Experience with Life Cycle Cost analysis in the Netherlands Marcel Smit Colloquium Life Cycle Costing

RHID, Brussels, Belgium 7 March, 2012

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Outline

TNO What is LCC ? LCC support in Life Cycle phases TNO’s role in acquisition programs FEL SALDO methodology Uncertainty analysis Examples LCC studies Cost analysis in in-service phase International co-operation Questions

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TNO facts & figures Founded by law in 1932 Applied research for government and business Independent of public or private interests Defence research started after WWII Multidisciplinary Not-for-profit 4189 employees in 2010 564 M€

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Themes and innovation areas

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Areas of expertise To safeguard the consistency and quality of TNO’s knowledge and resources, the following areas of expertise have been identified: Technical Sciences Behavioural and Societal Sciences Earth, Environmental and Life Sciences

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Our organization Expertise areas: in charge of knowledge and resources Technical Sciences

Behavioural Earth, and Societal Environmental Sciences and Life Sciences HEALTHY LIVING INDUSTRIAL INNOVATION

Themes: in charge of projects and impact

DEFENCE, SAFETY AND SECURITY ENERGY MOBILITY BUILD ENVIRONMENT INFORMATION SOCIETY

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TNO in the Netherlands Den Helder

Groningen

Soesterberg Hoofddorp

Leiden

Rijswijk Enschede The Hague

Apeldoorn

Helmond Delft Utrecht Zeist Eindhoven

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What is LCC ?

Life Cycle Costs (LCC): all costs made by the owner of equipment as result of acquisition, operation and support at a required standard of performance, and disposal..

Life Cycle Cost Analysis (LCC-analysis): Systematic process of estimating and analysing the LCC and evaluating alternatives.

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LCC support in life cycle phases

Focus on support in acquisition phase new systems NL MoD

Feasibility, Research & Development, Production

Acquisition

In-service

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Why LCC analysis in acquisition phase ? Obliged in all phases of the NL Defence Materiel Process (DMP) Better selection process possibility to compare alternatives (relative and absolute) Risk reduction gain insight into not only acquisition costs, but also in costs for operation and support insight into the main factors of influence /cost drivers cost risk and uncertainty analysis

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Types of LCC analyses in acquisition phase Estimate total costs new equipment. Compare LCC for different options to fulfil requirements: more than one candidate different options per candidate different ways to introduce new system (efficiency study) different options to organize maintenance different options to organize training

Sensitivity analyses on important factors of influence.

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TNO’s role in acquisition projects: support the acquirer (NL MoD) Way of involvement: the more complex acquisition projects (assist in) composing questionnaires to be answered by industry as part of RFI, RFQ or RFP evaluating answers from industry: LCC analysis desk research and meetings with industry comparing alternatives or candidates on costs performing sensitivity, cost risk, uncertainty analyses part of multidisciplinary support to NL MoD project team with: Operational, Technical and Logistic Studies and Multi Criteria Analysis

Reason: independent developers of step-by-step method (FELSALDO)

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FEL-SALDO (Step-by-step approach for Analysis of Life cycle cost within the Defence Organisation) Developed by TNO together with Defence organisation Enables LCC-analysis in each phase of Defence Materiel Process (DMP) Has become standard within the defence organisation Facilitates a uniform, systematic and repetitive way of life cycle cost analysis Five steps: planning, definition, development, analysis and report

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Five steps of FEL-SALDO 1 Planning

LCC-objectives constraints project team availability data detailed planning 2 Definition

system utilisation maintenance

3 Development

cost breakdown structure estimating method collect data 4 Analysis

estimate LCC sensitivity analysis uncertainty analysis cost drivers 5 Report

interpret results report/ present results

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Example CBS

LCC

Acquisition cost

Exploitation cost

Procurement or development cost

Operation cost

Disposal cost

Support cost

Initial logistic support cost Operating personnel

Maintenance personnel

Operators training

Maintenance training

Cost testing and acceptance

Operating documentation

Maintenance facilities

Cost installation the system

Operational infrastructure/facilities

Spare/repair parts incl. stocks

Project costs

Consumables

Test & support cost

Other operation cost

Maintenance documentation

Preparation cost

Other acquistion cost

Computer resources Infrastructure Packing, Handling, Storage & Transportation Contracting out maintenance Modification/Upgrading

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Methods for estimating the cost Engineering

Parametric

Analogy

Costs maintenance personnel level A =

MidsomA* LifeCycle* (TRUNC(MMHAFH* NumberHeli* NumberFH/ NumberDirHours) +1)

“comparable”

Statistics

Costold

Expert opinion

Heuristics

Costnew

Simulation

Rules of thumb

Cost estimates are most of times combination of these methods

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Uncertainty analysis Requirement to identify uncertainty in results cost analysis: Estimates are uncertain! Uncertainty about the future No or missing data or information Unclear data or information Doubts about the accuracy of data or information How to conduct uncertainty analysis? Aim to determine bandwidths for parameters with uncertain values Panel of experts Individual estimates experts Consensus on (1) most likely, (2) lower, (3) upper value (Delphi approach).

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Uncertainty analysis: Applying bandwidths

Bandwidths for all uncertain parameters are combined using Monte Carlo simulation. Result: cost distribution per candidate for LCC

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Example results uncertainty analysis – Multiple candidates

candidate 1

candidate 2

candidate 3

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Some examples LCC studies in acquisition phase

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Developments in LCC Analysis in the Netherlands Until some years ago LCC analyses to support acquisition new systems. Now.. more attention for cost analysis in in-service phase LCC analysis not a one time job: monitoring of costs and expenses is required. Comparison actual O&S costs with results LCC-study. Estimate changes in costs as a result of changes in operations, technics or maintenance policy. Use O&S costs of current system as reference point for O&S costs new system.

Life cycle system Feasibility, Research & Development, Production

Acquisition

In-service

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LCC analysis in in-service phase Challenges LCC estimates to support acquisition decision not often used for planning and control LCC estimates for acquisition phase not monitored or evaluated in in-service phase. Reasons: Different cost structures used in acquisition and in-service phase. Information systems not suitable. Responsibilities for acquisition and in-service Anticipated versus actual use of equipment. Other nations face the same problems

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International co-operation in Cost Analysis NATO-RTO SAS-028: Generic Cost Breakdown Structure SAS-054: Methods and models for Life Cycle Costs (chair) SAS-063: Benchmarking study and capability costing SAS-069: Booklet Codes of Best Practice LCC (chair) SAS-076: Independent Cost Estimate & Capability Portfolio Analysis SAS-095: Cost Benefit of Military Training NATO AC/327: WG 3: NATO Guidance on Life Cycle Cost (ALCCP-1) NATO Missile Defence Cost Analysis Team for ALTBMD Feasibility study (chair) Cost Analysis Team for MD Feasibility Study (chair)

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2007-2008

Overview of Process for Estim ating Risk and Uncertainty Risk-Adjusted Cost Estimate Stochastic Xs Discreet risk events

2005 to 2007

µ2

Stochastic model inputs from CARD, data analysis, & expert opinion

(CARD, checklists, engineering judgment, analogies, brainstorming)

Data Collection & Analysis

µ2 - µ1 = Risk$

Deterministic model inputs from CARD

AC/327 SG 3 WG 3 on Life-Cycle Costs: ALCCP-1 Lead: Prof. Ticocar Ciobotaru

Baseline Cost Estimate Fixed Xs Stochastic error terms Monte Carlo Simulation

2004 to 2006

µ1

For each WBS element, choose or estimate: 1. Type of probability distribution 2. Parameters of the distribution (e.g., µ, σ²) 3. Correlation with other WBS elements

SAS-054: Methods and Models for Life Cycle Costing. Lead: Mr. Marcel SMIT

2000 to 2003

SAS-028: Cost Breakdown Structure for NATO Lead: Dr. Gérard Seguin

NATO Cost Analysis Improvement

SAS-069: Booklet code of practice. Lead: Mr. Marcel SMIT

2008 -2011

SAS-076: Practicing guideline with Independent Cost Estimates Lead: Dr. Brian Flynn

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Summary

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More information ? TNO Behavioural and Societal Sciences Strategic Business Analysis M.C. (Marcel) Smit, M.Sc. Brassersplein 2 2612 CT Delft The Netherlands Phone: +31 88 866 39 09 Mobile: +31 6 211 343 54 Email: [email protected]