Lecture 5 - Life Cycle Costing Process

Question 1

What is the 12 step Plan to AM Life Cycle?

Answer 1

REFER TO DIAGRAM

Question 2

What is Step 1:

Answer 2

• Strategic level
  – What the business need for the asset? How will this asset assist with meeting strategic business unit goals?
  – What will the purchase/ development of the asset achieve?
• Functional level
  – What operational and other requirements must the new asset meet at a technical (including HSE Standards)
  – What are the functional requirement?
  – What are the constraints?
• Identify technical performance measures?

Question 3

What is the link between Project Requirements and & Business Need

Answer 3

• Improve profit before tax by 15% within 3 years
• Organizational Strategic Plan: To achieve profit improvements through expanding capacity so as to meet increased demand
• AM strategy: To upgrade the core infrastructure to produce x t/hr product with y quality at $ z/t.
• Project Plan: Ensure the A pumps to produce w l/s for with a minimum of 95% availability and 60% efficiency over 5 years.
  THIS IS AN EXAMPLE REFER TO SLIDES

Question 4

What is Step 2:

Answer 4

• Establish a baseline for the development of a cost breakdown structure and the estimation of cost for each year of the projected life cycle. Be sure all lifecycle activities are included. REFER TO SLIDES

Question 5

What is Step 3:

Answer 5

Identify cost categories and develop a cost breakdown structure. REFER TO SLDIES

Question 6

What are some general reccomendations for step 3?

Answer 6

• All LCC should be considered and identified in the LC cost breakdown structure.
• Cost categories in the CBS must be well defined.
• Manager, accountants and engineers should have a common understanding about what is included in a given cost category.
• CBS must be at sufficient level of detail to identify high cost areas.
• Assumptions about future costs should be clear particularly as they relate to maintenance activities, downtime costs and lost production.

Question 7

What is Step 4:

Answer 7

Step 4: Identify input data requirements / sources

Question 8

What is Step 5:

Answer 8

• Develop appropriate cost-estimating relationships and estimate the costs for each category in the CBS on a year-by-year basis over the life cycle. Make sure all relevant costs are included.
• What are the Issues?
  – Cost estimation (parametric, engineering or analogous – see AS4536 for definitions)
  – Forecasting
  – Assumptions
  – Data quality

Question 9

What are Steps 6, 7, and 8:

Answer 9

Step 6: Select a cost model for analysis and evaluation (often done in Excel)
Step 7: Develop cost profile and summary
Step 8: Identify high-cost contributors and establish cause and effect relationships

Question 10

What is Step 9:

Answer 10

• Identify those outputs are sensitive to changes in selected inputs. Revisit the assumptions that determine these outputs and attempt to improve input data confidence.
• Ask – how sensitive are results to variations in uncertain input factors?
• Ask – to what extent can selected input parameters be varied without changing the result of the analysis?

Question 11

What is Step 10:

Answer 11

Evaluate and prioritize the problem areas identified in Steps 8 and 9 through using a Pareto chart to show the relative contributions of the different categories.

Question 12

What is Step 11:

Answer 12

Identify feasible alternatives

Question 13

What is Step 12?

Answer 13

Common factors used to trade-off for LCC are
– operational availability,
– intrinsic availability,
– spares cost,
– manpower cost,
– probability of mission success.