1. Leadership in Engineering
Systems Engineering Program
Department of Engineering Management, Information and Systems
EMIS 7305/5305
Systems Reliability, Supportability and Availability Analysis
System Cost Analysis
Dr. Jerrell T. Stracener, SAE Fellow
Leadership in Engineering

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

3. Warranties/ Guarantees Wrap-Up
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
Life Cycle Costing: An analytical study of a system’s live cycle cost – not an exact science
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
Definition
RDT&E
Production
O&S
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. Typical LCC Model Structure
Life Cycle Cost
Acquisition Cost
Sustaining Cost
Development Cost
Investment Cost
Operating & Support Cost
Retirement Cost
Prime Equipment
Supply Introduction
Prime Equip. And Initial Spares
Scheduled Maintenance
Replenishment Spares
Facility Usage
Support Equipment
Initial Training
Support Equipment & Initial Spares
Unscheduled Maintenance
Operating
Recurring Training
Software
Initial Technical Data
Installation & System integration
Packaging & Transportation
Energy Consumption
Technical Data Management
New/Modified Facilities
1st Destination Transportation
Modification
Supply Management
Support Equip. Maintenance
Software Maintenance

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 effectiveness

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.

38. Maintenance Cost Elements
Monte Carlo Process
Random
MTBF
Labor Cost/Repair
Unit Cost
Constant
Number of Systems
Service Life Period
Operating Hours
Inputs
Possible Distributions
Uniform
Triangular
Normal
Maintenance Cost Elements
Model
Labor
Material
Shipping
Administration
Frequency
Outputs
Maintenance Cost Sample
Histogram
Statistical Parameters
Cumulative Distribution
Risk $ x
0.2

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
Availability
Sortie Generation Rates
Basing
Product
Reliability
Maintainability
Supportability
Testability
Maintenance
Concept
Support
Concept
Organization
Requirements
Schedule Maintenance
Unscheduled Maintenance
Spares
Technical Publications
Training
Support Equipment

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

45. Cost-Effectiveness Factor Interactions
S Analysis
M Analysis
R Analysis
LCC Analysis
A Analysis
CE Analysis
MTBF
MTTR
MTBM $
MDT A0
Mission R

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

51. Design to Cost (DTC) DTLCC Program trade-off issues UPC vs. MTBF
Redundancy vs. no redundancy
Built-InTest (BIT) vs. no BIT
Two vs. Three-Level maintenance
Repair vs. discard
LCC vs. system performance
Different sparing assurances
Different levels of environmental stress screening (ESS)

52. Design to Cost (DTC) Trade-Off Process Define Purpose
Identify Candidates
Establish Basis of Comparison
Select/ Develop Model
Secure Input Data
Perform Baseline Analysis
Rank Candidates
Perform Sensitivity Analysis
Select Best Candidate

53. Operating and Support Cost Development and Acquisition Cost
Design to Cost (DTC)
LCC Vs. MTBF
Total Life Cycle Cost
Cost
($)
Operating and Support Cost
Development and Acquisition Cost
MTBF (Hours)

54. Scheduled Maintenance Trade Study
Scheduled Vs. Unscheduled Maintenance
1.85
Unsched
1.80
Sched 1000 B
Sched 800
1.75
LCC (Billions)
1.70 A
1.65
1.60
1.55
1.50
1.45 60 80
100
120
140
Percent of Predicted Baseline - MTBF

55. Repair Versus Discard Trade Study
LCC
Discard
$600
Unit Production Cost (UPC)
Discard
LCC
Repair
12 Staff-hrs
Staff-hrs per repair

56. 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

57. Cost as an Independent Variable
What is CAIV?
An extension of DTLCC where cost and requirements are independent variables not just requirements

58. Cost as an Independent Variable
CAIV Vision Team Effort
Define Operational
Requirement
Control $
Make Trade Decisions
User
Acquirer
Industry
Mange Contract
Identify Trades
Define Capabilities
Make Trade Inputs
Build System

59. 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

60. Wrap-Up
Team concept is vehicle for a successful CAIV program
Cost must be a design parameter not a consequence of design