1. © 04/16/20011 Logistics Systems Engineering System Cost Analysis, Part II NTU SY-521-N SMU SYS 7340 James R. Brennan, Product Assurance Analysts

2. © 04/16/20012 Agenda Cost Analysis Principles Life-Cycle Cost (LCC) Analysis System Considerations LCC Management –Design to Cost (DTC) –Cost as an Independent Variable (CAIV)

3. © 04/16/20013 Agenda LCC Organization Warranties/ Guarantees Wrap-Up

4. © 04/16/20014 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. © 04/16/20015 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. © 04/16/20016 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. © 04/16/20017 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. © 04/16/20018 Cost Analysis Principles Six Desired Characteristics of Cost Models –Validity: Capable of providing logical, reproducible results.

9. © 04/16/20019 Cost Analysis Principles Payback Analysis Cost ($) Time - Years Payback Period Crossover Point Modified System Existing System

10. © 04/16/200110 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. © 04/16/200111 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. © 04/16/200112 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. © 04/16/200113 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. © 04/16/200114 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. © 04/16/200115 Percentage 100 0 Life Cycle Phase 50 LCC Analysis: Phased LCC Funding Trends Funds Committed Funds Expended Definition RDT&E ProductionO&S

16. © 04/16/200116 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. © 04/16/200117 Life-Cycle Cost (LCC) Analysis Cardinal Principles –Should be an integral part of the design, production and support processes - DTLCC

18. © 04/16/200118 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. © 04/16/200119 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. © 04/16/200120 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. © 04/16/200121 Life-Cycle Cost (LCC) Analysis LCC Objectives –Estimate Costs –Compare Costs –Balance Cost Acquisition CostSustaining Cost

22. © 04/16/200122 Insert: Typical LCC Model Structure, p 18

23. © 04/16/200123 Life-Cycle Cost (LCC) Analysis: Flow Doctrines Procurement Operational Maint./Support System Characteristics Standard Factors Input Data Estimates Cost Model Estimate of LCC Best Estimate of LCC Sensitivity Analysis

24. © 04/16/200124 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. © 04/16/200125 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. © 04/16/200126 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. © 04/16/200127 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. © 04/16/200128 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. © 04/16/200129 LCC Analysis: Data Paradox Small Value Large Value Small Amount Large Amount Cost Decision Value Data Availability Value of Cost Decision Amount of Available Data

30. © 04/16/200130 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. © 04/16/200131 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. © 04/16/200132 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. © 04/16/200133 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. © 04/16/200134 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. © 04/16/200135 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. © 04/16/200136 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. © 04/16/200137 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. © 04/16/200138 Insert: Monte Carlo Process, p. 29

39. © 04/16/200139 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. © 04/16/200140 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. © 04/16/200141 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. © 04/16/200142 System Considerations Driving System Concepts –Maintenance/Support Data Required MTTR at each maintenance level Required spares assurance factors and TATS Support equipment requirments

43. © 04/16/200143 Product Spares Technical Publications Training Support Equipment Availability Sortie Generation Rates Basing Reliability Maintainability Supportability Testability Operational Concept Maintenance Concept Support Concept Organization Requirements Schedule Maintenance Unscheduled Maintenance RMS as Key System Elements

44. © 04/16/200144 System Considerations Cost-Effectiveness Analysis Outcomes A B E C Effectiveness LCC A is preferable IF E is worth more than C A is more effective B cost less

45. © 04/16/200145 Insert: Cost-Effectiveness Factor Interaction, p. 36

46. © 04/16/200146 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. © 04/16/200147 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. © 04/16/200148 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. © 04/16/200149 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. © 04/16/200150 Design to Cost (DTC) DTLCC Implementation –Keys to Success Challenging the performance requirements Adhering to hierarchy - equipment, cost category and design driver

51. © 04/16/200151 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. © 04/16/200152 Design to Cost (DTC) Trade-Off Process Insert: Trade-Off process, p. 42

53. © 04/16/200153 Design to Cost (DTC) LCC Vs. MTBF Cost ($) MTBF (Hours) Total Life Cycle Cost Operating and Support Cost Development and Acquisition Cost

54. © 04/16/200154 Scheduled Maintenance Trade Study 1.85 100 1201408060 1.80 1.75 1.70 1.65 1.60 1.55 1.50 1.45 Unsched Sched 1000 Sched 800 A B Percent of Predicted Baseline - MTBF LCC (Billions) Scheduled Vs. Unscheduled Maintenance

55. © 04/16/200155 Repair Versus Discard Trade Study Unit Production Cost (UPC) Discard Repair $600 LCC Staff-hrs per repair Repair Discard 12 Staff-hrs LCC

56. © 04/16/200156 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. © 04/16/200157 Cost as an Independent Variable What is CAIV? –An extension of DTLCC where cost and requirements are independent variables not just requirements

58. © 04/16/200158 Cost as an Independent Variable CAIV Vision Team Effort User Acquirer Industry Define Operational Requirement Control $ Make Trade Decisions Define Capabilities Make Trade Inputs Build System Mange Contract Identify Trades

59. © 04/16/200159 Cost as an Independent Variable Insert: Cost Vs. Capability, p. 49

60. © 04/16/200160 Cost as an Independent Variable Insert: CAIV Process Flow, p. 50

61. © 04/16/200161 LCC Organization Team Organization Program Manager Systems Engineer Design-Prime and Support Equip Electrical Mechanical Systems Software Manufac- turing Relia- bility Maintain- ability Integrated Logistics Support (Support- ability) LCC

62. © 04/16/200162 LCC Organization Management of LCC –Engineering Team Member Responsibilities Manage assigned cost targets for their cost drivers Define tradeoffs in their respective disciplines Estimate input data to LCC model for trade-off analyses Assist in discussion of trade-off results leading to decisions

63. © 04/16/200163 LCC Organization Management of LCC –Engineering Team Member Responsibilities Implement trade-off decisions into hardware/software design Document trade-off analysis decisions

64. © 04/16/200164 LCC Organization Management of LCC –Cost Analyst Team Responsibilities Understand, modify or develop LCC and trade-off models for use on program Clearly define input data requirements for team member data estimation Perform all LCC-related analyses Interpret LCC analysis results to team members to aid decision making and implementation of decisions

65. © 04/16/200165 LCC Organization Management of LCC –Cost Analyst Team Responsibilities Assume role of catalyst for team by performing baseline analysis and establishing drivers through sensitivity analysis

66. © 04/16/200166 Warranties / Guarantees Introduction: Scope of Warranties Marketing (Getting the Business) WARRANTIES Customer Satisfaction (Keeping the Business)

67. © 04/16/200167 Warranties / Guarantees Warranties and Quality –The best warranty is one you never have to use –A warranty you never have to use means a quality product –A quality product means a satisfied customer –Satisfied customers mean increased sales –Increased sales mean more opportunities to satisfy customers

68. © 04/16/200168 Warranties / Guarantees Warranty Principles –Benefits: Good marketing tool for suppliers Insurance for customers Good measure of customer satisfaction –Criteria of Good Warranty: Motivates supplier to impv. Rel. of product Profit opportunity of supplier Insurance for customer Win/win

69. © 04/16/200169 Warranties / Guarantees Warranty Principles –Warranty Objectives: Insurance Assurance Incentives –Warranty Types: Repair-Threshold or failure-free Systemic Performance

70. © 04/16/200170 Warranties / Guarantees Warranty Principles –Coverage: Material and Workmanship (Failures) Design & Manufacturing (Defects) Performance (compliance/non-compliance) –Remedies: Repair/replace-eliminate failure under M&W coverage Redesign/retrofit-eliminate defect under D&M coverage Penalties/Incentives under perf. coverage

71. © 04/16/200171 Warranties / Guarantees Warranty Principles –Realities of Warranties: Items under warranty may fail Warranties are not free Warranties are not iron-clad assurance that all the warranted parameters will be met- no magic Warranties indicate the level of liability for which the supplier accepts responsibility RMS are driving issues in the conception, costing, negotiating and implementation of a warrant

72. © 04/16/200172 Warranties / Guarantees Warranty Principles –Warranty Process: Requirements Costing/pricing Negotiating Cost Benefit Implementation/administration

73. © 04/16/200173 Warranties / Guarantees Warranty Principles –Warranty Keys: Customer satisfaction involves the product quality/reliability and quality service Warranty is a process not a discipline - it is the amalgamation of several disciplines We should always strive to design quality/reliability into the product- warranties motivate suppliers to that end Good reliability wins the bets from both supplier and customer standpoints

74. © 04/16/200174 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

75. © 04/16/200175 Wrap-Up Team concept is vehicle for a successful CAIV program Cost must be a design parameter not a consequence of design CAIV is here to stay- the well is drying up