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Logistics Systems Engineering System Cost Analysis, Part II

SMU SYS 7340. NTU SY-521-N. Logistics Systems Engineering System Cost Analysis, Part II. James R. Brennan, Product Assurance Analysts. Agenda. Cost Analysis Principles Life-Cycle Cost (LCC) Analysis System Considerations LCC Management Design to Cost (DTC)

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Logistics Systems Engineering System Cost Analysis, Part II

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  1. SMU SYS 7340 NTU SY-521-N Logistics Systems Engineering System Cost Analysis, Part II James R. Brennan, Product Assurance Analysts

  2. Agenda • Cost Analysis Principles • Life-Cycle Cost (LCC) Analysis • System Considerations • LCC Management • Design to Cost (DTC) • Cost as an Independent Variable (CAIV)

  3. Agenda • LCC Organization • Warranties/ Guarantees • Wrap-Up

  4. 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

  5. Cost Analysis Principles State Objectives Define Assumptions Select Cost Element Develop CERS Collect Data Estimate Element Cost Perform Sensitivity Analysis Perform Uncertainty Analysis Present Results

  6. Cost Analysis Principles • 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.

  7. Cost Analysis Principles • 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.

  8. Cost Analysis Principles • Six Desired Characteristics of Cost Models • Validity: Capable of providing logical, reproducible results.

  9. Cost Analysis Principles • Payback Analysis Existing System Cost ($) Crossover Point Modified System Payback Period Time - Years

  10. 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

  11. Life-Cycle Cost (LCC) Analysis • 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

  12. Life-Cycle Cost (LCC) Analysis • 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.

  13. Life-Cycle Cost (LCC) Analysis • 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

  14. Life-Cycle Cost (LCC) Analysis • 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

  15. LCC Analysis: Phased LCC Funding Trends 100 Funds Committed Percentage 50 Funds Expended 0 Production O&S RDT&E Definition Life Cycle Phase

  16. Life-Cycle Cost (LCC) Analysis • 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

  17. Life-Cycle Cost (LCC) Analysis • Cardinal Principles • Should be an integral part of the design, production and support processes - DTLCC

  18. Life-Cycle Cost (LCC) Analysis • 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: • Reliability • Maintainability • Logistics • Design • Production • Cost

  19. Life-Cycle Cost (LCC) Analysis • Cost Analysis Estimates • Estimated data is followed by test and evaluation data which is in turn followed by field data

  20. Life-Cycle Cost (LCC) Analysis • Basic LCC Models LCC = CA + CS CA: Acquisition Cost CS: Sustaining Cost CA = CD + CI CD: Development Cost CI: Investing Cost CS = COS + CR COS: Operating and Support Cost CR: Retirement Cost

  21. Life-Cycle Cost (LCC) Analysis • LCC Objectives • Estimate Costs • Compare Costs • Balance Cost Acquisition Cost Sustaining Cost

  22. Insert: Typical LCC Model Structure, p 18

  23. Life-Cycle Cost (LCC) Analysis: Flow • Doctrines • Procurement • Operational • Maint./Support System Characteristics Input Data Estimates Cost Model Estimate of LCC Best Estimate of LCC Sensitivity Analysis Standard Factors

  24. Life-Cycle Cost (LCC) Analysis • LCC Estimating Techniques • Analogy/Scaling • Parametrics-LCC as a function of weight for example • Engineering (Bottom-Up) Analysis • Vendor Data • Field Data

  25. Life-Cycle Cost (LCC) Analysis • LCC Input Data • System Characteristics • Quantity of item under study in larger system • Item unit cost • Item MTBF/MTBM • Item Weight

  26. Life-Cycle Cost (LCC) Analysis • LCC Input Data • System Characteristics • Item Volume • Item MTTR • Quantity of stock number introduced and managed support equipment (if applicable) unit cost

  27. Life-Cycle Cost (LCC) Analysis • LCC Input Data • Standard Factors • Maintenance labor rates at each maintenance level • Shipping rates • Cost per stock number for introduction • Cost per stock number for management • Cost per page for technical data creation/management

  28. Life-Cycle Cost (LCC) Analysis • LCC Input Data • Standard Factors • Attrition rates for recurring training • Facility space cost factors • Support equipment maintenance cost factor

  29. LCC Analysis: Data Paradox Large Value Large Amount Cost Decision Value Value of Cost Decision Amount of Available Data Data Availability Small Value Small Amount

  30. Life-Cycle Cost (LCC) Analysis • 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

  31. Life-Cycle Cost (LCC) Analysis • 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

  32. Life-Cycle Cost (LCC) Analysis • 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.

  33. Life-Cycle Cost (LCC) Analysis • 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 Quantity • Expected Service Life of System

  34. Life-Cycle Cost (LCC) Analysis • LCC Applications • Customer • Affordability studies - CAIV • Source Selection • Design Trade Studies - Establishing reliability and maintainability goals / requirements • Repair Level Analysis • Warranty should cost and cost effectivenss

  35. Life-Cycle Cost (LCC) Analysis • 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

  36. Life-Cycle Cost (LCC) Analysis • 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

  37. Life-Cycle Cost (LCC) Analysis • 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

  38. Insert: Monte Carlo Process, p. 29

  39. System Considerations • Driving System Concepts • Procurement Data • Number of Systems procured • Production Schedule • Installation Schedule • Design to unit production cost (DTUPC) requirements • First destination transportation requirements

  40. System Considerations • Driving System Concepts • Operational Data • Number of operational sites • Quantity of systems per site • Mission schedule - number of missions per period • Mission Profile - mission length, mission type • Ground operation requirements • Mission readiness and reliability requirements

  41. System Considerations • Driving System Concepts • Maintenance/Support Data • Number of levels of maintenance • Quantity of maintenance sites per level • Location of maintenance sites • Number of systems supported per site • Description of maintenance at each level • Scheduled/preventive maintenance requirements

  42. System Considerations • Driving System Concepts • Maintenance/Support Data • Required MTTR at each maintenance level • Required spares assurance factors and TATS • Support equipment requirments

  43. RMS as Key System Elements Operational Concept Support Concept Maintenance Concept • Availability • Sortie Generation Rates • Basing Product • Reliability • Maintainability • Supportability • Testability • Organization • Requirements • Schedule Maintenance • Unscheduled Maintenance • Spares • Technical Publications • Training • Support Equipment

  44. System Considerations • Cost-Effectiveness Analysis Outcomes • A is preferable IF E is • worth more than C A LCC C B • A is more effective • B cost less E Effectiveness

  45. Insert: Cost-Effectiveness Factor Interaction, p. 36

  46. 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

  47. 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

  48. 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

  49. Design to Cost (DTC) • DTLCC Implementation • Keys to Success • Useable LCC model • Reasonable input data • Extensive trade-off analyses- LCC not ony criterion • Relating of results to hardware/software design • Implementation of trade-off decisions into the hardware/software design

  50. Design to Cost (DTC) • DTLCC Implementation • Keys to Success • Challenging the performance requirements • Adhering to hierarchy - equipment, cost category and design driver

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