DEVELOPMENT OF PRODUCT LIFE-CYCLE COST ANALYSIS TOOL

AHMED YUSSUF HUSSEIN

A project report submitted in partial fulfillment of the requirements for the award of the degree of Master of Engineering (Mechanical - Advanced Manufacturing Technology)

Faculty of Mechanical Engineering Universiti Teknologi Malaysia

April, 2008

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To my beloved family

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ACKNOWLEGDEMENT

In the Name of Allah, the Most Beneficent, the Most Merciful. All praise and thanks to Allah, lord of the universe and all that exists. Prayers and peace be upon His prophet Mohammed, the last messenger for all humankind. First, I would like to express my sincere gratitude and thanks to ALLAH. I am deeply thankful to my parents for their continuous support and love throughout my study. It is difficult to mention one person before the other. However, I undoubtedly owe much to my project supervisor, Professor Dr. Awaluddin Mohamad Shaharoun, for his condescending guidance and encouragement, intuitive suggestions and endless endurance throughout the project. I am also highly indebted to my co-supervisors, Dr. Muhammad Zameri Bin Mat Zaman, for his guidance, advices and motivation without his continued support and interest, this thesis would not have been successful. I would like to take this opportunity to express my sincere appreciation to Islamic Development Bank (IDB) for giving me the scholarship opportunity. This scholarship was of great assistance to me in my goal of attaining a masters degree. Also I would like to thank my friends, colleagues and staff for enjoyable and enlightening period in UTM. Many people contributed to this work, either directly or indirectly. Thanking every one by name would take many pages. Therefore, for the people I did not mention in this acknowledgment, from my heart THANK YOU.

ABSTRACT

The main purpose of this project was to develop a life cycle cost analysis (LCCA) tool which can be used by small and medium sized enterprises (SMEs) for the decision making process when comparing different alternatives of their products. The tool is expected to assist designers in making choices regarding the definition of product characteristics, integrating a series of analysis, calculation, and decision-making tools in the most appropriate manner in order to compare different alternatives of their product. LCCA appears to be a useful approach to a comprehensive assessment of economic, environmental and social impacts of the life cycle of a product and aids SMEs to meet environmental requirements adopted in nations around the world. The tool plays a primary role in this specific context due to the fact that not only production costs, but also those costs incurred during use and disposal are greatly conditioned by the initial design choices. Due to the differences exist in the cost structure of different products under evaluation, it is difficult to generalize the model; However, by making some modification to cost categories and by following the general LCCA framework developed, it is possible to match the model to any application desired. The model is simplified for usage in the form of ExcelTM in such away that the analyst can easily input data into tables and generate outputs using Excel Charts. The decision is made based on the alternative with lowest life cycle cost.

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ABSTRAK

Tujuan utama projek ini adalah bagi membina life cycle cost analysis (LCCA) kitar hidup analisis kos sebagi alat yang boleh digunakan oleh syarikat berskala kecil dan sederhana, bagi membantu prosess membuat keputusan apabila perbandingan alternatif terhadap penghasilan produk dilakukan. Alat ini dijangka dapat membantu jurutera di dalam membuat pilihan berdasarkan definasi ciri produk, integrasi bebarapa siri analisa, pengiraan dan alat pembuat keputusan dalam keadaan tersusun bagi membolehkan pelbagai alternatif penghasilan produk dibandingkan. LCCA merupakan pendekatan yang amat berguna dalam membuat penilaian menyeluruh terhadap ekonomi, alam sekitar dan impak sosial terhadap kitar hidup produk serta membantu perusahaan kecil sederhana bagi memenuhi kehendak alam sekitar yang telah diterima pakai di seluruh dunia. Alat ini digunakan secara spesifik bukan hanya kos produksi malah kos yang terhasil daripada penggunaan dan pelupusan dijana dengan menyeluruh pada pemulaan pemilihan design. Oleh kerana wujud perbezaaan dalam struktur kos produk dibawah penilaian/ pembuatan ianya amat sukar untuk mengeneralisasi model tersebut. Walaubagaimanapun melalui beberapa modifikasi dalam kategori kos dan melalui generalisasi rangka kerja LCCA ianya membolehkan model tersebut disuaikan dengan aplikasi yang dikehendaki. Model tersebut dipermudahkan penggunaannya dalam bentuk ExcelTM dimana input data dimasukkan dengan mudah dan output dapat diterbitkan menggunakan carta Excel. Seterusnya pemilihan dibuat berdasarkan alternatif yang memiliki nilaian semasa terendah berdasarkan kitar hidupkos.

TABLE OF CONTENTS

CHAPTER

TITILE

PAGE ii iii iv v vi vii x xi xii

DECLARATION DEDICATION ACKNOWLEDGEMENT ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS

INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 Background Problem Statement Objectives Scope Significance of study Structure of the thesis

1 1 3 5 5 6 8

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LITERATURE REVIEW 2.1 2.2 2.3 2.4 2.5 2.6 Introduction Cost analysis and the life cycle approach Life Cycle Costing (LCC) Product Life Cycle Cost Analysis Review of LCCA models Summary

10 10 11 14 17 18 24

METHODOLOGY 3.1 3.2 3.3 Introduction General framework for LCCA Preliminary Definitions 3.3.1 3.3.2 3.3.3 3.4 3.4.1 3.4.2 3.4.3 3.5 3.5.1 3.5.2 3.6 3.7 Definition of the problem Identification of Feasible Alternatives Development of Cost Breakdown Structure - (CBS) Selection of cost model Development of cost estimates Development of Cost profiles Identification of high cost contributors Accomplishment of sensitivity analysis

25 25 27 29 29 30 30 31 31 32 32 34 35 35 36 36

Cost Valuation

Result Analysis

Decision making Summary

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MODEL DEVELOPMENT 4.1 4.2 4.3 LCCA model Cost breakdown structure CBS Cost Estimating 4.3.1 Total Product Cost (TC) 4.3.1.1 Research and development cost - CR 4.3.1.2 Production and construction cost - CP 4.3.1.3 Operation and support cost - CO 4.3.1.4 Retirement and disposal cost - CD 4.4 Software development 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 Model input Evaluation of alternatives High cost contributors Sensitivity analysis Application of LCCA model in automotive industry 4.4.5.1 Cost contribution 4.4.5.2 Evaluation of the two alternatives 4.4.5.3 Cost profiles 4.4.5.4 Decision making 4.4.5.5 Sensitivity analysis using scenario manager 4.4.6 Summary

38 38 39 42 42 43 47 51 58 61 61 64 64 65 65 68 69 71 72 73 74 75 81 84 88-91

5 6

DISCUSSION CONCLUSIONS AND OPPORTUNITY FOR FURTHER STUDY REFRENCES APPENDIX A INTEREST FACTOR TABLES

LIST OF TABLES

TABLE NO.

TITLE

PAGE

2.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7

Comparison of life cycle cost models Cost breakdown structure - CBS Evaluation of alternatives Percentage of cost contribution Sensitivity analysis Cost breakdown structure of the two configurations Evaluation of alternatives Scenario summary

21 57 58 59 61 63 66 70

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LIST OF FIGURES

FIGURE NO.

TITLE

PAGE

1.1 2.1 2.2 2.4 3.1 4.1 4.2 4.3

4.4 4.5

Life cycle cost in various stages of product development Product life cycle stages (marketing perspective) Perception of life cycle: producer vs. consumer Costs in product life cycle stages Framework for life cycle cost analysis Life cycle cost model configuration Cost breakdown structure CBS Percentage of cost contribution
Development of life cycle cost profiles Cost profiles of the two designs

6 11 12 17 25 37 39 65
68 69

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LIST OF ABBREVIATION

LCM LCCA LCC SMEs DFE ANN ABC TCA PLCCA LCA CBS TC CR CP CO CD ExcelTM PV

Life Cycle Management Life Cycle Cost Analysis Life Cycle Costing Small and Medium Sized Enterprises Design for Environment Artificial Neural Network Activity Based Costing Total Cost Assessment Product Life Cycle Cost Analysis Life Cycle Assessment Cost Breakdown Structure Total Cost Research and Development Cost Production and Construction Cost Operation and Maintenance Cost Retirement and Disposal Cost Excel Template Present Value

CHAPTER 1

INTRODUCTION

1.1

Background

Lack of environmental awareness has led us to mistakenly consider ourselves to be outside the global ecosystem and, consequently, to satisfy our needs according to the sole criterion of the greatest efficiency at the lowest cost. the resulting environmental crises has shown how the eco-system has been seriously degraded by the use of modern means of production, conceived without concern for either the environment or the balanced use of resources. Above all, the widespread idea that profit and respect for the environment are incompatible (a dangerous prejudice delaying a processes of recovery that can no longer be postponed) is based on an inadequate vision of the problem (Gnther, 2007).

Any costs avoided by a production system in neglecting environmental issues will fall, redoubled, onto the community. Clearly, industry must respect the elementary condition of earning more than it spends, but it is crucial that profit is made while

2 reducing environmental impacts to sustainable development. a minimum. This has increased the need for

The main influencing factors include an expanding regulatory framework and more stringent environmental protection standards. However, if a better match between the corporate behavior and the principles of sustainable development is to be achieved, businesses themselves will have to be active in seeking ways of meeting social, environmental and economic objectives (Labuschange, 2005). Manufacturers will have to assume a larger degree of responsibility for activities related to the life cycle of their products after the purchasing and installation stage (Westkaempfer, 2000).

Life cycle management (LCM) is an approach supporting sustainable development and the most efficient possible use of resources. Based on the life cycle concept the costs and benefits of strategic aims and choices can be understood and justified in a comprehensive manner. LCM covers the entire life cycle of a product with a view to maximizing value along the life cycle while meeting cost and environmental requirements. Integral components of this value are, for example, reliability, costs, manufacturability, operational capacity, usefulness, usability, recycling capacity and other environmental aspects (Prasad, 1999).

One important part of LCM is life cycle cost analysis (LCCA). The objective of this analysis is to optimize the manufacturing, maintenance and operation of a product (e.g. manufacturing equipment) for the period of its usability based on establishing all the important cost items over this period.

3 This facilitates a quantified assessment of various product design alternatives, comparison of cost items at various stages of the product life cycle and comparison between the stages with a view to choosing the optimal alternative.

The cost items monitored include all costs incurred in relation to manufacturing of a product until its disposal at the end of its life cycle. The items should be structured so as to allow for identification of potential links between various items with a view to establishing optimal life cycle costs. The structure of cost items will always depend on the nature of the product and it should always facilitate life cycle cost analysis. The purpose of estimating cost links is to express cost items as a function of one or more independent variables. The final stage of the calculation process is determination of a method for formulating life cycle costs.

Some would say that LCCA is to help engineers think like MBAs but act like engineers. That is true, but LCCA is broader in sense. According to Emblemsvag (2003), the main purpose of LCCA is to help organizations apply knowledge about past performance and their gut feelings to future issues of costs and risks. This is done not in the traditional sense of budgeting, but in meaningful predictions about future costs of products, process, and their associated risks.

1.2

Statement of The Problem

The pressure for implementation of principles of sustainable development in corporate decision-making processes is increasing continuously. Other aspects concerning product life cycle management are also subject to this pressure.

4 Life cycle cost analysis appears to be a useful approach to a comprehensive assessment of economic, environmental and social impacts of the life cycle of a product. It is necessary to realize the importance of costs throughout the full life cycle of a product in order to adopt measures to optimize the product value in relation to the financial resources used. Literature also increasingly emphasizes that rapid technological change and shortened life cycles have made product life cycle cost analysis critical to organizations (Ray and Schlie, 1993; Barfield et al., 1994; Murthy and Blischke, 2000).

Despite this growing awareness of aspects related to LCCA, the use of this method in Small & Medium-Sized Enterprises (SMEs) is still insufficient. There are a number of reasons for the generally lower level of acceptance of the life cycle costing methods. One of the major reasons is lack of motivation resulting, above all, from insufficient trust in the outcomes and achievements of the methodology.

Therefore, it is important to overcome the current situation where preference is given to assessing products based on manufacturing costs, and to short-term effects, where the link between manufacturing and future costs is ignored and where there is a lack of knowledge of the LCCA methods and their use. This study will focus on the development of a user-friendly product lifecycle cost analysis tool that will include all identifiable cost categories of product from conception until disposal. The tool in the form of software is expected to assist SMEs carry out LCCA in their product/process decision-making. With the help of this tool, designers can substantially reduce the life-cycle cost of products by giving due consideration to life-cycle implications of their design decisions. In this role, LCCA becomes an operational instrument used to implement one of the basic strategies for achieving sustainable development, the integrating economic and environmental considerations in to the decision-making process (WCED, 1987).

1.3

Objectives of the study

The primary objective is to develop a life-cycle cost analysis (LCCA) tool that can assist designers in making choices regarding the definition of product characteristics, integrating a series of analysis, calculation, and decision-making tools in the most appropriate manner in order to compare different alternatives of their product.

A secondary objective is to simplify the usage of the tool in the form of simple software so that minor modifications of the model can lead to many other applications.

1.4

Scope of the study

The project surveys several LCCA methodologies, product design considerations until disposal are surveyed and a framework for the development of LCCA process is developed, and to validate this framework in actual practice, simple software is developed to enable different decisions to be considered with respect to their effect in the life-cycle costing.

The purpose of the tool is to enable different design configurations (different materials, different design, and different processes) to be compared not only from an environmental compliance view but also from a cost perspective. The tool offers support in the decision-making process at the early phases of the design process. The inclusion of cost permits more informed business decisions and considerations to be undertaken by the designer.

1.5

Significance of the study

The importance of estimating and controlling costs during the design process, with the aim of limiting the cost of producing a product, is now considered and ineluctable factor in the development of an efficient product. Such products are able to respond to a market demanding high standards of quality and ever-shorter development times combined with contained costs (Weustink et al., 2000).

LCCA plays a primary role in this specific context due to the fact that not only production costs, but also those costs incurred during use and disposal are greatly conditioned by the initial design choices. By some assessments, more than half of the total cost of a products life-cycle is determined by the concept design phase alone (Fabrycky and Blanchard, 1991), and up to 85% can be considered fixed by the end of the completed design phase (Dowlatshahi, 1992), although only a limited fraction of this cost will have actually been spent on these phases of the development process. The field of application of LCCA is particularly wide and includes evaluation and comparison of alternative designs; assessment of economic viability of projects and products; identification of cost drivers; and cost effective improvements; evaluation and comparison of different approaches for replacement, rehabilitation, life extension, and disposal; optimal allocation of available funds to activities in a process of product development; and long term financial planning.

Figure 1.1 highlights an important paradox the effectiveness of design choices in controlling the costs of the life-cycle is greatest in the design preliminary phases of product development, and decreases as the design level evolves. On the other hand, the possibility of establishing a relation between design choices and costs is lower in the preliminary phases of product development, and increases as the design as the design

7 level evolves. This is a direct consequence of how adequate knowledge and information about the design problem and the product under development is the end of the design process.

Figure 1.1 Life Cycle Cost in various stages of product development

With this premises, LCCA becomes the assessment of all costs associated with the life-cycle of a product that are directly covered by the any one or more of the actors in the product life-cycle (supplier, producer, user/consumer, end-of-life actors), with complimentary inclusion of externalities that are anticipated to be internalized in the decision-relevant future (Hunkeler and Rebitzer, 2003).

1.6

Structure of the thesis

This thesis is structured into six main chapters. Chapter 1 introduces the concept of LCCA, problem statement, significance of study, scope and main objectives of this project. Chapter 2 emphasis mainly on literature review regarding LCCA, application of LCCA in product development, manufacturing cost strategies, and different LCCA models. Chapter 3 defines the methodological framework of LCCA, chapter 4 emphasizes the development of analytical LCCA model and software development, chapter 5 focuses on discussions related to the application of LCCA, and finally chapter 6 is conclusion and opportunities for further study.

CHAPTER 2

LITERATURE REVIEW

2.1

Introduction

A thorough review of existing literature on a given subject matter creates a firm foundation for advancing knowledge by identifying the areas where a plethora of research already exists, while also uncovering areas where research is needed (Webster and Watson, 2002). Hence, a systematic review of literature was conducted to obtain sources pertaining to life-cycle costing and methods of LCCA. Details of what has been done on the subject of LCCA will be discussed throughout this chapter.

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2.2

Cost Analysis and The Life-Cycle Approach

Cost analysis and assessment are two of the principle factors guiding the process of product development, since they strictly condition the main decisional choices in a clear-cut manner. From the earliest theorizing on design intervention, it has been emphasized how the economic worthwhileness of a proposal (i.e., the property of making the final product acquire sufficient value to repay the expenditure incurred in the production phase) is one of the most rigid selection criteria (Asimow, 1962).

On entering the market, a product manufactured through processes of transforming the resources employed must have increased in value such that it can be produced and commercialized. From the earliest initial phases of needs analysis and their translation into product concept, the design team must assess at least two different typologies of economic validity, according to whether the viewpoint is that of the manufacturer or of the consumer of the product.

Describing the product life-cycle may appear to be rather elementary; however, experience has indicated that many different interpretations of what constitutes the life cycle may exist (Blanchard, 1978). The interpretation of life-cycle of a product depends on the perspective of the decision-maker. From the marketing perspective, the life-cycle consists of four stages (introduction, growth, maturity, and decline) which are shown in figure 2.1.

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Figure 2.1 Product life cycle stages (Marketing Perspective)

Figure 2.2 shows two different perceptions of producer and consumer. for a manufacturer thinking in terms of production perspective, the life-cycle consists of five stages (production conception, design, product and process development, production, and logistics), on the other hand, when the product reaches the end-user (consumer perspective), the life-cycle consists of five stages (purchase, operating, support, maintenance, and Disposal) (Emblemsvag, 2003).

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The producer directly acquires the necessary raw materials, and workforce on the open market, transforms them into product, and introduces the product onto the market. By evaluating the costs of development, production, and distribution, and comparing them with the market value of the product, it is possible to accurately quantify its economic validity. Even more complex is the case where environmental performance becomes one of the factors in play, the environmental performance of a product must be evaluated over its entire life-cycle and is influenced by the interaction between the actors involved. The evaluation of economic efficiency from consumers view point is much more complex and subjective. In fact, it depends not only on the cost of the product on the market but also on the level of efficacy with which the product satisfies the needs that generated it. Clearly, this kind of value is subjective in that it cannot be measured by the market, but depends on the perceptions of the customer.

The most common economic models used in product design and development originated in relation to the first necessity, that of assessing the economic validity of a commodity during its definition and development; their primary aim is, therefore, to evaluate the production costs corresponding to different design alternatives (Dieter, 2000; Ulrich and Eppinger, 2000). These models are part of that approach to product analysis which, developed in relation to the interests of the manufacturer, generally stop at distribution without taking into consideration successive phases of the life cycle. In this case, the life cycle is understood as the set of phases consisting of development, production, and distribution, at most going so far as to consider product support services.

The assessment of product value as perceived by the consumer requires different models that are able to relate the functionality of a product with its cost, in a way that quantifies its capacity to meet the performance required per unit cost. This is the concept

13 at the base of value engineering, a customer-oriented approach to the whole design process formulated according to a view of the life cycle extended, of necessity, to include the phase of product use (Ullman, 2003)

2.3

Life-Cycle Costing (LCC)

The first extension of cost analysis beyond the production phase dates back to mid-1960s, when the term Life-Cycle Costing was first coined (LMI, 1965). In its original form, the analysis of life-cycle costs was heavily conditioned by the context in which it was developed, that of defense procurement (i.e., the planning and acquisition of large pieces of military equipment and material characterized by their great expense and particularly long useful life) (kinch, 1992). This area is particularly susceptible to the problem of establishing the right balance between the cost of acquisition and the cost of utilization, considering that the latter, consisting of operating and maintenance costs, is usually much greater than the former; Figure 2.3 explains this issue.

Under this stimulus, life cycle costing (LCC) become widely used to evaluate the advantage of developing and purchasing this particular type of material, which is expensive and must be kept at maximum efficiency for a long period. It was, therefore, understood as a technique for evaluating the comprehensive cost of a commodity i.e., the sum of cost of purchase) (procurement cost) and operation (ownership cost) (Dhillon, 1989), where the latter includes all the costs incurred during the useful life of the commodity itself.

14 In the mid-1970s the technique of LCC also known as Life Cycle Cost Analysis (LCCA), by then well-accepted in the field of military procurement, began to spread into the more general arena of industrial activity (Harvey, 1976). Thus the concept of product life-cycle began to take form also in the context of economic analysis, and it was immediately extended; the category of procurement cost was enlarged to include the phases of research and development, evaluation and choice of solutions, and product support. The category of ownership costs, in some cases, went so far as also include the cost of disposal.

Figure 2.3 Cost of acquisition and utilization.

Therefore, there was a maturation of a life-cycle thinking approach, understood as a decision-making framework that encompasses the identification of all the revenues and costs associated with a product or service as it moves time-wise through predictable stages and phases of evolution (shewchuk, 1992).

15 There is no exact definition that has been agreed upon for LCC, this is mainly due to different interpretations of what constitutes the life-cycle of the product; however, the concept of LCC can be comprehended from the following definitions ;

"The life cycle cost of an item is the sum of all funds expended in support of the item from its conception and fabrication through its operation to the end of its useful life, (White and Ostwald, 1976, pg. 39).

Further definition by several researchers states that life-cycle costs comprise all costs attributable to a product from conception to those customers incur throughout the life of the product, including the costs of installation, operation, support, maintenance and disposal (Shields and Young, 1991; Shank and Govindarajan, 1992; Artto, 1994; Barfield et al., 1994; Foster and Gupta, 1994).

Asiedu and Gu (1998), defined LCCA as a framework for specifying the estimated total incremental cost of developing, producing, using, and retiring a particular item. Another definition by Fabrycky and Blanchard (1991) States that Life cycles costing (LCC) or life cycle cost analyses (LCCA) are the methodologies used to evaluate all the costs associated with a product over its entire life cycle.

In light of the above definitions, Life Cycle Cost Analysis (LCCA) can be thought as a technique to establish the total cost of product or systems from early design until disposal. It is a structured approach which addresses all the elements of this cost and can be used to produce a spend profile of the product over its anticipated life-span. The results of an LCCA can be used to assist management in the decision-making process when there is a choice of product.

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2.4

Product Life-Cycle Cost Analysis

Many traditional product designers make their design decisions based on a products technical and functional features. From the designers point of view the most important criteria for products are quality, durability, performance and conformance with the customers specifications (Tomberg et al., 2002). Recently, additional criteria have become important in the decision-making process at the design stage; for example, most of the developed countries have set new legislations which are planned to require manufacturers to recover and recycle their products after its useful time.

Therefore, designers can substantially reduce the life-cycle cost of a product by giving due consideration to life-cycle implications of their design decisions. The estimation of the costs early in the design stage is important because they represent a competitive factor, a differentiation in selecting a product.

Studies reported by many researchers in design suggest that the design of the product influences between 70% and 85% of the total cost of a product Dowlatshahi (1992). This is because design decisions that are made prior to manufacturing implicitly define the majority of costs (Asiedu and Gu, 1998), as shown in Figure 2.4.

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Figure 2.4 Costs in Product life cycle stages

In this context, the economic competitiveness can only be achieved through the life-cycle approach, and only by including the costs of the entire life-cycle among the parameters of the design process it is possible to achieve an effective design for economic feasibility (Fabrycky and Blanchard, 1991).

2.5

Review of LCCA models

The choice of cost model for the calculation of costs is fundamental to the entire life cycle costing procedure. The model consists of a set of assumptions, rules, equations, constants, and variables defining the mechanism of the system of monetary flows to be

18 examined. Given the proliferation of models for LCCA developed with the objective of fully integrating cost analysis into product design, the literature contains complete studies that provide an overview of the state of the art as well as comparative information about characteristics and limitations of the various approaches (Asiedu and Gu, 1998; Kumaran et al., 2001).

Most LCCA models are structured along three general lines: conceptual, analytical, and heuristic (Kolarik, 1980; Gupta, 1983). Conceptual models consist of a set of hypothesized relationships expressed in a qualitative framework. They are generally very flexible, and can accommodate a wide range of systems. They require a minimum of details and require little ability to quantify a systems cost characteristics. Conceptual models are limited when they come to analyses (Kolarik, 1980).

Analytical models are usually based on mathematical relationships which are designed to describe a certain aspect of a system/product under certain conditions/assumptions. These assumptions tend to restrict or limit the models ability to reflect the actual systems performance. Heuristic models are ill-structured analytical models, usually employing an approach which produces a feasible and sufficient solution, but does not guarantee that the solution is optimal (Gupta, 1983).

Complete and general procedures for LCCA began to be introduced from the early 1990s (Greene and Shaw, 1990; Fabrycky and Blanchard, 1991). Over the past decade the development of LCCA models has continued, providing a wide variety of models, both a specific type (i.e., developed in relation to the need to evaluate the costs of specific systems) and those of a more general nature (Dhillon, 1989).

19 Some refer to particular fields of application e.g., the design of production systems (Dahlen and Bolmsjo, 1996; Westkamper and von der Osten-sacken, 1998). Others were developed to aid cost analysis expressly in the design phase, but taking into consideration specific activities of a products life-cycle such as manufacturing (Boothroyd, 1994), servicing (Gershenson and Ishii, 1993), purchasing and procurement (Woodward, 1997), or retirement (Navin-Chandra, 1993; Ishii et al., 1994).

A model based on activity-based costing by Dimache et al. (2007) combines both product and process aspects which are necessary for calculation. Finally the cost model is integrated as a module within the DFE (Design for Environment) workbench software tool. Alongside these models, an approximate LCCA method have been developed, an approximate model based on Artificial Neural Network (ANN) for cost estimating has been developed by Seo et al (2002).

Comparisons of the existing LCCA models conducted by Kumaran et al (2001) demonstrate that no one of the existing LCCA methodologies addresses the environmental costs of the environmental burdens caused by the product/service in its entire life cycle, in the calculation of the total cost of the product/service.

Table 2.1 illustrates this fact while main emphasis has been given to features that are related to eco-friendly design and manufacturing concept. The grades awarded in this comparison are defined on the basis of the description and efficacy of a feature in a particular model, and also the relative comparison with the same feature in the other models. Grade ``A or ``NA denotes the availability of any feature. The most efficient feature is awarded an ``E grade and an optimally efficient feature is awarded a ``G grade.

20 The allocation of grades purely reflects the authors own view on the basis of their review. More emphasis has been given to features that are related to eco-friendly design and manufacturing concept. The models reviewed are: (1) LCCA model of Fabrycky and Blanchard (1991); (2) LCCA model of Woodward (1997); (3) LCCA model of Dahlen and Bolmsjo (1996); (4) Activity-based costing (ABC) model (Bras and Emblemsvag, 1996); (5) Economic input-output LCA model (Cobas et al., 1996); (6) Design to cost model (Eversheim et al., 1998); (7) PLCCA to manufacturing system (WestkamperandOsten-Sacken, 1998); (8) Total cost assessment (TCA) model (PPRC, 1997). Guidance et al (2006) stated that none of the existing models has ever evolved to become or been accepted as a standard reference model, for a diverse reasons: Substantial differences in the nature of the problem motivating the analysis, Different typologies of products and system under analysis, and The existence of different systems of data collection. Work done by Zhang and Kendall (2001) shows that one of the significant barriers to using LCCA models is data gathering from organizations to meet requirements of a life cycle costing model. This results from a highly distributed heterogeneous environment with a huge number of information sources. When data-processing systems are distributed in various formats, manufacturers have to search them separately and manually integrate information from flat files, relational databases, and remote supplier parts catalogs. Due to the explosion in the amount of information, it is more complex for collectors to understand customer needs, develop a product to meet these needs, and bring that product to market quickly and at fair value.

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Table 2.1 Comparison of Life Cycle Cost Models

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2.6

Summary

This chapter explains the historical development of life-cycle cost analysis from its early use in the military applications to a more broader design approach. life-cycle cost analysis originated as an instrument for the assessment and reduction of costs in much broader contexts than that of product development. It has become a valid aid in the management of the activities of manufacturing companies and, more generally, of all the typologies of organizations that handle and transform resources. On the other hand, the importance of cost estimation and control during the design process with the aim of recasting the costs involved in the various phase of a products life-cycle is today an inescapable factor that must be taken into account in the development of an efficient product able to succeed in a highly competitive market.

Most of the LCCA models reviewed in literature were developed mainly for military applications and were not intended for use in the early stages of product development, while others were meant to solve specific problems. Literature also states that a wider implementation of the life cycle costing methodology is still being hampered by a lack of reliable information. Data on life cycle performance are often missing for many components and systems (data on maintenance, lifespan, replacement regimes, performance and time aspects of operation, etc.).

Therefore, the need to develop a life cycle cost analysis tool that will include all costs of product from conception until disposal was realized important. The tool which is simplified for different usages and demands is expected to help designers to reduce lifecycle cost of a product in the early stage of the product development.

CHAPTER 3

METHODOLOGY

3.1

Introduction

From the literature retrieved in Chapter 2, it is evident that the use of Life Cycle Cost Analysis in small and medium sized Enterprises (SMEs) is still insufficient. Hampered by lack of experts and user friendly tools. As a result, this research was conducted in attempt to increase this area of knowledge by developing a user-friendly tool to assist SMEs perform LCCA for their product/process decision-making.

The project execution flowchart is shown in Figure 3.1. The initial step was model development were all identifiable cost elements are addressed and existing models in literature were incorporated into single more detailed LCCA model. A case study was conducted to test model functionality and result is compared with the base system. After successful result have been achieved, the software development stage began using MS ExcelTM .

25 The Excel model developed is based on the cost elements developed in the analytical models retrieved from literature.

Figure 3.1 Project execution flowchart

26 The software is tested with the same data tested in the analytical model. When the software result were found to be similar with the analytical one, it was proven for use and further development.

A complete documentation of how to use the model and the type of data needed for the model input have been developed. Finally full report is submitted combining all the steps of project execution, discussions, and future improvement of the model.

3.2

General framework for LCCA

The methodological framework of LCCA has evolved from simpler forms (such as those developed for military systems) to more general forms. The advantage of the former is that they are relatively inexpensive and rapid to use, but they are not adequate for the development of radically new systems (Dhillon, 1989). Selecting a proper framework is essential for the determination of the total cost of a product, pertaining to its entire life cycle.

LCCA may be accomplished in addressing a wide variety of problems at different stages of the product-life cycle. In any event, the accomplishment of LCCA is iterative, ongoing, and must be tailored to the specific application. Regardless of the application, however, there are a series of general steps that are usually followed , even though the depth of coverage will vary.

27 Figure 3.2 shows LCCA framework inspired by the proposals made in more general terms by authors (Fabrycky and Blanchard, 1991).

28

3.3

Preliminary Definitions

The preliminary definition is the first phase of LCCA. It includes the definition of the problem necessitating the application of LCCA, identification of the possible alternatives to be analyzed, and the development of the structure for allocating the costs (cost breakdown structure - CBS).

3.3.1

Definition of the Problem

The initial step constitutes the clarification of objectives, defining the issues of concern, and bounding the problem such that it can be studied in an efficient and timely manner. The detailed definition of the problem is necessary for the analysis to be structured correctly, which requires a clear identification of the subject of the analysis itself.

In essence, there may be a requirement for a life-cycle cost analysis in evaluating alternative technologies as part of feasibility study leading to a system design approach, alternative manufacturing approaches, alternative distribution and transportation methods, operation and utilization scenarios, servicing and maintenance strategies, different production approaches, etc.). The analyst needs to define the problem, and describe the approach to be followed in resolving the problem.

29

3.3.2

Identification of Feasible Alternatives

Critical in the accomplishment of any LCCA is the identification of feasible alternatives and the projection of each selected alternative in the context of the entire life cycle. The point to be made here is that life cycle cost (and not R & D cost or production cost only) constitutes the evaluation criterion for selecting a preferred approach. Each decision has life-cycle cost implications. For instance; an equipment packaging configuration will directly effect the test equipment and spare parts required for the follow-on sustaining support of that equipment; product reliability will effect both production requirements and maintenance and logistics support policies; production utilization will effect design requirements; and so on.

3.3.3

Development of Cost Breakdown Structure - (CBS)

Given the definition of alternative configurations and of the activities associated with them, a structure of cost allocation and collection is developed, which must allow the classification of the different cost typologies, relating them to the main life cycle activities. There is no set method for breaking down cost as long as the method used can be tailored to the specific application. The depth of composition of the Cost Breakdown Structure (CBS) depends on the purpose of the analysis to be performed. Is essential in performing LCCA, and is intended to aid in providing overall cost visibility. The cost categories will vary somewhat in terms of depth of coverage, depending on the type of system being evaluated. However, it is important that all identifiable cost be addressed in the CBS.

30 It is often difficult to determine the method by which the costs are derived for the various categories. One should not only know what specific cost segments are included, but how each factor is handled and the relationships between the various costs in any given category.

3.4

Cost Valuation

The criteria employed in the evaluation process may vary considerably depending on the stated problem. The choice of calculation method and model is one of the key steps in the whole procedure, since models that are not adequate for the purposes of the investigation may be insensitive to the problem set as the objective. The cost estimation must be made in strict relationship with cost breakdown structure and cost estimating relationships.

Finally, the development of cost profiles is determinant in the comparison of the various alternatives under consideration, since they quantify the influence of the alternative over the entire life-cycle through future cost projections.

3.4.1

Selection of Cost Model

After defining the cost breakdown structure, it is necessary to develop a model (or series of models) to facilitate the life-cycle economic evaluation process.

31 The model may be a simple series of parameter relationships or a complex set of computer subroutines, depending on the phases of the system life-cycle in which the model is used and the nature of the problem at hand.

3.4.2

Development of Cost Estimates

A cost estimate is an opinion based on analysis and judgment of the cost of the product, system, or structure. This opinion may be arrived at in either a formal or an informal manner by several methods, all of which assume that experience is a good basis for predicting the future. In many cases, the relationship between past experience and future outcome is fairly direct and obvious; in other cases it is unclear, because the proposed product or system differs in some significant way from its predecessors.

The techniques used for cost estimating range from intuition at one extreme to detailed mathematical analysis at the other (Fabrycky and Blanchard, 1991).

3.4.3

Development of Cost profiles

With the product life cycle defined and cost estimating approaches established, it is now appropriate to develop a cost profile (or cost projection) illustrating the distribution of costs over the life cycle. In developing cost profile, there are different approaches that may be followed.

32

The following are suggested by (Fabrycky and Blanchard, 1991): 1. 2. 3. Identify all activities throughout the life cycle that will generate costs of one type or another. Relate each activity identified in step 1 to a specific cost category the cost breakdown structure (CBS). Establish the appropriate cost factors in constant dollars for each activity in the CBS, where constant dollars reflect the general purchasing power of constant dollars that will allow for a direct comparison of activity levels for year to year prior to the introduction of inflationary cost factors, changes in price levels, economic effects of contractual agreements with suppliers, and so on, which often cause some confusion in the evaluation of alternatives. 4. Within each cost category in the CBS, the individual cost elements are projected into the future on a year-to-year basis over the life cycle as applicable. The result should be a cost stream in constant dollars for the activities that are included. 5. For each cost category in the CBS, and for each applicable year in the life cycle, introduce the appropriate inflationary factors, economic effect of learning curves, changes in price levels, time value of and so on. The modified values constitute a new cost stream and reflect realistic costs as they are anticipated for each year of the life cycle. 6. Summarize the individual cost streams by major categories in the CBS and develop a top-level cost profile. Referring to step 5, a typical profile might be presented in three different ways to include; a) A discounted profile, using the time value of money concepts for the comparison of two or more alternatives on an equivalent basis.

33 b) A budgetary profile using constant dollars to allow for the evaluation of a single profile on year-to-year basis in terms of todays dollars; and c) A budgetary profile using inflationary factors, effects of learning curves, and so on, to allow for the evaluation of a single profile in terms of possible resource or budgetary constraint. While the economic analysis effort requires the time value of money considerations, a manager will often want to look at a profile presented in budgetary terms prior to making a decision in selecting a specific alternative.

3.5

Result Analysis

This phase covers the procedures of analyzing the result (sensitivity analysis), and identifies the most influential cost factor (high cost contributors).

The result of cost estimating phase must be evaluated in different ways. For example; by identifying the main cost factors, it is possible to reveal the criticalities of each alternative, indicating which factors may be modified to improve the overall economic performance.

34

3.5.1

Identification of High Cost Contributors

Given the results of LCCA, the analyst may wish to identify those areas of potential risk and where possible improvement can be introduced with the objective of reducing the overall life-cycle cost. In other words, the analyst can review the initial results of the analysis, identify the high cost areas determine possible causes, and make recommendations for improvement leading to a lower overall life-cycle cost. This process can be facilitated through an understanding of the input factors to the cost categories in the CBS used in the analysis, as can be seen by reviewing the cost estimating models in chapter 4.

3.5.2

Accomplishment of sensitivity analysis

When completing LCCA, there may be a few key parameters about which the analyst is very uncertain due to inadequate input data, initial assumptions, pushing the state-of-art, or any combination of factors. These basic questions are how sensitive are the results of analysis to variations of these uncertain parameters? Will these variation ends to justify the selection of an alternative configuration not currently being considered? How much variation of a given parameter is required to shift the decision from selecting alternative A in lieu of alternative B?.

In accomplishing a sensitivity analysis, the analyst may wish to employ the model using a baseline system configuration, and then return the model while varying different key input parameters to determine the impact on the results.

35

The sensitivity analysis can be extremely beneficial to the decision maker, and often conveys more information than any other single aspect of the overall life cycle cost analysis process. The analyst can readily identify cause and effect relationships, is able to predict trends, and is better prepared to respond to the what if questions.

3.6

Decision Making

The LCCA process concludes with the decision-making-process, choosing the alternatives considered best, and defining the principle recommendation and actions for improvement.

3.7 Summary

This chapter explains the methodology of this project and the formal procedure of performing LCCA . LCCA can be accomplished during conceptual design when limited input data are available and, of course, it can be accomplished later during detailed design and development when the system configuration is fairly well defined. In any event, the accomplishment of LCCA is iterative, ongoing, and must be tailored to the specific application. Regardless of the applications, however, there are a series of general steps that are usually followed, even though the depth of coverage may vary.

36 Accomplishing LCCA incorporates the steps described in Figure 3.2. The problem necessitating the LCCA application must be well defined; followed by the identification of all feasible alternatives; develop Cost Breakdown Structure (CBS) of each alternative to be evaluated; estimate cost ( the cost estimation must be made in strict relationship with cost breakdown structure); to evaluate each alternative cost profiles must be developed for each alternative; identify high cost contributor, perform sensitivity analysis of the high cost contributors and see the effect of its variation to the total lifecycle cost, and finally recommend the preferred approach based on the outcome of the LCCA.

CHAPTER 4

MODEL DEVELOPMENT

4.1

LCCA Model

In addressing the depth analysis approach with the desired model design features in mind, experience indicates that a series of models (or single model with a series of sub-routines) is required (Woodward, 1978). LCCA itself constitutes a compilation of a variety of cost factors representing many different types of activities. This point is illustrated further in Figure 4.1, where the general life-cycle cost model is divided in to four sub-models. The summation of these models will give the total life-cycle cost of a product.

For the purpose of this research, we adopted the analytical models developed in a more general terms by Fabrycky and Blanchard (1991) to our life-cycle cost model. The model is characterized by the following phases;

38 1. Research and development cost 2. Production and construction model 3. Operation and maintenance model 4. Retirement and disposal model

4.2

Cost breakdown structure - CBS

In accomplishment of a LCCA, one needs to develop a cost breakdown structure (CBS), or cost tree, to facilitate the initial allocation of costs (top-down) and the subsequent collection of costs on a functional basis (bottom-up). The CBS shown in Figure 4.2 represent the various elements of cost that when combined, represent total lifecycle cost.

39 The categories identified indicate cost collection points which can be summarized upward into broader categories and/or can be collected for different program functions or system elements.

The intent is to incorporate a high degree of flexibility in order to provide the necessary visibility for cost allocation, cost measurement, and cost control. This CBS can be applied to a variety of programs; however, the depth of coverage may vary from program to program depending on the type of system being evaluated. Detailed descriptions of each cost category are mathematically modeled in the following sections.

40

41

4.3

Cost Estimating

Cost estimates is based on determining the functional relationships between cost variations and the factors on which these depend (product characteristics). These relationships are expressed using mathematical functions primarily obtained through the statistical evaluation of previous design experiences; they allow the evaluation of the costs of the product or activity associated with various important parameters expressing measurable attributes.

Analytical method is more appropriate for an LCCA at the stage of product concept development and makes it possible to directly relate technical and economical parameters.

4.3.1

Total Product Cost (TC)

This includes all future life-cycle costs associated with the research and development, production and construction, operation and maintenance, and retirement of the system or product. The cost breakdown structure of each cost category is illustrated in figure 4.2. Mathematically, TC = [CR+ CP + CO + CD] (1)

42 Where, CR = Research and development cost CP = Production and construction cost CO = Operation and maintenance cost CD = Retirement and disposal cost.

4.3.1.1

Research and Development Cost - CR

Includes all costs associated with product management, product planning, product research, engineering design, design documentation, product software, and product test and evaluation. These costs are basically nonrecurring. Or, CR [CRM + CRP + CRR + CRE + CRD + CRS + CRT] (2)

I. Product life cycle management cost - CRM

Cost of all management activities throughout the product life cycle applicable to product planning, product research, product design, production/construction, test and evaluation, operation and logistics support, and product retirement. Or, CRM
CRMi

CRMi
i =1

= cost of specific activity i

43 N = number of activities.

II. Product planning cost - CRP

Covers preliminary and detailed market analysis, feasibility studies, development of operational and program proposals, development of program plans and specifications, development of financial plans, etc.
Or,
N

CRP CRPi N

CRPi
i =1

= cost of specific planning activity i = number of activities.

III. Product research cost CRR

Includes all costs associated with applied research, test models, and research laboratory support (i.e., manpower, materials, and facilities). Or, CRR CRRi N =

CRRi
i =1

= cost of specific research activity i = number of activities

44 IV. Engineering design cost - CRE

This includes all conceptual design, preliminary design, and detailed design effort associated with the development and/or modification of a system, process, or product. Specific areas include systems engineering; design engineering (electrical, mechanical, structural, chemical, layout and drafting); reliability and maintainability engineering; human factors and safety; functional analysis and allocation; logistics support analysis; components engineering; producibility; and so on. Also, this category covers design support (e.g., computer-aided design capability, procurement activities, etc.) and formal design review functions. Or, CRE CRE N =

CREi
i =1

= cost of specific design activity i = number of activities

V. Design documentation cost CRD

This category covers the cost of preparation printing, publication, distribution, and storage of all data and documentation associated with CRR, CRD, and CRT. Specific elements include R and D reports; design data (drawings, parts list, specifications, layouts); Analysis; test plans, test procedures, and reports; preliminary operational, installation and maintenance procedures; and design-related supporting documentation. Program proposals and plans are included in CRP. Or, CRD CRDi =

CRDi
i =1

= cost of data item i

45 N = number of data items

VI. Product software cost - CRS

All initial development (requirements, procedures, layout, logic flows, etc), modification, and production of software are included in this category. This covers both recurring and nonrecurring costs. Or, CRS Where, CRSD CRSP = software development = software production CRSM = software modification = [CRSD+ CRSM + CRSP]

VII. System test and evaluation cost CRT

This category includes fabrication, assembly, tests and evaluation of engineering breadboards, engineering models and pre-production prototype models (in support of product designCRE). Specifically, this constitutes fabrication and assembly of hardware and software; material procurement and handling; instrumentation; quality control and inspection; logistics support (personnel, training, supply support, test and support equipment, facilities, etc); data collection and analysis and evaluation plans, procedures, and reports are included in CRD. Recurring production tests are included in CP. Or,

46

CRT Where,

= [CRTA*NRT + CRTB*NRT + CRTT i ]

i =1

CRTA = cost of engineering model fabrication and assembly labor CRTB NRT N = cost of engineering model material = Number of engineering models = number of identifiable tests CRTTi = cost of test operations and support associated with specific test i

4.3.1.2

Production and Construction Cost - CP

This category includes all recurring and nonrecurring costs associated with industrial engineering, product manufacturing, construction of new facilities, and initial logistics support. CP = [CPI + CPM + CPC + CPQ + CPL] . (3)

I. Industrial engineering and operations analysis cost - CPI

Includes all recurring and nonrecurring costs associated with the initial engineering and sustaining engineering functions of manufacturing and construction. Specifically, this constitutes: (1) plant engineering (e.g., design of production and storage facilities, utility requirements, capital equipment needs, material handling provisions, etc); (2) manufacturing engineering (e.g., make or buy decisions, process design, design

47 of special tools/fixtures/test equipment, man-machine functions, etc.); (3) methods engineering (e.g., work methods, job skill requirements, standards, design of subassembly and assembly operations, etc.);(4) Production control operations (e.g., production lot quantities and batch sizes, economic order quantities and inventory levels, work-order [processing and assignment); and (5) sustaining engineering support throughout the production/construction phase. Or, CPI Where, CPIP CPIM CPIE CPIC CPIS = Cost of plant engineering = Cost of manufacturing engineering = Cost of methods engineering = Cost of production control = Cost of sustaining engineering = [CPIP + CPIM + CPIE + CPIC + CPIS]

II. Manufacturing cost CPM

This can be further categorized as; (1) Recurring manufacturing cost fabrication and assembly labor cost, material and inventory cost, inspection and test cost, product rework cost (as required), packing and initial transportation cost, and direct engineering support cost. (2) Nonrecurring manufacturing cost labor and material costs associated with the installation and support of factory tools, fixtures, and test equipment. Design costs are included in CPIM. Or, CPM Where, CPMR = Recurring manufacturing cost = [CPMR + CPMN]

48 CPMN = Non recurring manufacturing cost

III. Construction cost - CPC

This category covers: (1) Manufacturing facilities which support the functions described in CPI and CPM initial acquisition and sustaining maintenance costs are included herein. (2) Special test facilities necessary to cover unique and peculiar test and evaluation requirements (above and beyond available facilities for engineering and manufacturing test as covered in CRT and CPM). Initial acquisition and sustaining maintenance costs are included herein. (3) Special facilities required for the day-to-day operation of large systems/products by the consumer or user. Acquisition costs are included herein and sustaining costs are covered in COOF. (4) Special facilities required for the sustaining support of maintenance need of the system throughout its programmed life cycle (e.g., repair, rework, periodic calibration, overhaul, modification, etc.). Recurring sustaining costs are covered in COLM. (5) Special facilities required for training consumer or user personnel in the operation and maintenance of the system/product (e.g., large simulator). Sustaining costs are covered in COOT and COLT. Special warehousing required for system/product storage and distribution. Sustaining costs are covered in COLW. Or, CPC CPCP CPCE = [CPCP + CPCE + CPCC + CPCM+ CPCT + CPCW] = Cost of manufacturing facilities = cost of special cost facilities

49 CPCC CPCT = acquisition cost of consumer facilities (system operations) = acquisition cost of training facilities

CPCM = acquisition cost of maintenance facilities CPCW = acquisition cost of inventory warehouses

IV. Quality Control Cost - CPQ

CPQ Where,

= [CPAQ +

CPQC + CPQS ]
i =1 i =1

CPQA = Quality assurance cost CPQC = Cost of qualification CPQS = Cost of production sampling test i

V. Initial logistic support cost - CPL

CPL = [CPLC + CPLS + CPLT + CPLH + CPLD + CPLP + CPLE]

Where,

CPLC = initial customer service cost CPLS = initial supply support cost CPLT = initial test and support equipment cost CPLH = initial transportation and handling cost CPLD = initial technical data cost CPLP = initial training cost CPLE = initial training equipment cost

50

4.3.1.3

Operation and support cost - CO

This category includes all costs associated with product distribution, product operational use (by the consumer), and the sustaining life cycle logistics support of the product in the field. Or, CO = [COO + COD + COL] . (4)

I.

Product operation cost COO

COO Where,

= [COOP + COOT + COOF]

COOP = operating or user personnel cost COOT = cost of operation training COOF = cost of operational facilities

i.

Operating or user personnel cost - COOP

COOP = (COPP) (QOP) (TO) (NOP) * (% Allocation)

Where,

COPP = cost of operator labor QOP = quantity of operators per system TO = hours of system operation

51

NOP = number of operating system

ii.

Operator training cost - COOT

COOT = [(COTT) (QOT) (TT) + (COTS) * (% Allocation)]

Where,

COTT QOT TT COTS

= cost of operator training ($/student-week) = quantity of student operators = Duration of training (weeks) = cost of training equipment and facility support

iii.

Operational facilities cost (COOF)

COOF = [(COFS + COFU) (NOF) * (% Allocation)] Where, COFS = cost of operational facility support ($/site) COFU = cost of utilities ($/site) NOF = number of operational sites

II.

Product distribution cost - COD

COD = [CODM + CODT + CODI] Where,

52 CODM = cost marketing and sales CODT = cost of transportation and traffic management CODI = cost of inventory in warehouses

III.

Sustaining logistic support COL

COL = [COLC + COLW + COLM + COLS + COLT + COLE + COLN + COLD + COLK] Customer service cost COLC COLC = COLA + COLB Where, COLA = cost of unscheduled or corrective maintenance COLB = cost of scheduled or preventive maintenance

i.

Corrective maintenance cost COLA

COLA = [(COUL) (MMHU) (QMAU) + (QMAU) (COUM) + (QMAU) * (COUD)] (NMS)

Where, COUL = unscheduled maintenance labor cost ($/MMHU) MMHU = unscheduled maintenance man-hours per maintenance action QMAU = quantity of unscheduled maintenance actions QMAU = (TO) () COUM = cost of material handling per unscheduled maintenance action COUD = cost of documentation per unscheduled maintenance action NMS TO =number of maintenance sites = hours of system operation

53 = product failure rate in failures/hour

ii.

Preventive maintenance cost - COLB

COLB = [(COSL) (MMHS) (QMAS) + (QMAS) * (COSM) + (QMAS) (COSD)] (NMS) Where, COSL = scheduled maintenance labor cost ($/MMSH) MMHS = scheduled maintenance man-hours per maintenance action QMAS = quantity of scheduled maintenance actions. COSM = cost of material handling per scheduled maintenance action COSD = cost of documentation per scheduled maintenance action NMS = number of maintenance sites

iii.

Warehouse facilities cost COLW

COLW = [(COWS) + (COWU) (NOW)] (% Allocation) Where, COWS = cost of warehouse facility support ($/warehouse) COWU = cost of utilities ($/warehouse) NOW iv. = number of warehouses

Maintenance facilities and training facilities cost COLM

COLM = (COMM) (NOM) + (COMT) (NOT) * (% Allocation) Where, COMM = cost of maintenance facility support

54 NOM NOT = number of maintenance facilities = number of maintenance training facilities

COMT = cost of training facility support

v.

Supply support cost COLS

COLS = [COSO + COSI + COSD + COSS + COSC] Where, COSO = cost of spare/repair parts at organizational level COSI COSS COSC COSO = = cost of spare/repair parts at intermediate level =cost of spare/repair parts at supplier = cost of consumables [(CA) (QA) + COSD =cost of spare/repair parts at depot level

NMS

(CMi) (QMi) +

i =1

(CHi) (QHi)]

Where, CA QA CMi QMi CHi QHi = average cost of material purchase order ($/order) = quantity order ($/order) = cost of spare part i = quantity of i items demanded = cost of maintaining spare item i in the inventory ($/$ value of the inventory) = quantity of i items in the inventory NMS = number of maintenance sites. COSI, COSD, COSS, and COSC are determined in a similar manner.

55

vi.

Maintenance personnel training cost COLT

COLT = (COTM) (QOM) (TT) + (COLL) (% Allocation) Where, COTM = cost of maintenance training ($/student week) QOM TT COLL = quantity of maintenance students = direction of training (weeks) = cost of training equipment support

vii.

Test and support equipment cost - COLE

COLE = [COEO + COEI + COED] Where, COEO = cost of maintenance of the test and support equipment at organizational level. COEI = cost of maintenance of the test and support equipment at intermediate level COED = cost of maintenance of the test and support equipment at dept and supplier level. COEO = [COEU + COES] COEU = cost of equipment unscheduled maintenance COES = cost of maintenance of the test and support equipment at depot and supplier level COEI and COED are derived in a similar manner.

viii.

Transportation and handling cost COLH

COLH = [(CT) (QT) + (CS) (QT) + CX]

56 Where, CT QT CS CX = cost of transportation = quantity of on-way shipments = cost of packing = cost of transportation and handling equipment maintenance

CT = [(W) (CTC)] W= weight of item kg - will vary depending on whether reusable containers are employed. CTC = shipping cost $/kg will vary with the distance in kilometers of one-way shipment. CS = (W) (CSC) CSC = packing cost ($ /kg) will vary depending on whether reusable containers are employed. x. Technical data cost COLD

COLD = Where,

i =1

COLDi

COLDi = cost of specific data item i N xi. = number of data items Product modifications - COLK

COLK =

i =1

COLKi

57 Where, COLKi = cost of specific modifications i N = number of product modifications.

4.3.1.4

Retirement and Disposal Cost - CD

Retirement and disposal costs consist of the following categories, CD = [CDC + CDA + CDR + CDE + CDS + CDD] .. (4)

Where, CDC CDA CDM CDR CDS CDD = cost of product collection = cost of product disassembly = cost of remanufacturing = cost of recycling = cost of disposal = cost of documentation

I.

Cost of Collection CDC Cost of collection includes all costs associated with the collection of the product

after its useful life.

58 II. Cost of Disassembly CDA The product is taken apart without destroying any parts or components. Some products may undergo only this process, which occurs if the reusable parts are sold (the product loop is closed) whereas the rest is recycled

III.

Cost of Remanufacture CDM This category covers costs related to remanufacturing of the product. This is an

industrial process that restores worn products to like-new condition. A retired product is first completely disassembled, and its usable parts are then cleaned, refurbished, and put into inventory. Finally, a new product is reassembled from both old and new parts, relating a unit equal in performance to the original or a currently available alternative. In contrast, a repaired or rebuilt product usually retains its identity, and only those parts that have failed or are badly worn are replaced. Remanufacturing is therefore a systematic way of closing the product loop.

IV.

Cost of Recycling CDR As name implies, this includes all costs associated with the recycling of the

product. In this process, material is reprocessed into new raw material. This is the same as closing the material loop. Recycling is perhaps the most common strategy to closing the materials loop, but is the least effective one in the sense that it is the most wasteful strategy (except disposal)

59 V. Cost of Disposal CDS All cost associated with disposal are listed under this category. The last resort of the product is the disposal, which ideally should not happen at all. In fact, countries like America, a lot of resources are transformed into nonproductive solids and gases. VI. Cost of documentation CDD This category covers the cost associated with the documentation and recording of all costs under retirement and disposal cost, this covers CDC, CDM, CDR, CDA and CRS.

60

4.4

Software Development

In order to make the model easy for use, a simple ExcelTM software have been developed that will facilitate the analyst job when performing LCCA. The software contains input data collection sheets and alternative evaluation worksheet. How to use the model is explained in the outline worksheet.

4.4.1

Model Input

In general, the Excel model uses the following inputs; Input data Estimated costs Assumptions Parameters discount rate useful life/ analysis period

Cost inputs typical of those generated by the functional departments such as (research and development, production and construction, operation and maintenance, retirement and disposal). Assumption can be made based on the cost estimates and relevant to the problem at hand.

61

Discount rate refers to the rate of change of true value of money over time, considering fluctuations in both investment interest rates and the rate of inflation. Individual cost projections for each alternative must be discounted to the present value. LCCA is done using the basic multi-year discounting formula:

PV =
where ,

1 0 (1 + r ) t t=
N

Cost

PV = present value at time zero (base year) r t = discount rate = time (number of year)

Cost = equals the cost in year t

Analysis period refers to time frame that is sufficiently long to reflect differences among different strategy alternatives. It is necessary to select an analysis period over which the alternatives are compared.

The CBS assumed for the purpose of this study is presented in Table 4.1 (also refer to Figure 4.2). Although not all cost categories may be relevant or significant in terms of the magnitude of cost as a function of total life-cycle cost, this CBS does serve as a good starting point. Initially, all costs must be considered, with the subsequent objective of concentrating on those cost categories reflecting the high contributors. In the previous section, the cost estimating relationships of the CBS have been developed in more details.

62

Table 4.1 Cost Breakdown Structure Each product/system alternative should be calculated the same way using this table

Cost Category*
Research & Development Cost - CR 1. Product Management 2. Product Planning 3. Product Research 4. Design Documentation 5. Product Software 6. Engineering Design 7. Product Test & Evaluation Subtotal Production & Construction Cost - Cp 1. Industrial Engineering and Operation Analysis Cost 2. Manufacturing cost 3. Construction cost 4. Quality Control Cost 5. Initial logistic support cost Subtotal Operation & Maintenance Cost - Co 1. Product operation cost 2. Operator training cost 3. Operational facilities cost 4. Operating or user personnel cost 5. Product distribution cost 7. Preventive maintenance cost 10. Maintenance personnel training cost 11. Test and support equipment cost 12. Transportation and handling cost Subtotal Retirement & Disposal Cost -CD 1.Cost of Collection 2.Cost of Disassembly 3.Cost of Remanufacture 4.Cost of Recycling 5.Cost of Disposal 6.Cost of documentation Subtotal

Category
CRM CRP CRR CRD CRS CRE CRT

Cost by Program Year** 1 2

Total Cost $

CPI CPM CPC CPQ CPL

COO COOT COOF COOP COD COLB COLT COLE COLH

CDC CDA CDM CDR CDS CDD

Grand total
* Depends on your product cost categories ** Depends on Product Life Cycle Years

63

4.4.2

Evaluation of Alternatives

With the product CBS defined and cost estimating approaches established, it is appropriate to apply the resultant data to the product life cycle using Table 4.2. When evaluating two or more alternatives on a relative basis, the individual cost projections for each alternative must be discounted to the present value.

TABLE 4.2 EVALUATION OF ALTERNATIVES Each alternative Present cost should be calculated the same way using this table Cost

Product Activity*
Research and development Production and construction Operation and support Retirement and disposal Total actual cost Discount Factor Total present value cost Cumulative Product Cost

Category

Cost by Program Year**

1 2 3

Total Actual Cost

CR CP Co CD

TC % PV PC

* Depends on your product cost categories ** Depends on Product Life Cycle Years

4.4.3

High Cost Contributors

Given the results of LCCA, the analyst may wish to identify those areas of potential risk and where possible improvement can be introduced with the objective of

64 reducing the overall life-cycle cost. this process can be facilitated through an understand of the input factors to the cost categories in the CBS used in the analysis.

4.4.4

Sensitivity Analysis

The analyst should select the high cost contributors (those which contribute more than 10% of the total cost); determine the cause and effect relationships; and identify the various input data factors that directly impact cost. The model has a built in sensitivity analysis, where iterative process is used to change one variable at a time while holding the rest constant.

4.4.5

Application of LCCA Model In Automotive Industry

Relative to applications in the system or product life cycle, a problem oriented example where life cycle cost analysis is appropriate to support decision making process for automotive manufacturers is noted. Specifically, life cycle cost analysis should be employed in the evaluation of, a) Alternative system/product operational, utilization, and environmental profiles. b) Alternative system maintenance concepts and logistics support policies c) Alternative product design configurations, such as Design for (Recycling, Reuse, & Remanufacturing )

65 d) Alternative material selection, such as ( steel or aluminum) in a car body. e) Alternative procurement sources and the selection of a supplier for a given item f) Alternative production approaches. g) Alternative product distribution channels. h) Alternative product disposal and recycling methods and so on.

A typical example of the CBS comparing two different design configurations with their percentage of cost contribution of an automotive component design is presented in Table 4.3. The life-cycle of the system is assumed to be 13 years.

Table 4.3 Cost Breakdown Structure of The Two Configurations Design "A" Cost Category
Research & Development Cost CR 1. Product Management CRM 573,392.0 10.8 533,091.0 9.3

% of Total

Design "B" % of Total Cost $

Category Cost $

2. Product Planning 3. Product Research

CRP CRR

92,748.0

1.7

87,345.0

1.5

4. Design Documentation 5. Product Software

CRD CRS

106,841.0

2.0

174,587.0

3.0

6. Engineering Design

CRE

532,959.0

10.0

466,133.0

8.1

7. Product Test & Evaluation

CRT

132,614.0

2.5

136,398.0

2.4

Subtotal Production & Construction Cost Cp

1,438,554.0

27.1

1,397,554.0

24.4

66

1.

Industrial

Engineering

and CPI 136,847.0 2.6 121,786.0 2.1

Operation Analysis Cost

2. Manufacturing cost

CPM

1,301,796.0

24.5

1,398,080.0

24.4

3. Construction cost

CPC

195,954.0

3.7

210,876.0

3.7

4. Quality Control Cost

CPQ

153,527.0

2.9

149,989.0

2.6

5. Initial logistic support cost

CPL

437,185.0

8.2

434,578.0

7.6

Subtotal Operation & Maintenance Cost Co 1. Product operation 2. Operator training 3. Operational facilities COO COOT COOF

2,225,309.0

41.9

2,315,309.0

40.4

4. Operating or user personnel

COOP

52,092.0

1.0

50,191.0

0.9

5. Product distribution 6. Sustaining logistic support

COD COL

549,170.0

10.3

620,098.0

10.8

7. Preventive maintenance

COLB

268,653.0

5.1

378,453.0

6.6

8. Supply support 9. Warehouse facilities 10. Maintenance personnel

COLS COLW

616,532.0

11.6

776,908.0

13.6

training

COLT

18,898.0

0.4

27,986.0

0.5

11. Test and support equipment

COLE

74,674.0

1.4

74,146.0

1.3

12. Transportation and handling

COLH

11,150.0

0.2

15,487.0

0.3

Subtotal Retirement & Disposal Cost -CD

1,591,169.0

29.9

1,943,269.0

33.9

1.Cost of Collection

CDC

8,000.0

0.2

8,000.0

0.1

2.Cost of Disassembly

CDA

15,000.0

0.3

18,000.0

0.3

3.Cost of Remanufacture

CDM

17,000.0

0.3

26,000.0

0.5

67

4.Cost of Recycling

CDR

11,000.0

0.2

15,000.0

0.3

5.Cost of Disposal

CDS

4,000.0

0.1

4,000.0

0.1

6.Cost of documentation

CDD

5,000.0

0.1

5,000.0

0.1

Subtotal

60,000.0

1.1

76,000.0

1.3

Grand total

5,315,032.0 100.0

5,732,132.0

100.0

4.4.5.1

Cost contribution

Figure 4.3 reflects the output of Table 4.3 above, where constant dollar estimates are summarized under the major cost categories in the CBS. A comparison of costs in design A and B can be made in terms of the percent contribution of each major category to the total.

(a)

(b)
Figure 4.3 Percentage of cost contribution

68

4.4.5.2

Evaluation of the two alternatives

The two design configuration A & B in Table 4.4 discounted to 10 % are presented in Table 2. Present value calculations can be simplified using standard interest tables in appendix A and by multiplying the future sum by the appropriate factor.

TABLE-

4.4

EVALUATION

OF

ALTERNATIVES Each alternative Present cost

should be calculated the same way using this table Cost Product Activity* Category Design A
Research and development CR 434,294.00 408,019.00 596,241.00

Cost by Program Year** (US$ Dollars) 1 2 3 4 5

Production and construction

CP

217,348.00

680,254.00

678,386.00

649,321.00

Operation and support Retirement and disposal

Co CD

62,888.00

138,383.00

160,827.00

Total actual cost

TC

434,294.00

625,367.00

1,339,383.00

816,769.00

810,148.00

Discount Factor

10%

0.91

0.83

0.75

0.68

0.62

Total present cost

PV

394,812.73

516,832.23

1,006,298.27

557,864.22

503,038.17

Cumulative Product Cost Design B Research and development

PC

394,812.73

911,644.96

1,917,943.23

2,475,807.45

2,978,845.62

CR

404,294.00

497,019.00

496,241.00

Production and construction

CP

297,348.00

650,254.00

698,386.00

669,321.00

Operation and support Retirement and disposal

Co CD

82,888.00

148,383.00

190,827.00

Total actual cost

404,294.00

794,367.00

1,229,383.00

846,769.00

860,148.00

69

Discount Factor

10%

0.91

0.83

0.75

0.68

0.62

Total present cost

PV

367,540.00

656,501.65

923,653.64

578,354.62

534,084.23

Cumulative Product Cost

PC

367,540.00

1,024,041.65

1,947,695.30

2,526,049.92

3,060,134.15

Continued ..
Total Actual Cost ($) 6 7 8 9 10 11 12 13

1,438,554.00

2,225,309.00

170,870.00

190,916.00

223,985.00

247,206.00

131,575.00

137,144.00

120,384.00

6,991.00

1,591,169.00

60,000.00

60,000.00

170,870.00

190,916.00

223,985.00

247,206.00

131,575.00

137,144.00

120,384.00

66,991.00

5,315,032.00

0.56

0.51

0.47

0.42

0.39

0.35

0.32

0.29

96,451.66

97,970.10

104,490.66

104,839.48

50,727.86

48,068.14

38,358.05

19,404.91

3,539,156.46

3,075,297.28

3,173,267.37

3,277,758.03

3,382,597.50

3,433,325.36

3,481,393.50

3,519,751.55

3,539,156.46

35,166,788.29

1,397,554.00

2,315,309.00

209,870.00

230,916.00

253,985.00

287,206.00

191,575.00

177,144.00

160,384.00

10,091.00

1,943,269.00

76,000.00

76,000.00

209,870.00

230,916.00

253,985.00

287,206.00

191,575.00

177,144.00

160,384.00

86,091.00

5,732,132.00

70
0.56 0.51 0.47 0.42 0.39 0.35 0.32 0.29

118,466.14

118,496.42

118,485.88

121,803.38

73,860.46

62,087.89

51,103.29

24,937.50

3,749,375.10

3,178,600.30

3,297,096.72

3,415,582.59

3,537,385.97

3,611,246.43

3,673,334.32

3,724,437.60

3,749,375.10

37,112,520.05

4.4.5.3

Cost Profiles

The profiles in Figure 4.4 represents the cost streams of different activities of the two designs projected over the life cycle years. This is a budgetary estimate covering future resource needs of design configurations A and B.

(a)

(b)
Figure 4.4 Development of life cycle cost profiles

71

4.4.5.4

Decision Making

Referring to Figure 4.5, the results of this analysis support design A as the preferred configuration on the basis of present equivalent life-cycle cost. Design A assume a slight advantage; i.e., a difference of approximately US$
210,218.65 with a 10% discount rate.

Figure 4.5 Cost profiles of the two designs

72

4.4.5.5

Sensitivity Analysis using scenario manager

Sensitivity analysis is performed using scenario manager in Excel. This is a what-if model that includes variable cells linked together by one or more formulas. For example, How sensitive is the result of life-cycle cost to variation of interest rate. This is shown in the scenario report in Table 4.5.
Table.4.5-Scenario Summary

Current Values: rate 5%

baseline rate 10% rate 15% rate 20% rate 25% rate 35%

Changing Cells: rate Result Cells:

rate 10% 5% 10% 15% 20% 25% 35%

10%

5%

10%

15%

20%

25%

35%

LCC-A

3,539,156.46

4,282,240.35

3,539,156.46

2,985,484.10

2,560,748.13

2,226,904.39

1,740,519.84

LCC-B

3,749,375.10

4,572,035.94

3,749,375.10

3,143,955.26

2,684,312.18

2,326,107.73

1,809,179.12

Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. Changing cells for each Scenario are highlighted in gray. Base line rate= 10%

73

4.5

Summary

A life-cycle cost analysis may be accomplished in addressing a wide variety of problems at different stages of the system/product life cycle. It is applicable in the initial structuring of system requirements in the evaluation of design alternatives, and in the development of manufacturing approaches. It can be effectively utilized in assessing an existing system capability already in being by identifying high-cost contributors and costly problem areas. Accomplishment of LCCA incorporates the steps developed in chapter 3. A cost breakdown structure is developed (refer to Figure 4.2), cost generating variables and factors are identified, and costs are summarized year by year. Finally, cost profiles are developed, sensitivity analysis is performed, and the best configuration is selected based on the outcome of the analysis. A simple software is developed using ExcelTM to facilitate the use of LCCA. The procedure of using the software can be easily understood from the example given, illustrating various tables and figures. Necessary information of how to use the model is provided with the software overview worksheet.

CHAPTER 5

DISCUSSION

The main purpose of this project was to develop a life cycle cost analysis (LCCA) tool that can be used by small and medium sized enterprises (SMEs) for the decision making process when comparing different alternatives of their products. LCCA appears to be a useful approach to a comprehensive assessment of economic, environmental and social impacts of the life-cycle of a product and helps SMEs to meet environmental requirements adopted in nations around the world by choosing the lowest life cycle cost.

Among many of the alternatives regarding their products include, alternative system/product operational, utilization, and environmental profiles; alternative system maintenance concepts and logistics support policies; alternative product design configurations, such as Design for (Recycling, Reuse, & Remanufacturing ); alternative material selection, such as ( steel or aluminum) in a car body; alternative procurement sources and the selection of a supplier for a given item; alternative production approaches; alternative product distribution channels; alternative product disposal and recycling methods and so on.

75 LCCA may be accomplished in addressing a wide variety of problems at different stages of the product life cycle. In any event, the accomplishment of LCCA is iterative, ongoing, and must be tailored to the specific application. Regardless of the application, however, there are a series of general steps that are usually followed , even though the depth of coverage will vary.

First of all, the problem necessitating the LCCA application must be well defined; followed by the identification of all feasible alternatives; then develop Cost Breakdown Structure (CBS) of each alternative to be evaluated; estimate cost, the cost estimation must be made in strict relationship with cost breakdown structure; to evaluate each alternative cost profiles must be developed for each alternative; identify high cost contributor, perform sensitivity analysis of the high cost contributors and see the effect of its variation to the total life-cycle cost, and finally recommend the preferred approach based on the outcome of the LCCA.

The model incorporates four models which have been collected from literature namely, research & development, production & construction, operation & maintenance, and retirement & disposal. Due to the natural differences exist in different system/product, it is impossible to generalize the model; However, by making some modification to cost categories and by following the steps developed, it is possible to match the model to any application desired.

The acquisition of the right type of input data in a timely manner is one of the most important steps in the overall LCCA process. However, lack of reliable information and data on life cycle performance which are often missing for many components and systems (data on maintenance, lifespan, replacement regimes, performance and time aspects of operation, recycling, remanufacturing, disposal etc) is one of the reasons hampering the implementation of LCCA.

76 It is worth mentioning that proper data collection for performing LCCA is difficult if not impossible for academic projects, and hence the cost figures shown are collected from documented case studies for validation purpose. The objective here is to convey the overall approach used in the LCCA model.

The model is simplified for usage in the form of ExcelTM in such away the analyst can easily input data into tables and generate outputs using Excel Charts. The software contains input data collection sheets, alternative evaluation tables, cost contribution sheets, and sensitivity analysis tables.

The example shown in Chapter 4, illustrates the application of LCCA in automotive industry to support a design decision where two design configurations are being evaluated. The objective was to select the design configuration that will fulfill the lowest life cycle cost (LCC).

The CBS of two different design configurations are presented in Table 4.3. The categories identified indicate cost collection points which can be summarized upward into broader categories and/or can be collected for different program functions or system elements. The intent is to incorporate a high degree of flexibility in order to provide the necessary visibility for cost allocation, cost measurement, and cost control. This cost breakdown structure can be applied to a variety of programs; however, the depth of coverage may vary depending on the emphasis desired.

The evaluation itself address two candidate systems, each of which meets the specified performance and effectiveness requirements and fall with the allocated budget. However, each configuration exhibits different performance and effectives and the objective is to select the best in terms of Life Cycle Cost.

77

In evaluation of alternatives a similar profile may be developed for each project being considered, and the various alternative projects in question are then reviewed in terms of selecting a preferred approach. The profiles in Figure 4.3 represents the cost streams of different activities of the two designs A and B projected over the life cycle years. This is a budgetary estimate covering future resource needs of design configurations A and B.

Figure 4.4 reflects the output of table 4.3 above, where constant dollar estimates are summarized under the major cost categories in the CBS. A comparison of costs in design A and B cane be made in terms of the percent contribution of each major category to the total. Categories where the percent contribution is relatively high should be broken down into the different sub categories included therein, and high cost areas should be investigated further in order to determine the causes. The breakout of costs in this fashion not only allows for a comparison of different activities for a given system/product configuration, but also facilitates the direct comparison with other systems where costs are presented in a like manner.

When reviewing different profiles the analyst should not only look at the quantitative life cycle cost figures of merit developed by summing the costs reported through the CBS (refer to Table 4.3), but the analyst should also address the time impact of costs i.e. time value of money. The individual cost projections for each alternative must be discounted to the present value. Example of the two design configuration A & B of Table 4.3 discounted with 10 % discount factor are presented in Table 4.4. Present value calculations can be simplified using standard interest tables in (Appendix A) and by multiplying the future sum by the appropriate factor. Referring to Figure 4.4, the results of this analysis support design A as the preferred configuration on the basis of life cycle cost. Note that the research and

78 development (R & D) cost is higher for design A; however, the overall life cycle cost is lower due to a significantly lower operation and maintenance (O & M) cost. This would tend to indicate that the equipment design for reliability, relative to Design A, is somewhat better. Although this increased reliability results in higher R & D, the anticipated quantity of maintenance actions is lower resulting in lower O & M costs. The reliability characteristics in equipment design have a tremendous effect on life cycle.

When completing life cycle cost analysis, there may be a few key parameters about which the analyst is very uncertain due to inadequate input data, initial assumptions, pushing the state-of-art, or any combination of factors. In view of the possible inaccuracies associated with the input data, the analyst may wish to perform a sensitivity analysis to determine the effects of input parameter variations on the life cycle cost analysis output. The analyst should determine how much variation can be tolerated before the decision shifts in favor of design B. The analyst should select the high cost contributors (those which contribute more than 10% of the total cost); determine the cause and effect relationships; and identify the various input data factors that directly impact cost.

The model has a built in sensitivity analysis where iterative process is used to change one variable at a time while holding the rest constant, this is done using scenario

manager in Excel. This is a what-if model that includes variable cells linked together by
one or more formulas. For example, How sensitive is the result of life-cycle cost to variation of interest rate which is independent variable. The result is shown in the scenario report in Table 4.5, the result still favors design A as the preferred configuration due to its lower LCC. While the tool assists SMEs meet environmental legislations by manufacturing products that satisfy economic and environmental needs, it also supports the decision making process when buying equipments were emphasize is not given to initial

79 purchasing price but the overall life cycle cost. This was the primary use of LCCA for military equipment procurement such as airplane, because the support and maintenance cost is high compared to initial price.

CHAPTER 6

CONCLUSIONS AND OPPORTUNITY FOR FURTHER STUDY

Literature increasingly emphasizes that rapid technological change and shortened life cycles have made product life cycle cost analysis critical to organizations (Ray and Schlie, 1993; Barfield et al., 1994; Murthy and Blischke, 2000). Paying attention to economic and environmental challenges, life cycle cost analysis is expected to assist manufacturing firms;

To assess better the effectiveness of planning by comparing actual with budgeted life cycle costs as well as the distribution of those costs (Clinton and Graves, 1999).

To enhance their capacity to make better pricing decisions (Adamany and Gonsalves, 1994). To improve the assessment of product profitability (Hansen and Mowen, 1992). To aid in the design of more environmentally desirable products (Kreuze and Newell, 1994; Madu et al., 2002). To focus on post-sale factors that have become a larger percentage of life cycle costs, including warranty, cost of parts, service and maintenance, as well as being increasingly important to customers in their purchasing decisions (Shields and

81 Young, 1991; Murthy and Blischke, 2000), and many others.

The fact that LCCA is based on the life-cycle approach means that this instrument has a primary role in precisely the design context; it is particularly appropriate in elation to life cycle design, with which it has a common basis. Production costs as well as those incurred in the phases of use and disposal are, in fact, strongly conditioned by the first design choices, and this renders LCCA a valuable instrument for managing conflicts and identifying the most effective trade-off strategies and interventions. This study presents a simplified LCCA tool that can assist SMEs in the decisionmaking process when comparing different design alternatives, different material alternatives, different manufacturing approaches, and different support policies, etc of their products. ExcelTM is developed in such a way that minor modifications of the model can lead to many other applications. There are some areas where this study did not cover but necessary for efficient LCCA tool. Specifically, future work should be employed in the following areas; (a) Cost estimates are not incorporated within the model, and therefore requires separate calculations using the equations developed. Hence, further work is necessary to develop built-in equations that can perform estimates automatically. (b) A detailed cost description of End-of-Life cost categories was not presented in this study due to luck of data and information regarding the factors involved in their estimates. Future work is necessary to identify a detailed CBS of retirement and disposal costs and their estimating equations, so that cost related to recycling and remanufacturing of a product can be calculated easily. (c) Even though LCCA provide us information about the alternative with the lowest overall life-cycle cost, but it fails to provide information regarding the environmental impacts on selecting the alternative. Nowadays, separate tool

82 called life cycle assessment (LCA) is used to perform such analysis. Therefore, future work should be focused on integrating the LCCA with the available Life Cycle Assessment (LCA) tools. This will give further insight to both economic as well environmental impacts of the design decision.

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85 Kolarik W.J., (1980). Life cycle costing & associated models in proceedings of 1980 spring annual conference, American institute of industrial engineers, Atlanta, G.A, pp 58-64. Kreuze, J., Newell, G.E., 1994. ABC and life-cycle costing for environmental expenditures. Manage. Acc. (February), pp 3842. Kumaran D.S, Ong S.K., Reginal B.H, & Nee A.Y.C, (2001). Environmental life cycle cost analysis of products, environmental management and health, Vol. 12, pp 260276 Labuschange, C., (2005): Sustainable Project Life Cycle Management: the need to integrate life cycles in the manufacturing sector Int. Journal of Project Management 23, Elsevier, pp. 159-168. LMI, 1965. Life cycle costing in equipment procurement, LMI Task 4C-5, Logistics Management Institute, Washington, DC Madu, C.N., Kuei, C., Madu, I., 2002. A hierarchic metric approach for integration of green issues in manufacturing: a paper recycling application. J. Environ. Manage. (March), pp 261272. Murthy, D.N.P., Blischke, W.R., (2000). Strategic warranty management: a life-cycle approach. IEEE Transact. Eng. Manage., 47 (1), pp 4054. Navin-chandra, D. Restar, (1993): A design tool for environmental recovery analysis in proceedings of ICED93-9th Intr. Conference on engineering design, the Hague, Netherlands Prasad, B., (1999),: A Model for Optimizing Performance based on Reliability, Life Cycle Cost and other Measurements. Production Planning & Kontrol, Vol. 10, NO. 3, pp.286-300. Ray, M.R., Schlie, T.W., (1993). Activity-based management of innovation and R&D operation. J. Cost Manage. (Winter), pp 1622. Seo K., Park J., Jang D., & Wallace D., (2002). Approximate estimations of the product life cycle cost using artificial neural networks in conceptual design: international journal of advanced manufacturing technology, pp 75-82 Shank, J.K, and Govindarajon V., (1992). Strategic cost management & the chain value chain. Journal of cost management, pp 5-21

86 Shewchuk, J., (1992). Life cycle thinking, CMA Certified Management Accountant, 66(4), pp 34-36. Shields, M.D., and Young, S.M, (1991). Managing product life cycle costs: an organizational model, journal of cost management, pp 39-52 Sutton, J., 1992. Smart industry decisions can produce growth amid growing regulations. Ind. Eng. (March), pp 1415. Tomberg, Katja, Jamsen, Miikka, Paranko, Jari, (2002). Activity-based costing & process modeling for cost conscious product design: a case study in manufg company, intl journal of production economics, No. 70, pp 75-82 Ullman, D.G., 2003. The mechanical design process, 3rd ed., McGraw-Hill, New York Ulrich, K.T. and Eppinger, S.D., (2000). Product design and development, 2nd ed., McGraw-Hill, New York. WCED, (1987). Our common future, would commission on environment and development. Oxford univ. press, New York. Webster, Jane and Watson, Richard (2002) Analyzing the Past to Prepare for the Future: writing a Literature Review, MIS Quarterly, 26(2): PP13-23. Weistnik, I.F. et al., (2000), A generic framework for cost estimation and cost control in product design, journal of materials processing technology, 103, pp141-148. Weitz, K.A., Smith, J.K., Warren, J.L., 1994. Developing a decision support tool for lifecycle cost assessments. Total Quality Environ. Manage. (Autumn), pp 2336. Westkamper E., and Vonder Osten-Sacken D., (1998). Product life cycle costing applied to manufacturing systems, annuals of the CIRP, 47(1), PP 353-356. White, G.E, and Ostwald, P.H, (1976). Life cycle costing management accounting. (US), pp 39-42. Woodward, D. G., (1997): Life Cycle Costing Theory, Information Acquisition and Application. International Journal of Project Management, Vol. 15, No 6, pp.335344. Zhang, T.I., and Kendall, E., (2001), System Analysis of Agent-Based LCC Information Gathering: Pricai 2000 workshop reader. LNAI2112, pp 289-298

87

APPENDIX A

INTEREST FACTOR TABLES

Present Value of $1 to Be Paid in the Future

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

3.00% $0.97 $0.94 $0.92 $0.89 $0.86 $0.84 $0.81 $0.79 $0.77 $0.74 $0.72 $0.70 $0.68 $0.66 $0.64 $0.62 $0.61 $0.59

3.50% $0.97 $0.93 $0.90 $0.87 $0.84 $0.81 $0.79 $0.76 $0.73 $0.71 $0.68 $0.66 $0.64 $0.62 $0.60 $0.58 $0.56 $0.54

4.00% $0.96 $0.92 $0.89 $0.85 $0.82 $0.79 $0.76 $0.73 $0.70 $0.68 $0.65 $0.62 $0.60 $0.58 $0.56 $0.53 $0.51 $0.49

4.50% $0.96 $0.92 $0.88 $0.84 $0.80 $0.77 $0.73 $0.70 $0.67 $0.64 $0.62 $0.59 $0.56 $0.54 $0.52 $0.49 $0.47 $0.45

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

5.00% $0.95 $0.91 $0.86 $0.82 $0.78 $0.75 $0.71 $0.68 $0.64 $0.61 $0.58 $0.56 $0.53 $0.51 $0.48 $0.46 $0.44 $0.42

5.50% $0.95 $0.90 $0.85 $0.81 $0.77 $0.73 $0.69 $0.65 $0.62 $0.59 $0.55 $0.53 $0.50 $0.47 $0.45 $0.42 $0.40 $0.38

6.00% $0.94 $0.89 $0.84 $0.79 $0.75 $0.70 $0.67 $0.63 $0.59 $0.56 $0.53 $0.50 $0.47 $0.44 $0.42 $0.39 $0.37 $0.35

6.50% $0.94 $0.88 $0.83 $0.78 $0.73 $0.69 $0.64 $0.60 $0.57 $0.53 $0.50 $0.47 $0.44 $0.41 $0.39 $0.37 $0.34 $0.32

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19 20 21 22 23 24 25 $0.57 $0.55 $0.54 $0.52 $0.51 $0.49 $0.48 $0.52 $0.50 $0.49 $0.47 $0.45 $0.44 $0.42 $0.47 $0.46 $0.44 $0.42 $0.41 $0.39 $0.38 $0.43 $0.41 $0.40 $0.38 $0.36 $0.35 $0.33 19 20 21 22 23 24 25 $0.40 $0.38 $0.36 $0.34 $0.33 $0.31 $0.30 $0.36 $0.34 $0.32 $0.31 $0.29 $0.28 $0.26 $0.33 $0.31 $0.29 $0.28 $0.26 $0.25 $0.23 $0.30 $0.28 $0.27 $0.25 $0.23 $0.22 $0.21

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7.00% $0.93 $0.87 $0.82 $0.76 $0.71 $0.67 $0.62 $0.58 $0.54 $0.51 $0.48 $0.44 $0.41 $0.39 $0.36 $0.34 $0.32 $0.30 $0.28 $0.26 $0.24 $0.23 $0.21 $0.20 $0.18

7.50% $0.93 $0.87 $0.80 $0.75 $0.70 $0.65 $0.60 $0.56 $0.52 $0.49 $0.45 $0.42 $0.39 $0.36 $0.34 $0.31 $0.29 $0.27 $0.25 $0.24 $0.22 $0.20 $0.19 $0.18 $0.16

8.00% $0.93 $0.86 $0.79 $0.74 $0.68 $0.63 $0.58 $0.54 $0.50 $0.46 $0.43 $0.40 $0.37 $0.34 $0.32 $0.29 $0.27 $0.25 $0.23 $0.21 $0.20 $0.18 $0.17 $0.16 $0.15

8.50% $0.92 $0.85 $0.78 $0.72 $0.67 $0.61 $0.56 $0.52 $0.48 $0.44 $0.41 $0.38 $0.35 $0.32 $0.29 $0.27 $0.25 $0.23 $0.21 $0.20 $0.18 $0.17 $0.15 $0.14 $0.13

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

9.00% $0.92 $0.84 $0.77 $0.71 $0.65 $0.60 $0.55 $0.50 $0.46 $0.42 $0.39 $0.36 $0.33 $0.30 $0.27 $0.25 $0.23 $0.21 $0.19 $0.18 $0.16 $0.15 $0.14 $0.13 $0.12

9.50% $0.91 $0.83 $0.76 $0.70 $0.64 $0.58 $0.53 $0.48 $0.44 $0.40 $0.37 $0.34 $0.31 $0.28 $0.26 $0.23 $0.21 $0.20 $0.18 $0.16 $0.15 $0.14 $0.12 $0.11 $0.10

10.00% $0.91 $0.83 $0.75 $0.68 $0.62 $0.56 $0.51 $0.47 $0.42 $0.39 $0.35 $0.32 $0.29 $0.26 $0.24 $0.22 $0.20 $0.18 $0.16 $0.15 $0.14 $0.12 $0.11 $0.10 $0.09

10.50% $0.90 $0.82 $0.74 $0.67 $0.61 $0.55 $0.50 $0.45 $0.41 $0.37 $0.33 $0.30 $0.27 $0.25 $0.22 $0.20 $0.18 $0.17 $0.15 $0.14 $0.12 $0.11 $0.10 $0.09 $0.08

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Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11.00% $0.90 $0.81 $0.73 $0.66 $0.59 $0.53 $0.48 $0.43 $0.39 $0.35 $0.32 $0.29 $0.26 $0.23 $0.21 $0.19 $0.17 $0.15 $0.14 $0.12 $0.11 $0.10 $0.09 $0.08 $0.07 11.50% $0.90 $0.80 $0.72 $0.65 $0.58 $0.52 $0.47 $0.42 $0.38 $0.34 $0.30 $0.27 $0.24 $0.22 $0.20 $0.18 $0.16 $0.14 $0.13 $0.11 $0.10 $0.09 $0.08 $0.07 $0.07 12.00% $0.89 $0.80 $0.71 $0.64 $0.57 $0.51 $0.45 $0.40 $0.36 $0.32 $0.29 $0.26 $0.23 $0.20 $0.18 $0.16 $0.15 $0.13 $0.12 $0.10 $0.09 $0.08 $0.07 $0.07 $0.06 12.50% $0.89 $0.79 $0.70 $0.62 $0.55 $0.49 $0.44 $0.39 $0.35 $0.31 $0.27 $0.24 $0.22 $0.19 $0.17 $0.15 $0.14 $0.12 $0.11 $0.09 $0.08 $0.07 $0.07 $0.06 $0.05 Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13.00% $0.88 $0.78 $0.69 $0.61 $0.54 $0.48 $0.43 $0.38 $0.33 $0.29 $0.26 $0.23 $0.20 $0.18 $0.16 $0.14 $0.13 $0.11 $0.10 $0.09 $0.08 $0.07 $0.06 $0.05 $0.05 13.50% $0.88 $0.78 $0.68 $0.60 $0.53 $0.47 $0.41 $0.36 $0.32 $0.28 $0.25 $0.22 $0.19 $0.17 $0.15 $0.13 $0.12 $0.10 $0.09 $0.08 $0.07 $0.06 $0.05 $0.05 $0.04 14.00% $0.88 $0.77 $0.67 $0.59 $0.52 $0.46 $0.40 $0.35 $0.31 $0.27 $0.24 $0.21 $0.18 $0.16 $0.14 $0.12 $0.11 $0.09 $0.08 $0.07 $0.06 $0.06 $0.05 $0.04 $0.04 14.50% $0.87 $0.76 $0.67 $0.58 $0.51 $0.44 $0.39 $0.34 $0.30 $0.26 $0.23 $0.20 $0.17 $0.15 $0.13 $0.11 $0.10 $0.09 $0.08 $0.07 $0.06 $0.05 $0.04 $0.04 $0.03

Years 1 2 3 4 5 6 7 8

15.00% $0.87 $0.76 $0.66 $0.57 $0.50 $0.43 $0.38 $0.33

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9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 $0.28 $0.25 $0.21 $0.19 $0.16 $0.14 $0.12 $0.11 $0.09 $0.08 $0.07 $0.06 $0.05 $0.05 $0.04 $0.03 $0.03