Logistics Systems Engineering

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

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

3
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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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
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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.

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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 systems life.

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Cost Analysis Principles

• Six Desired Characteristics of Cost Models
• Validity Capable of providing logical,
  reproducible results.

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Cost Analysis Principles

• Payback Analysis

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

• 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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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

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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
0
Production
OS
Definition
RDTE
Life Cycle Phase
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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

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Life-Cycle Cost (LCC) Analysis

• Cardinal Principles
• Should be an integral part of the design,
  production and support processes - DTLCC

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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

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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

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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

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Life-Cycle Cost (LCC) Analysis

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

Acquisition Cost
Sustaining Cost
22
Insert Typical LCC Model Structure, p 18
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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
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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

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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

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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

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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

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Life-Cycle Cost (LCC) Analysis

• LCC Input Data
• Standard Factors
• Attrition rates for recurring training
• Facility space cost factors
• Support equipment maintenance cost factor

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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
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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

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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

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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.

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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

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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

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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

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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, but the anticipated earning
  power must be adjusted thusly

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Insert Monte Carlo Process, p. 29
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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

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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

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RMS as Key System Elements

• Availability
• Sortie Generation Rates
• Basing

Product

• Reliability
• Maintainability
• Supportability
• Testability

• Organization
• Requirements
• Schedule Maintenance
• Unscheduled Maintenance

• Spares
• Technical Publications
• Training
• Support Equipment

44
System Considerations

• Cost-Effectiveness Analysis Outcomes

• A is preferable IF E is
• worth more than C

A
LCC
C
B

• A is more effective
• B cost less

E
Effectiveness
45
Insert Cost-Effectiveness Factor Interaction,
p. 36
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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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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

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Design to Cost (DTC)

• DTLCC Implementation
• Keys to Success
• Challenging the performance requirements
• Adhering to hierarchy - equipment, cost category
  and design driver

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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)

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Design to Cost (DTC)

• Trade-Off Process

Insert Trade-Off process, p. 42
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Design to Cost (DTC)

• LCC Vs. MTBF

Total Life Cycle Cost
Cost ()
Operating and Support Cost
Development and Acquisition Cost
MTBF (Hours)
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Scheduled Maintenance Trade Study
Scheduled Vs. Unscheduled Maintenance
1.85
Unsched
Sched 1000
1.80
Sched 800
B
1.75
1.70
LCC (Billions)
A
1.65
1.60
1.55
1.50
1.45
100
120
140
80
60
Percent of Predicted Baseline - MTBF
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Repair Versus Discard Trade Study
Repair
LCC
Discard
600
Unit Production Cost (UPC)
Discard
LCC
Repair
12 Staff-hrs
Staff-hrs per repair
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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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Cost as an Independent Variable

• What is CAIV?
• An extension of DTLCC where cost and requirements
  are independent variables not just requirements

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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

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Cost as an Independent Variable
Insert Cost Vs. Capability, p. 49
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Cost as an Independent Variable
Insert CAIV Process Flow, p. 50
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LCC Organization

• Team Organization

Program Manager
Systems Engineer

• Design-Prime
• and Support
• Equip
• Electrical
• Mechanical
• Systems
• Software

Integrated Logistics Support (Support- ability)
Manufac- turing
Relia- bility
Maintain- ability
LCC
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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

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LCC Organization

• Management of LCC
• Engineering Team Member Responsibilities
• Implement trade-off decisions into
  hardware/software design
• Document trade-off analysis decisions

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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

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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

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Warranties / Guarantees

• Introduction Scope of Warranties

Marketing (Getting the Business)
WARRANTIES
Customer Satisfaction (Keeping the Business)
67
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

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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
Warranties / Guarantees

• Warranty Principles
• Warranty Objectives
• Insurance
• Assurance
• Incentives
• Warranty Types
• Repair-Threshold or failure-free
• Systemic
• Performance

70
Warranties / Guarantees

• Warranty Principles
• Coverage
• Material and Workmanship (Failures)
• Design Manufacturing (Defects)
• Performance (compliance/non-compliance)
• Remedies
• Repair/replace-eliminate failure under MW
  coverage
• Redesign/retrofit-eliminate defect under DM
  coverage
• Penalties/Incentives under perf. coverage

71
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

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Warranties / Guarantees

• Warranty Principles
• Warranty Process
• Requirements
• Costing/pricing
• Negotiating
• Cost Benefit
• Implementation/administration

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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

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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

75
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