Reliability Engineering
Module 2
1
Examples - Maintenance Prevention
• Car battery. Ten years ago, most car batteries required
periodic addition of distilled water into the cells for
continued longevity. Now, due to improved design and
construction, most car batteries are “maintenance-free”.
• Small electric motors. Many small electric motors are now
equipped with sealed bearings which eliminate the need for
periodic lubrication
• Clearing paper jams on a copy machine. A paper jam used
to require a service call to the “key operator” or
maintenance contractor. Now the machines are designed
with imbedded step by step diagnostics and simplified
instructions on how to clear the jam.
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1
Life-Cycle Cost Analysis
• The life-cycle cost of a product, equipment item, or system is its total
cost over the whole of its life.
The U.S. Office of Management and the Budget defines it as: “The
sum of the direct, indirect, recurring, non-recurring, and other related
costs of a large-scale system during its period of effectiveness. It is the
total of all costs generated or forecast to be generated during the
design, development, production, operation, maintenance, and support
processes.”
• Life-cycle Costing Analysis is a systematic decision-making
technique that incorporates life-cycle cost as a parameter at the design
stage, performing all possible trade-offs to ensure an economic lifecycle cost for the user’s system or design.
3
Total Cost Visibility
Poor Management
Acquisition Cost
(Planning, design
and development,
construction)
Inventory Cost
(spares and material
support)
Training and Technical
data cost
Maintenance Cost (Customer Product Distribution Operations Cost
service, organization
Cost (Packaging,
(Facilities, energy,
intermediate, plant
transportation and
utilities, taxes)
maintenance personnel cost
handling, warehousing,
and storage)
Retirement and disposal cost
Tools
and Test
Equipment Cost
4
2
Life-Cycle Costing ( LCC)
• Includes the costs associated with acquiring, using, caring, and
disposing of physical assets, including feasibility studies, research,
design, development, production, maintenance, replacement and
disposal, as well as support, training and operating costs generated by
the acquisition, use, maintenance and replacement of permanent
physical assets
• The costs of ownership of a physical asset are:
1. The cost of providing the asset (costs arise during the asset life
cycle when the asset is proceeding from initial study through
construction and installation)
5
Life-Cycle Costing ( LCC)
Design and Build
An organization or company which designs and constructs assets
for its own use will incur the costs of:
• Initial study
• Design and development
• Construction
• Installation
• Testing and commissioning
• Modification and defect clearance
• Spare parts provisioning
• Training of personnel
• Preparation of drawings and manuals
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3
Life-Cycle Costing ( LCC)
Purchased:
An organization or company which buys assets from a supplier incurs the
costs of:
• The asset
• Installation
• Commissioning
• Spare parts provisioning
• Training of personnel
• Ancillary tools and equipment
2. The costs of operation and maintenance during the period of use (occur
on an annual basis)
During the years of normal operation and maintenance, the annual costs
will arise from
• Operating the asset( labor, power, equipment and overhead charges)
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Life-Cycle Costing ( LCC)
• Maintaining the asset (labor, parts, materials, and overhead
costs)
3. The costs, or benefits, from disposal ( can be a credit or a deficit
depending on whether the asset is resold or is just dismantled at a
loss)
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4
Life Cycle Costs of Assets
Cash
Flow
Operational costs
KEY:
Maintenance costs
Development costs
Design, purchase & construction
Design,
Purchase,
Construction
Disposal costs
operation
maintenance
development
Start-up
Life (years)
Disposal
9
Why use LCC?
1. The historical emphasis on production or acquisition cost alone is no
longer valid. Analogous to an iceberg, with the visible portion being
production costs, “hidden” support costs can often be seven times or
more as great as the original build cost.
2. Inflationary effects on the cost of money, energy, labor, and materials
can be significant.
3. The fast pace of technology may reduce present product life and reduce
product value long before startup costs are recovered.
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5
Why use LCC?
4. Increasing liability costs require safer product planning and support.
5. Consumers are increasingly more conscious of operation and
maintenance costs over the duration of product life.
6. Control of life-cycle costs can ensure greater life cycle profits.
7. Analytical techniques with the use of computers result in better
estimates of the future, and quantify, if not reduce, risks and
uncertainties.
11
Life-Cycle Costs as an Aid to the
Increase of Profit
• Life-cycle cost data can be applied usefully in a number of situations:
– When building plant, equipment, buildings, etc.:
• As an aid to investment analysis
• Replace or repair decisions
• Hire or buy decisions
– To identify high cost areas in order that action be taken to:
• Reduce high costs in the life-cycle
• Improve design
• Modify operating policy or methods
• Modify maintenance policy or methods
12
6
Life-Cycle Cost Analysis Process
Requirements
Action
Analysis Approach
- What is the problem?
- Define analysis goals
- Define ground rules
and constraints
- Identify feasible
alternatives
- Define approach
to problem resolution
Feedback
Cost Model Requirements
- System product definition (baseline)
operational requirements, maintenance,
program plan, etc.
- Define evaluation criteria
- Develop cost breakdown structure
- Identify cost-generating variables
and identify cost factors
- Select evaluation techniques
- Identify data needs and model output
requirements
Decisions
Feedback
Analysis Results
- Recommendations
based on life cycle
cost
- Confidence levels
- Breakeven or payback points
- Tradeoffs
- Sensitivities ( risk
and uncertainties)
Does
Model
Exist?
Yes
Evaluation Process
- Run cost model
using baseline data
- Run cost model (or
individual subroutines) to solve
specific problems
- Perform sensitivity
analysis
Data Collection
- Utilize existing data
- Acquire forecasts &
prediction data --R&D,
production, reliability,
maintainability, logistics.
- Derive cost estimating
relationships
- Acquire test data.
Source: B. Blanchard
No
Construct new
Model and
validate
13
Life-Cycle Cost Estimating
LCC = Capital Cost C + Lifetime Operating Costs O + Lifetime
Maintenance Costs M + Lifetime Plant Losses L
+ Plant Disposal Cost D
Let n = number of years and N = life of system in years
LCC = C + ∑ O
n + ∑ Ln +
Nn + ∑ MN
ND
n=1
n=1
n=1
where: On = operator labor costs + energy costs + operating services
(e.g. water, hydraulics)
Mn = maintenance labor costs + spares/materials +maintenance
services (e.g. w/shop, cranes, transport)
Ln = Plant breakdown losses + plant performance losses
14
7
Effect of Inflation and the Time Value
of Money
• Inflation is primarily related to labor and material costs
– Inflation factors applied to labor, due to increased labor costs
arising from:
• Salary and wage increases
• Cost of living expenses
• Personnel fringe benefits and retirement services
– Inflation factors applied to material, due to increased material costs
arising from:
• Material availability, supply and demand
• Materials processing cost increases
• Materials handling and transportation costs
15
Effect of Inflation and the Time Value
of Money
• Cost estimates must also be adjusted for the variation of dollar value with
time
– Use of Net Present Worth (NPV) method
Let inflation rate be constant at r%, and discount rate be i%. Assume annual
operating costs, maintenance costs, plant losses are incurred at the end of the
operating year.
LCC = C* + O1(1+i) +…+ ON(1+i)N + M1(1+i) ….+
(1+r)
(1+r)
(1+r)N
N
MN(1+i) …..+ L1(1+i) +… +LN(1+i)N
(1+r)N
(1+r)
(1+r)N
N
+ D(1+i)
* If capital costs spread over several years, then C
(1+r)N
must be also be modified for inflation and
discounting/compounding
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8
Procedure for LCC Analysis
1. Establish boundary of LCC analysis
– Describe clearly the major elements in the item’s life cycle
Information (Needs, resources,
environment, constraints)
Planning
Resources
Concept formulation and
system definition phases
Planning Period
System Requirements
Engineering
Resources
Development Phase
Acquisition
Period
Model
Production &
Installation
Resources
Production & Installation
phases
System
Operations &
Support Resources
Operations & Support phase
Use
period
Cost-Effectiveness
Modification/
Retirement
Resources
Modification & Retirement
phases
New requirements
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Procedure for LCC Analysis
2. Establish L. C. Cost Structure and identify probable significant cost elements
Research &
Development
Basic research
Program management
Advanced development
Equipment development
and test engineering data
Production/
Construction
Investment
Manufacturing nonrecurring &
recurring facilities
Initial logistics
support
Operations,
Maintenance &
Support
Termination
Operations:
Personnel
Training,
Facilities,
support:
Maintenance:
Scheduled PM
Unscheduled corrective
repairs
Repair parts and spares
Support:
Transportation
Tools
Modifications
Tech data
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9
Procedure for LCC Analysis
3. Determine most appropriate estimating techniques for each cost
element
4. Determine most probable life of assets to be analyzed
5. Estimate costs of each element in each year at present day prices
6. Estimate inflation rates and discount rates for each year of projected
life of assets
7. Determine NPV of each cost element
8. Summate NPV to produce the LCC
9. Can be followed up by applying sensitivity and risk analysis to the
project.
19
LCC Example using Present Value
Evaluating a new fork-lift purchase with three alternatives.
Type Characteristics
Acquisition Cost
A
B
C
U.S., medium-size,
$ 6,500
lifts 2000 lb., 15 miles/gallon
Imported, small size, high
$ 8,800
performance, lifts 3000 lb., 30 miles/gal
U.S., medium size, high
$ 7,200
performance, lifts 2500 lb., 25 miles/gal
The following assumptions were made, for the purpose of simplicity:
– Depreciation and insurance are not included
– Salvage value at the end of the four-year life is zero.
– Discount rate is 10%
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10
LCC Example using Present Value
The average usage will be 15, 000 miles per year.
A summary of estimated operation and support costs for each fork-lift truck is
shown in the following table:
Estimated Operation and Support Costs
Criteria
Fork-lift
Undiscounted Cost ($) per Year of Ownership
Year 1
Year 2
Year 3
Year 4
950
1,200
1450
1,600
475
600
700
800
570
720
840
960
Operation
15,000 ml. x cost
mpg
A
B
C
Unscheduled Maintenance (labor and
material
A
B
C
220
185
100
370
295
250
420
250
300
400
500
400
Scheduled mainttenance (labor and
material)
10% discount factor
A
B
C
65
100
55
0.909
75
90
60
0.826
85
90
90
0.751
105
100
80
0.683
Gas costs
$.95/gal in
$1.2/gal in
$1.4/gal in
$1.6/gal in
Repairs
year
year
year
year
1
2
3
4
Oil changes, lubrica
tion, periodic
checks
Year 0 = 1.00
21
LCC Example using Present Value
LCC Problem Answer
Fork -lift
Purchase
Price
Consumer Operation and Support
Cost
Year 1
Year 2
Year 3
Total LCC
Present Value ($)
Year 4
A
actual
discounted
6,500
6,500
1,235
1,123
1,645
1,359
1,955
1,468
2,105
1,438
11,888
actual
discounted
8,800
8,800
760
691
985
814
1,040
781
1,400
956
12,042
actual
discounted
10% discount
rate factor
7,200
7,200
725
659
0.909
1,030
851
0.826
1,230
924
0.751
1,440
983
0.683
B
C
10,617 *
*C is lowest LCC
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11