Stracener_EMIS 7305/5305_Spr08_04.23.08 1 System Cost Analysis Dr. Jerrell T. Stracener, SAE Fellow Leadership in Engineering EMIS 7305/5305 Systems Reliability,

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Stracener_EMIS 7305/5305_Spr08_04.23.08

System Cost Analysis

Dr. Jerrell T. Stracener, SAE Fellow

Leadership in Engineering

EMIS 7305/5305Systems Reliability, Supportability and Availability Analysis

Systems Engineering ProgramDepartment of Engineering Management, Information and Systems

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• Cost Analysis Principles• Life-Cycle Cost (LCC) Analysis• System Considerations• LCC Management

– Design to Cost (DTC)– Cost as an Independent Variable (CAIV)

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Agenda

• LCC Organization• Warranties/ Guarantees• Wrap-Up

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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

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State Objectives

Define Assumptions

Select Cost Element

Develop CERS

Collect Data

Estimate Element Cost

Perform Sensitivity Analysis

Perform Uncertainty Analysis

Present Results

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• 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.

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• 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.

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• Six Desired Characteristics of Cost Models– Validity: Capable of providing logical,

reproducible results.

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• Payback Analysis

Cost

($)

Time - Years

Payback Period

Crossover PointModified System

Existing System

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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

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• 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

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• 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.

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• 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

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• 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

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Perc

en

tag

e

100

0

Life Cycle Phase

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LCC Analysis: Phased LCC Funding Trends

FundsCommitted

FundsExpended

Definition RDT&E Production O&S

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• 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

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• Cardinal Principles– Should be an integral part of the design,

production and support processes - DTLCC

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• 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:ReliabilityMaintainabilityLogistics

DesignProductionCost

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• Cost Analysis Estimates– Estimated data is followed by test and

evaluation data which is in turn followed by field data

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• Basic LCC ModelsLCC = CA + CS

CA: Acquisition CostCS: Sustaining Cost

CA = CD + CICD: Development CostCI: Investing Cost

CS = COS + CRCOS: Operating and Support CostCR: Retirement Cost

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• LCC Objectives– Estimate Costs– Compare Costs– Balance Cost

Acquisition Cost Sustaining Cost

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Typical LCC Model StructureLife

CycleCost

Acquisition Cost

SustainingCost

Operating & Support Cost

RetirementCost

1st DestinationTransportation

Installation& System

integration

Support Equipment & Initial Spares

Modification

Packaging & Transportation

Scheduled Maintenance

UnscheduledMaintenance

New/ModifiedFacilities

InitialTechnical

Data

Prime Equip.And Initial

Spares

SupplyIntroduction

InitialTraining

Investment Cost

Investment Cost

Investment Cost

Development Cost

Development Cost

Development Cost

Software

Prime Equipment

SupportEquipment

SupplyManagement

Energy Consumption

ReplenishmentSpares

Operating

Support Equip.Maintenance

Technical DataManagement

FacilityUsage

RecurringTraining

Software Maintenance

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Life-Cycle Cost (LCC) Analysis: Flow

Doctrines•Procurement•Operational•Maint./Support

SystemCharacteristics

StandardFactors

InputData

EstimatesCost

Model

Estimateof

LCC

BestEstimateof LCC

Sensitivity Analysis

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• LCC Estimating Techniques– Analogy/Scaling– Parametrics-LCC as a function of weight for

example– Engineering (Bottom-Up) Analysis– Vendor Data– Field Data

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• LCC Input Data– System Characteristics

Quantity of item under study in larger system

Item unit costItem MTBF/MTBMItem Weight

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• LCC Input Data– System Characteristics

Item VolumeItem MTTRQuantity of stock number introduced and

managed support equipment (if applicable) unit cost

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• LCC Input Data– Standard Factors

Maintenance labor rates at each maintenance level

Shipping ratesCost per stock number for introductionCost per stock number for managementCost per page for technical data

creation/management

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• LCC Input Data– Standard Factors

Attrition rates for recurring trainingFacility space cost factorsSupport equipment maintenance cost

factor

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LCC Analysis: Data Paradox

SmallValue

LargeValue

SmallAmount

LargeAmount

Cost DecisionValue

DataAvailabilityV

alu

e o

f C

ost

Deci

sion

Am

ou

nt

of

Availa

ble

Data

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• 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

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• 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

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• 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.

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• 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 QuantityExpected Service Life of System

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• LCC Applications– Customer

Affordability studies - CAIVSource SelectionDesign Trade Studies - Establishing reliability

and maintainability goals / requirementsRepair Level AnalysisWarranty should cost and cost effectiveness

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• 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

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• 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

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• 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.

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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

Freq

uen

cy

Outputs

• Maintenance Cost Sample

• Histogram

• Statistical Parameters

• Cumulative Distribution

0

1

Risk

$x

0.2x$P

0.2

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System Considerations

• Driving System Concepts– Procurement Data

Number of Systems procuredProduction ScheduleInstallation ScheduleDesign to unit production cost (DTUPC)

requirementsFirst destination transportation

requirements

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• Driving System Concepts– Operational Data

Number of operational sitesQuantity of systems per siteMission schedule - number of missions per

periodMission Profile - mission length, mission

typeGround operation requirementsMission readiness and reliability

requirements

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• Driving System Concepts– Maintenance/Support Data

Number of levels of maintenanceQuantity of maintenance sites per levelLocation of maintenance sitesNumber of systems supported per siteDescription of maintenance at each levelScheduled/preventive maintenance

requirements

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• Driving System Concepts– Maintenance/Support Data

Required MTTR at each maintenance levelRequired spares assurance factors and

TATSSupport equipment requirments

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Product

•Spares•Technical Publications•Training•Support Equipment

•Availability•Sortie Generation Rates•Basing

•Reliability•Maintainability•Supportability•Testability

Operational

Concept

MaintenanceConcept

SupportConcept

•Organization•Requirements•Schedule Maintenance•Unscheduled Maintenance

RMS as Key System Elements

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• 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

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Cost-Effectiveness Factor Interactions

S AnalysisM AnalysisR Analysis

LCC Analysis

A Analysis

CEAnalysis

MTBF

MTTR

MTBM

$

MDT

A0

Mission R

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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

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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

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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

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• DTLCC Implementation– Keys to Success

Useable LCC modelReasonable input dataExtensive trade-off analyses- LCC not ony

criterionRelating of results to hardware/software

designImplementation of trade-off decisions into

the hardware/software design

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• DTLCC Implementation– Keys to Success

Challenging the performance requirementsAdhering to hierarchy - equipment, cost

category and design driver

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• DTLCC– Program trade-off issues

UPC vs. MTBFRedundancy vs. no redundancyBuilt-InTest (BIT) vs. no BITTwo vs. Three-Level maintenanceRepair vs. discardLCC vs. system performanceDifferent sparing assurancesDifferent levels of environmental stress

screening (ESS)

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• Trade-Off Process

EstablishBasis ofComparison

IdentifyCandidates

Define Purpose

Select/Develop Model

Secure Input Data

PerformBaselineAnalysis

RankCandidates

PerformSensitivityAnalysis

Select Best Candidate

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LCC Vs. MTBF

Cost($)

MTBF (Hours)

Total Life Cycle Cost

Operating and Support Cost

Development and Acquisition Cost

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Scheduled Maintenance Trade Study

1.85

100 120 1408060

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

(B

illio

ns)

Scheduled Vs. Unscheduled Maintenance

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Repair Versus Discard Trade Study

Unit Production Cost (UPC)

Discard

Repair

$600

LCC

Staff-hrs per repair

Repair

Discard

12 Staff-hrs

LCC

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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

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• What is CAIV?– An extension of DTLCC where cost and

requirements are independent variables not just requirements

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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

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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

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Wrap-Up

• Team concept is vehicle for a successful CAIV program

• Cost must be a design parameter not a consequence of design

Documents

Stracener_EMIS 7305/5305_Spr08_04.23.08 1 System Cost Analysis Dr. Jerrell T. Stracener, SAE Fellow Leadership in Engineering EMIS 7305/5305 Systems Reliability,