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Compaq Confidential – Need to Know Only Nonstop Enterprise Division Life-Cycle Cost Models How to Make a CFO Care about Reliability 8/27/03 Alan Wood.

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Presentation on theme: "Compaq Confidential – Need to Know Only Nonstop Enterprise Division Life-Cycle Cost Models How to Make a CFO Care about Reliability 8/27/03 Alan Wood."— Presentation transcript:

1 Compaq Confidential – Need to Know Only Nonstop Enterprise Division Life-Cycle Cost Models How to Make a CFO Care about Reliability 8/27/03 Alan Wood

2 G06.17 Nonstop Enterprise Division Page 2 8/27/2003 Typical CFO The CFO says: “What’s all this reliability stuff? Show me the money!"

3 G06.17 Nonstop Enterprise Division Page 3 8/27/2003 So if you’re talking to a CFO…  You better show him/her the money  Turn those failure rates, MTBFs, esoteric deep sub- micron physics-of-failure analyses into $  This is true for most Senior Executives –It is, after all, their job

4 G06.17 Nonstop Enterprise Division Page 4 8/27/2003 Life-Cycle Cost (LCC) Model Presentation  What is a Life-Cycle Cost (LCC) Model?  Why is it useful?  What does the model include?  How was the model created?  Where and how is it being used?  Results and recommendations  Demo

5 G06.17 Nonstop Enterprise Division Page 5 8/27/2003 What is a Life-Cycle Cost (LCC) Model?  A model that includes the entire cost of development, production, and support  Used for cost trades, product selection, etc. Support often overlooked Focus of presentation Product Life-Cycle Cost Development Production Support

6 G06.17 Nonstop Enterprise Division Page 6 8/27/2003 Example Design Trade from RAMs paper

7 G06.17 Nonstop Enterprise Division Page 7 8/27/2003 Life-Cycle Cost Model Components  Development Cost  Production Cost –Material Cost –Assembly, integration, and test cost  Support Cost –Sustaining Cost –Service Cost  Expected number of service calls  Cost per service call Usually accounted for Service Cost Model created to evaluate

8 G06.17 Nonstop Enterprise Division Page 8 8/27/2003 Why is a Service Cost Model Useful?  Allows us to evaluate ALL costs for: –Vendor selections –System architecture trades –Proposed design changes –Field or spares swap-out decisions –Support strategy alternatives  Provides a way to quantify the value of reliability

9 G06.17 Nonstop Enterprise Division Page 9 8/27/2003 The Service Cost Model Includes: Vendor Service Cost Service Call Cost - Travel time - On-site time - Inventory cost, carrying, holding, & scrap Repair Cost - Test & repair - Disassembly/ reassembly - Material cost Shipping & Handling - To/from Depots - Freight & duties Other - RCA cost - Penalties - Lost Billing Revenue Supplier Charges Total Service Cost Customer Service Cost (2.5 x Vendor Cost) Additional Factors - Cost of capital for discounting - Customer/Third party service - Warranty considerations

10 G06.17 Nonstop Enterprise Division Page 10 8/27/2003 Service Cost Model Concepts  Discounting – time value of money –I’ll gladly pay you tomorrow for a reliability improvement today –Use company’s cost of capital to discount future costs  Penalties for poor quality –May be MTBF guarantees, epidemic failure clauses, customers charging you for their lost business or penalties  Warranties/third-party service providers  Cost of your defects to the customer –Discussed in detail next

11 G06.17 Nonstop Enterprise Division Page 11 8/27/2003 Total Service Cost vs Vendor Service Cost  Defects cost your customers 2.5 times what they cost you –Quality literature estimates 2 to 3 x –Tandem model circa 1995 estimated 2.5 x  Vendor eventually bears these costs in the form of lost sales or maintenance contracts –Customers have less money to spend –Dissatisfaction with Vendor –Loss of reputation  Analysis recommendation –Calculate both Vendor Service Cost and Total Service Cost –If result is the same, conclusion is obvious –If result is different, need to decide if 2.5 factor is applicable

12 G06.17 Nonstop Enterprise Division Page 12 8/27/2003 When does Customer Cost Factor Apply?  Customer cost of 2.5 x Vendor cost applies to competitive situations, not necessarily survival or leadership

13 G06.17 Nonstop Enterprise Division Page 13 8/27/2003 Service Cost Model May Also Need to Include:  Marketing and product management  Preventive Maintenance  Software support  Training  Disposal cost (future) Note: expected number of failures is calculated separately and used in conjunction with service cost model to get total service cost

14 G06.17 Nonstop Enterprise Division Page 14 8/27/2003 How was the Service Cost Model Created?  Costs associated with (hardware) support identified  Equations developed to represent costs  Appropriate organizations contacted to get parameter values and validate equations  Agrees with outside literature, other models

15 G06.17 Nonstop Enterprise Division Page 15 8/27/2003 Sources of Information  Support Organization –Travel time, service time –Hourly rates –Shipping costs, duties,  Manufacturing –Repair and test time, vendor/component charges –Hourly rates –NTF percentage  Engineering –Sustaining  Finance –Cost of Capital  Sales/Marketing –Lost revenue

16 G06.17 Nonstop Enterprise Division Page 16 8/27/2003 Life-Cycle Cost Model Example

17 G06.17 Nonstop Enterprise Division Page 17 8/27/2003 Example – XYZ Power Architecture $38x25K units = $1M savings Service Call Cost Repair Cost Shipping & Handling Other Service Cost Total Service Cost (3.5xVendor) SERVICE COSTXYZ with Single PS XYZ with Dual PS $323 $258 $137 $63 $781 $2735 $330 $258 $141 $67 $796 $2785 Development Cost Production Cost (per XYZ) Service cost (per XYZ) Life-Cycle Cost (per XYZ) LIFE-CYCLE COST XYZ with Single PS XYZ with Dual PS N/A $1000 $738 (=.27 fails x $2735) $1738 N/A $1060 $640 (=.23 fails x $2785) $1700 Service cost per fail = 3 x unit cost

18 G06.17 Nonstop Enterprise Division Page 18 8/27/2003 Other Important Considerations  Time to Market  Break-Even Time (Payback Period)  Break Even After FCS  Gross Margin  Effect of higher development costs on gross margins or sales

19 G06.17 Nonstop Enterprise Division Page 19 8/27/2003 Example Decision Rule - Dollars per FIT Breakeven Cost for Improved Reliability Total cost, Vendor Units Incremental FITs (Failures per billion hours) Incremental Expenditure $0 $50 $100 $150 $200 $ $1,000 $5,000 $10,000 Cost based on Service Cost Model Assumes 5 year product life Product Cost Vendor saves money below the lines

20 G06.17 Nonstop Enterprise Division Page 20 8/27/2003 Example Decision Rule - Payback Period Payback Period for Spending X Dollars per 100 FITs Total cost, Vendor Units Years Dollars per 100 FITs $0 $20 $40 $60 $80 $100 $120 $ $1,000 $5,000 $10,000 FRU Cost

21 G06.17 Nonstop Enterprise Division Page 21 8/27/2003 Insights from Using Service Cost Models  The (total) service cost for a single field failure is generally 2 to 3 times higher than the production cost of the failed board or unit  The cost of an NTF is about 85% of the cost of a failure  A good rule of thumb is that we can afford to spend about $10-$50 per 100 FITS for higher reliability


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