-521-N

SMUSYS 7340

James R. Brennan, Product Assurance Analysts

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Agenda

• Cost Analysis Principles• Life-Cycle Cost (LCC) Analysis• System Considerations• LCC Management

– Design to Cost (DTC)– Cost as an Independent Variable (CAIV)

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Agenda

• LCC Organization• Warranties/ Guarantees• Wrap-Up

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Cost Analysis Principles

• Cost Analysis Essentials– Precise definition of what is being cost– Documentation of assumptions and

constraints– Model tailored to needs of problem and

consistent with existing level of system definition

– Risk/Uncertainty analysis to identify any conditions which could affect a conclusion

– Key limitations

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State Objectives

Define Assumptions

Select Cost Element

Develop CERS

Collect Data

Estimate Element Cost

Perform Sensitivity Analysis

Perform Uncertainty Analysis

Present Results

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• Six Desired Characteristics of Cost Models– Consistency: Conforms to current cost

estimating practices. This allows the Proposed System to be compared to an Analogous System.

– Flexibility: Constructed so that it is useful in the early phases and can evolve to accommodate more detailed information as the program continues through its life cycle.

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• Six Desired Characteristics of Cost Models– Simplicity: Requires only the minimum data

necessary to estimate the cost. More complex models can be used as more data becomes available.

– Usefulness: Provides useful information to the decision makers in their evaluation of support and design tradeoffs.

– Completeness: Models should include all applicable costs for a system’s life.

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• Six Desired Characteristics of Cost Models– Validity: Capable of providing logical,

reproducible results.

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• Payback Analysis

Cost

($)

Time - Years

Payback Period

Crossover PointModified System

Existing System

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Life-Cycle Cost (LCC) Analysis

• Introduction– LCC a well-traveled concept for over 30 years– Numerous papers, policies, and decisions

issued relative to LCC over these years– Despite its longevity, a universal

understanding of LCC has not been established– A common definition of LCC terms, processes

and applications is required– LCC or a derivative will exist as long as

controlling program costs is a critical consideration

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• Definitions– Life-Cycle Cost (LCC): Total cost to the

customer of acquisition and ownership of a system over its full life. It includes the cost of development, production, operation and support and disposal.

– Cost Effectiveness (CE): Consideration of mission capability, mission reliability and operational availability along with LCC to evaluate competing design, production or support alternatives

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• Definitions– Design To Cost (DTC): Cost is a design

parameter receiving consideration along with performance, schedule, etc. In program decisions. DTC is a management process to integrate cost into design, production and support decisions.

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• Scope of LCC– LCC analysis can be applied on commercial

as well as government programs– Existing programs require LCCA - increasing

frequency is expected– LCC analysis is applicable across all program

phases - development, production and use– LCC analysis is applicable to software as well

as hardware– LCC analysis can be performed in constant,

inflated or discounted dollars

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• LCC Limitations– LCC outputs are estimates and are only as

accurate as the inputs– Interval estimates (Cost-Risk Analysis) are

appropriate for LCC predicting or gudgeting purposes

– Accuracy of LCC estimates is difficult to determine

– Limited data exists on new programs particularly with respect to operation and support costs

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Perc

en

tag

e

100

0

Life Cycle Phase

50

LCC Analysis: Phased LCC Funding Trends

FundsCommitted

FundsExpended

Definition RDT&E Production O&S

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• Cardinal Principles– Not an exact science - highly estimate– No right or wrong - reasonable or

unreasonable– Most effective as a Trade-Off tool– Should employ cost-risk analysis for LCC

estimation– Requires project team approach - need

specialized expertise from the project disciplines

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• Cardinal Principles– Should be an integral part of the design,

production and support processes - DTLCC

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• Cost Analysis Estimates– As system definition matures, system-

comparable data replaced by system-specific data

– Systems Engineer should be LCC team leader and coordinate input data from team members:ReliabilityMaintainabilityLogistics

DesignProductionCost

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• Cost Analysis Estimates– Estimated data is followed by test and

evaluation data which is in turn followed by field data

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• Basic LCC ModelsLCC = CA + CS

CA: Acquisition CostCS: Sustaining Cost

CA = CD + CICD: Development CostCI: Investing Cost

CS = COS + CRCOS: Operating and Support CostCR: Retirement Cost

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• LCC Objectives– Estimate Costs– Compare Costs– Balance Cost

Acquisition Cost Sustaining Cost

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Insert: Typical LCC Model Structure, p 18

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Life-Cycle Cost (LCC) Analysis: Flow

Doctrines•Procurement•Operational•Maint./Support

SystemCharacteristics

StandardFactors

InputData

EstimatesCost

Model

Estimateof

LCC

BestEstimateof LCC

Sensitivity Analysis

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• LCC Estimating Techniques– Analogy/Scaling– Parametrics-LCC as a function of weight for

example– Engineering (Bottom-Up) Analysis– Vendor Data– Field Data

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• LCC Input Data– System Characteristics

Quantity of item under study in larger system

Item unit costItem MTBF/MTBMItem Weight

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• LCC Input Data– System Characteristics

Item VolumeItem MTTRQuantity of stock number introduced and

managed support equipment (if applicable) unit cost

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• LCC Input Data– Standard Factors

Maintenance labor rates at each maintenance level

Shipping ratesCost per stock number for introductionCost per stock number for managementCost per page for technical data

creation/management

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• LCC Input Data– Standard Factors

Attrition rates for recurring trainingFacility space cost factorsSupport equipment maintenance cost

factor

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LCC Analysis: Data Paradox

SmallValue

LargeValue

SmallAmount

LargeAmount

Cost DecisionValue

DataAvailabilityV

alu

e o

f C

ost

Deci

sion

Am

ou

nt

of

Availa

ble

Data

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• Types of LCC Analysis– Baseline: Evaluates LCC for particular system

configuration for given operational and maintenance policies

– Sensitivity: Evaluates the impact on LCC of changes to the input data to identify cost drivers requiring special attention during the program

– Tradeoff: Evaluates alternative approaches to aid in the selection of the preferred option based on LCC, mission capability, availability and mission reliability

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• Types of LCC Analysis– Tracking: Monitors LCC of System over time

to identify variances from baseline and aid in definition of trade-offs to control total program cost

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• LCC Sensitivity Analysis– Types of LCC Drivers:

Hardware - LRU/WRA, SRU/SRA, etc.Cost Element - Initial spares, maintenance,

etc.Design Parameter - MTBF, UPC, weight,

LOC, etc.

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• LCC Sensitivity Analysis– Common LCC Drivers:

System Usage - Hours, miles, cycles, etc.Unit Production Cost (UPC)Mean Time Between Failures (MTBF)Mean Time to Repair (MTTR)System QuantityExpected Service Life of System

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• LCC Applications– Customer

Affordability studies - CAIVSource SelectionDesign Trade Studies - Establishing

reliability and maintainability goals / requirements

Repair Level AnalysisWarranty should cost and cost effectivenss

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• LCC Applications– Supplier

Identification of cost drivers for emphasis during program - sensitivity analysis

Comparison of competing design, production and support alternatives - trade-off ranking

LCC Tracking during program - problem isolation

Marketing tool - new and modification programs

Warranty Pricing

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• Cost Analysis Considerations– Time Value of Money

Constant Dollars: States all costs in terms of constant purchasing power measured at a given time - also known as real dollars

Inflated Dollars: Cost stated in terms of estimated expenditures at the time the money is spent - also known as then-year future or actual dollars

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• Cost Analysis Considerations– Time Value of Money

Discounted Dollars: All costs are referenced to a common point in time based upon the anticipated earning power of money - costs can be in constant or inflated dollars, but the anticipated earning power must be adjusted thusly

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Insert: Monte Carlo Process, p. 29

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System Considerations

• Driving System Concepts– Procurement Data

Number of Systems procuredProduction ScheduleInstallation ScheduleDesign to unit production cost (DTUPC)

requirementsFirst destination transportation

requirements

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• Driving System Concepts– Operational Data

Number of operational sitesQuantity of systems per siteMission schedule - number of missions per

periodMission Profile - mission length, mission

typeGround operation requirementsMission readiness and reliability

requirements

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• Driving System Concepts– Maintenance/Support Data

Number of levels of maintenanceQuantity of maintenance sites per levelLocation of maintenance sitesNumber of systems supported per siteDescription of maintenance at each levelScheduled/preventive maintenance

requirements

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• Driving System Concepts– Maintenance/Support Data

Required MTTR at each maintenance levelRequired spares assurance factors and

TATSSupport equipment requirments

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Product

•Spares•Technical Publications•Training•Support Equipment

•Availability•Sortie Generation Rates•Basing

•Reliability•Maintainability•Supportability•Testability

Operational

Concept

MaintenanceConcept

SupportConcept

•Organization•Requirements•Schedule Maintenance•Unscheduled Maintenance

RMS as Key System Elements

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• Cost-Effectiveness Analysis Outcomes

A

B

E

C

Effectiveness

LCC

•A is preferable IF E is worth more than C

•A is more effective•B cost less

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Insert: Cost-Effectiveness Factor Interaction, p. 36

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Design to Cost (DTC)

• Establishes LCC as a design parameter - not a consequence of design

• Requires establishment of cost goals, monitoring of these goals and tread-off actions to keep the LCC within these goals (budgets)

• Activity focuses on identifying system cost drivers, potential risk areas relative to the drivers and on-going cost/ scheduled/ performance tradeoffs

• Should be early and continuos

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Design to Cost (DTC): Terms

• Design to unit production cost (DTUPC): Concerned with managing UPC goals- includes recurring and non-recurring production cost

• Design to LCC (DTLCC): Concerned with managing the total LCC of a system, including development, investment, operation and support and retirement- focuses on drivers since out-year costs are difficult to manage

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Design to Cost (DTC): Terms

• Design to Cost Effectiveness (DTCE): Concerned with managing not only LCC but also other system parameters such as mission reliability, readiness and mission capability

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• DTLCC Implementation– Keys to Success

Useable LCC modelReasonable input dataExtensive trade-off analyses- LCC not ony

criterionRelating of results to hardware/software

designImplementation of trade-off decisions into

the hardware/software design

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• DTLCC Implementation– Keys to Success

Challenging the performance requirementsAdhering to hierarchy - equipment, cost

category and design driver

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• DTLCC– Program trade-off issues

UPC vs. MTBFRedundancy vs. no redundancyBuilt-InTest (BIT) vs. no BITTwo vs. Three-Level maintenanceRepair vs. discardLCC vs. system performanceDifferent sparing assurancesDifferent levels of environmental stress

screening (ESS)

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• Trade-Off Process

Insert: Trade-Off process, p. 42

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Design to Cost (DTC)LCC Vs. MTBF

Cost($)

MTBF (Hours)

Total Life Cycle Cost

Operating and Support Cost

Development and Acquisition Cost

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Scheduled Maintenance Trade Study

1.85

100 120 1408060

1.80

1.75

1.70

1.65

1.60

1.55

1.50

1.45

Unsched

Sched 1000

Sched 800

A

B

Percent of Predicted Baseline - MTBF

LCC

(B

illio

ns)

Scheduled Vs. Unscheduled Maintenance

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Repair Versus Discard Trade Study

Unit Production Cost (UPC)

Discard

Repair

$600

LCC

Staff-hrs per repair

Repair

Discard

12 Staff-hrs

LCC

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Cost as an Independent Variable

• What is CAIV?– An acquisition strategy/methodology to

acquire and manage affordable systems– Early, continual and consistent focus on

balancing requirements to the program budget

– Establishment and management of cost targets consistent with the program budget

– Diligent use of trade-off analysis between requirements and cost to maintain performance and cost within targets

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• What is CAIV?– An extension of DTLCC where cost and

requirements are independent variables not just requirements

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Cost as an Independent VariableCAIV Vision Team Effort

User

Acquirer Industry

•Define Operational Requirement•Control $•Make Trade Decisions

•Define Capabilities•Make Trade Inputs•Build System

•Mange Contract•Identify Trades

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LCC Organization• Team Organization

ProgramManager

SystemsEngineer

Design-Primeand SupportEquip•Electrical•Mechanical•Systems•Software

Manufac-turing

Relia-bility

Maintain-ability

IntegratedLogisticsSupport

(Support-ability)

LCC

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LCC Organization

• Management of LCC– Engineering Team Member Responsibilities

Manage assigned cost targets for their cost drivers

Define tradeoffs in their respective disciplines

Estimate input data to LCC model for trade-off analyses

Assist in discussion of trade-off results leading to decisions

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LCC Organization

• Management of LCC– Engineering Team Member Responsibilities

Implement trade-off decisions into hardware/software design

Document trade-off analysis decisions

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LCC Organization

• Management of LCC– Cost Analyst Team Responsibilities

Understand, modify or develop LCC and trade-off models for use on program

Clearly define input data requirements for team member data estimation

Perform all LCC-related analysesInterpret LCC analysis results to team

members to aid decision making and implementation of decisions

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LCC Organization

• Management of LCC– Cost Analyst Team Responsibilities

Assume role of catalyst for team by performing baseline analysis and establishing drivers through sensitivity analysis

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Warranties / Guarantees

• Introduction: Scope of Warranties

Marketing(Getting the Business)

WARRANTIES

Customer Satisfaction(Keeping the Business)

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• Warranties and Quality– The best warranty is one you never have to

use– A warranty you never have to use means a

quality product– A quality product means a satisfied customer– Satisfied customers mean increased sales– Increased sales mean more opportunities to

satisfy customers

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• Warranty Principles– Benefits:

Good marketing tool for suppliersInsurance for customersGood measure of customer satisfaction

– Criteria of Good Warranty:Motivates supplier to impv. Rel. of productProfit opportunity of supplierInsurance for customerWin/win

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• Warranty Principles– Warranty Objectives:

InsuranceAssuranceIncentives

– Warranty Types:Repair-Threshold or failure-freeSystemicPerformance

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• Warranty Principles– Coverage:

Material and Workmanship (Failures)Design & Manufacturing (Defects)Performance (compliance/non-compliance)

– Remedies:Repair/replace-eliminate failure under

M&W coverageRedesign/retrofit-eliminate defect under

D&M coveragePenalties/Incentives under perf. coverage

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• Warranty Principles– Realities of Warranties:

Items under warranty may failWarranties are not freeWarranties are not iron-clad assurance

that all the warranted parameters will be met- no magic

Warranties indicate the level of liability for which the supplier accepts responsibility

RMS are driving issues in the conception, costing, negotiating and implementation of a warrant

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• Warranty Principles– Warranty Process:

RequirementsCosting/pricingNegotiatingCost BenefitImplementation/administration

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• Warranty Principles– Warranty Keys:

Customer satisfaction involves the product quality/reliability and quality service

Warranty is a process not a discipline - it is the amalgamation of several disciplines

We should always strive to design quality/reliability into the product-warranties motivate suppliers to that end

Good reliability wins the bets from both supplier and customer standpoints

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Wrap-Up

• LCC can be controlled on commercial and government programs through the diligent application of CAIV

• CAIV is a management tool to establish affordability and integrate LCC into the design process

• Tradeoffs are the cornerstone of CAIV• CAIV should be applied as early in the

program design process as possible

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Wrap-Up

• Team concept is vehicle for a successful CAIV program

• Cost must be a design parameter not a consequence of design

• CAIV is here to stay- the well is drying up

© 04/16/20011 Logistics Systems Engineering System Cost Analysis, Part II NTU SY-521-N SMU SYS 7340...

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