Life Cycle Costing

Techniques, Models and Applications

B. Dhillon

• Publisher: Routledge
• Year: 1989
• Print ISBN: 9782881243028
• eBook ISBN: 9781136773853
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Product acquisition involves an examination of the support cost of major equipment over its total life years. Depending on the type of equipment, support costs may range from 10 to 100 times the cost of acquisition. "Life Cycle Costing: Techniques, Models and Applications" offers a comprehensive approach to the entire field, and treats it in such a

CHAPTER 1

Introduction

1.1 Brief Life Cycle Costing History

It was almost a quarter century ago when wide dissemination of the term life cycle costing was given in a report [1] entitled “Life Cycle Costing in Equipment Procurement”. This document was the result of a study conducted by the Logistics Management Institute, Washington, D.C. for the Assistant Secretary of Defense for Installations and Logistics. As a result of this report, a series of three guidelines [2–4] for life cycle costing procurement was published by the United States Department of Defense. These guidelines were entitled “Life Cycle Costing Procurement Guide (interim)”, “Life Cycle Costing in Equipment Procurement-Casebook”, and “Life Cycle Costing Guide for System Acquisitions (interim)”. In 1971, the Directive 5000.1 [5] entitled “Acquisition of Major Defense Systems” was issued by the Department of Defense. This directive established the requirement for life cycle costing procurement for major defense systems acquisitions.

A project entitled “Life cycle budgeting and costing as an aid in decision making” was initiated by the United States Department of Health, Education, and Welfare in 1975 [6]. In 1974, the state of Florida formally adopted life cycle costing and in 1978, the United States Congress established the National Energy Conservation Policy Act. This Act requires every new federal building be life cycle cost effective.

Since 1974, many states in the United States have passed legislations making life cycle cost analysis mandatory in the planning, design, and construction of state buildings. Some of these states are New Mexico, Alaska, Maryland, North Carolina, and Texas. Over the years many other events have taken place in the history of life cycle costing and a large amount of published literature on the subject have appeared. References [7, 8] list a large volume of published literature on life cycle costing. An extensive list of publications on life cycle costing and related areas is presented in the Appendix.

1.2 Periodicals and Conference Proceedings

Information on life cycle costing can be found in various journals, conference proceedings, books, and reports. To the best of author's knowledge there are no periodicals or annual conferences specifically on the subject of life cycle costing. However, there are several journals and conference proceedings which time to time publish articles on the subject in question. Some of those journals and conference proceedings are listed below:

Journals

i) Microelectronics and Reliability: An International Journal

ii) IEEE Transactions on Reliability

iii) Defense Management Journal

Conference Proceedings

i) Proceedings of the Annual Reliability and Maintainability Symposium, USA.

ii) Proceedings of the Annual International Reliability, Availability, and Maintainability (Inter-RAM) Conference for the Electric Power Industry

iii) Proceedings of the Annual American Society for Quality Control (ASQC) Conference

1.3 Books

So far there has been only a limited number of books written on life cycle costing. Those books are listed below:

i) M.R. Seldon, Life Cycle Costing: A Better Method of Government Procurement, Westview Press, Boulder, Colorado, 1979.

ii) R.J. Brown, R.R. Yanuck, Life Cycle Costing: A Practical Guide for Energy Managers, The Fairmont Press, Inc., Atlanta, Georgia, 1980.

iii) B.S. Blanchard, Design and Manage to Life Cycle Cost, M/.A Press, Portland, Oregon, 1978.

iv) M.E. Earles, Factors, Formulas, and Structures for Life Cycle Costing, Second Edition, Eddins-Earles, Privately Published, Concord, Massachusetts, 1981.

v) A.J. Dell'isola, S.J. Kirk, Life Cycle Costing for Design Professionals, McGraw-Hill Book Company, New York, 1981.

A chapter on life cycle costing is given in the following books:

i) B.S. Dhillon, Reliability Engineering in Systems Design and Operation, Van Nostrand Reinhold Company, New York, 1983, pp. 210–238.

ii) B.S. Dhillon, H. Reiche, Reliability and Maintainability Management, Van Nostrand Reinhold Company, New York, 1985, pp. 214–235.

iii) H. Reiche, Life Cycle Cost, in Reliability and Maintainability of Electronic Systems, Edited by J.E. Arsenault and J.A. Roberts, Computer Science Press, Potomac, Maryland, 1980, pp. 3–23.

1.4 Definitions

This section presents selected definitions directly or indirectly related to life cycle costing [9–14],

Life Cycle Cost: the sum of all costs incurred during the life time of an item, i.e., the total of procurement and ownership costs.

Procurement Cost: the total of investment or acquisition costs (recurring and non-recurring).

Ownership Cost: the sum of all costs other than the procurement cost during the life time of an item.

Recurring Cost: the cost which recurs periodically during the life of a project.

Reliability: the probability that an item will carry out its mission satisfactorily for the desired period when used according to specified conditions.

Failure: the termination of the ability of an item to carry out its stated mission or function.

Maintenance Cost: the labor and materials expense required to maintain item(s) in suitable use condition.

Manufacturing Cost: the sum of fixed and variable costs chargeable to the production of a specified item.

Maintainability: the probability that a failed item will be restored to its satisfactory operational state within a specified total downtime when maintenance action is started according to stated conditions.

Redundancy: the existence of more than one means for carrying out a stated function.

Cost Model: an approach, based on technical and programmatic parameters, for computing concerned costs.

Nonrecurring Cost: the cost that is not repeated.

Maintenance: all scheduled and unscheduled actions appropriate for keeping an item in a serviceable condition or restoring it to serviceability. It includes inspection, repair, modification, servicing, remove and replace, etc.

Annuity: a series of equal payments, at equal intervals.

Cost: the amount of money paid or payable for the acquirement of services, materials, or property.

Downtime: the total time during which the product (or item) is not in a condition to carry out its stated function or mission.

Failure Rate: the number of failures of a product per unit measure of life (e.g. hours).

Active Redundancy: the term used when all redundant items are operating simultaneously.

Battery-Limits: a geographical designation for the process area of the project proposed.

Cost Estimating Relationship: an equation relating cost as the dependent variable to one or more independent variables.

Mean Time to Repair: the mean time needed to repair a product (or an item).

Repair Cost: the cost of restoring an item or a facility to its original condition or performance.

Compound Amount: the future value of money invested or loaned at compound interest.

1.5 Scope of the Book

Nowadays, life cycle costing is receiving increasing attention in government setups, industry, etc. Most of the information on life cycle costing is available in the form of technical papers or reports and there are only a limited number of books specifically dealing with life cycle costing. All of those books appeared during the period from 1978-1981. Since 1981, to the best of author's knowledge not a single text appeared on the topic but there have been many articles and reports. Professionals and others involved in life cycle costing need up to date information on the subject in question and generally face a great deal of difficulty. This book is an attempt to fulfill the current need. The book is written after reviewing the available literature on life cycle costing.

Therefore, every attempt was made to cover important past and current issues in life cycle costing. Previous knowledge is not generally necessary to comprehend the contents, since two chapters on basic economics and reliability theory are provided to give sufficient background. This book will find use in many disciplines and will be useful to reliability, maintainability, and quality control engineers, managers, procurement specialists, cost analysts, project, maintenance, design, system, computer hardware and software, chemical, electrical, electronic, civil, and mechanical engineers, researchers and university level teachers, and senior students of engineering and business administration.

1.6 Summary

This chapter presented a brief history of life cycle costing. A list of journals and conference proceedings publishing articles on life cycle costing is given along with books concerned with the topic in question. Several definitions directly or indirectly related to life cycle costing are presented. The scope of the text is discussed.

1.7 Problems

1. Write an essay on the history of life cycle costing.

2. Define the terms given below:

i) Life cycle costing

ii) Interest rate

iii) Disposal cost

iv) Economy

v) Development cost

vi) Mean time between failures

vii) Cost drivers

viii) Warranty

ix) Design to cost

x) Direct cost

1.8 References

1. “Life Cycle Costing in Equipment Procurement”, Report No. LMI Task 4C-5, Prepared by Logistics Management Institute (LMI), Washington, D.C., April, 1965.

2. “Life Cycle Costing Procurement Guide (interim)”, Department of Defense Guide No. LCC-1, United States Department of Defense, Washington, D.C., July 1970.

3. “Life Cycle Costing in Equipment Procurement-Casebook”, Depa...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Preface
• Acknowledgments
• 1. Introduction
• 2. Life Cycle Costing Economics
• 3. Life Cycle Costing Basics
• 4. Life Cycle Cost Models
• 5. Cost Estimation Techniques
• 6. Manufacturing, Quality and Maintenance Costs
• 7. Warranties
• 8. Cost Estimation Models
• 9. Computer Hardware and Software Costing
• 10. Life Cycle Costing in the Aircraft Industry
• 11. Life Cycle Costing of Energy Systems and On-Surface Vehicles
• 12. Introduction to Reliability
• Appendix
• Index