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Cost Analysis of Military Training

Cost Analysis of Military Training. Marcel C. Smit SAS-095 workshop on Cost-Benefit Analysis of Military Training Amsterdam, The Netherlands 5-6 June 2012. Outline. Cost Analysis Applications of Cost Analysis Costing process Framework of Cost Analysis Cost Breakdown Structure

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Cost Analysis of Military Training

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  1. Cost Analysis of Military Training Marcel C. Smit SAS-095 workshop on Cost-Benefit Analysis of Military Training Amsterdam, The Netherlands 5-6 June 2012

  2. M.C. Smit MP-SAS-096-06 Outline • Cost Analysis • Applications of Cost Analysis • Costing process • Framework of Cost Analysis • Cost Breakdown Structure • Methods • Uncertainty & Risk • Cost Effectiveness, Cost Benefit analysis • Economic Evaluation of Alternatives

  3. M.C. Smit MP-SAS-096-06 Cost analysis • Investment decisions are supported by weighing costs against benefits. • A life cycle cost estimate, if done properly, is the single best metric for measuring the value for money of defence resources. • Cost analysis can be done in each phase of the life cycle. • Insight in not only acquisition, but also O&S costs • Not an exact science: does not provide exact figure • Merely gives an insight into the major factors of influence • Highlights the magnitude of the costs • Identifies areas for potential cost savings The greatest opportunity to reduce life cycle costs usually occurs during the early stages of a programme

  4. M.C. Smit MP-SAS-096-06 Application of Cost Analysis • Evaluating and comparing alternative solutions • Assessing the affordability • Managing the budgets • Developing future expenditure profiles • Evaluating cost reduction opportunities • Evaluating area of financial risk and uncertainty • Benefits for stakeholders • Better insight in all costs • Identifying key cost drivers • Assist the decision making process • Methodical and consistent estimating approach

  5. M.C. Smit MP-SAS-096-06 Costing Process

  6. M.C. Smit MP-SAS-096-06 Framework Cost Analysis • Objective • Requirements • Identification of constraints • Assumptions • Cost Breakdown Structure • Data • Methods • Models • Uncertainty & Risk • Reporting & Presentation

  7. M.C. Smit MP-SAS-096-06 Cost Breakdown Structurefor Military Training

  8. M.C. Smit MP-SAS-096-06 Estimating methods

  9. M.C. Smit MP-SAS-096-06 Uncertainty and Risk • Requirement to identify uncertainty in results cost analysis: • Estimates are uncertain! • Uncertainty about the future • No or missing data or information • Unclear data or information • Doubts about the accuracy of data or information • Determine bandwidths for parameters with uncertain values • Apply Monte Carlo Simlulation to determine probability distribution

  10. M.C. Smit MP-SAS-096-06 Summary Framework

  11. M.C. Smit MP-SAS-096-06 • Cost–benefit analysis (CBA), is a systematic process for calculating and comparing benefits and costs of a project. • CBA has two purposes: • To determine if it is a sound investment/decision (justification /feasibility) • To provide a basis for comparing projects. It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much. • Cost Benefit Analysis (CBA) Source: Wikipedia However, the benefits can often not be expressed in monetary terms. Then Measures of Effectiveness (MoE) are developed and the CBA converts into a Cost Effectiveness Analysis (CEA). In a CEA the effectiveness and the total LCC are compared. Most common methodology for building MoEs and structuring a CEA is Multiple Criteria Decision Making (MCDM).

  12. M.C. Smit MP-SAS-096-06 Economic Evaluation of Alternatives • Buyer sends out an economic RfP, with: • All requirements and wishes to the system • And… an affordability assessment: optimistic, pessimistic and most-likely budget (funding) for the overall programme • Vendors submit their offer based on the different budget scenarios. • Buyer can derive the response function.

  13. M.C. Smit MP-SAS-096-06 Economic Evaluation of Alternatives Source: Prof.Dr. Francois Melese, Naval Post Graduate School

  14. M.C. Smit MP-SAS-096-06 Questions

  15. M.C. Smit MP-SAS-096-06 More information ? TNO Behavioural and Societal Sciences Strategic Business Analysis M.C. (Marcel) Smit, M.Sc. Brassersplein 2 2612 CT Delft The Netherlands Phone: +31 88 866 39 09 Mobile: +31 6 211 343 54 Email: marcel.smit@tno.nl

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