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

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

Warranties/ Guarantees Wrap-Up Agenda LCC Organization Warranties/ Guarantees Wrap-Up

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

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

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.

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.

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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)

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

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)

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

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

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

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

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

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

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