Life cycle costing: A reliability tool

Follow these 12 steps to get control of your LCC program.

By William D. Conner III, CMRP, P.E.

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Economic pressures make it imperative to maximize asset reliability at the optimum cost. Life-cycle costing begins with the design and selection of new or replacement assets. Procurement takes place only after the initial stages (asset strategy, plan, evaluate and design) are completed. This is followed by the cost of operating, maintaining and sometimes modifying the asset before its eventual disposal (Figure 1).

Figure 1. These are the stages of an asset’s life cycle.
Figure 1. These are the stages of an asset’s life cycle.

To complete the evaluation, however, you’ll need to factor in the asset reliability component, or what can be lost if equipment is less than reliable from the production perspective.

Many use a financial strategy of acquiring assets at the lowest initial cost, often termed “least first cost.” Considering an asset’s overall life-cycle cost instead of focusing on the least first cost offers the potential to acquire a more reliable asset even though initial cost is higher. What counts is the total cost of ownership, the sunken costs of development and the initial purchase price, as well as the operations and maintenance, modifications and eventual disposal costs. Note that the cost of lost production also is a significant cost of ownership. This new target can then decrease the total cost of ownership, especially when the production reliability value is considered.

Life cycle costing (LCC) is the conscious use of engineering process technology to increase system performance and reduce costs as far as possible, while satisfying, and often exceeding, customer requirements. LCC requires designing both the product and the product delivery process (i.e., the asset’s constructability and maintainability) for simplicity. This definition leads to two ways of viewing equipment acquisition:

  • What are the costs related to owning the piece of equipment during its operating life, including disposal costs?
  • What is the optimum combination of low initial costs and low running costs?

For the first alternative, a pigment manufacturer discovered that disposal cost for worn piping was increasing rapidly because of the naturally-occurring radioisotopes in the ore. Life-cycle cost analysis would have shown that changing the original piping design – although more expensive – would have saved disposal cost and more.

Consider the second alternative. A pesticide manufacturer performed a life cycle analysis of a new production pump that was considered, based on initial cost, to be too expensive. During the expected operating life of 15 years, the “cheaper” pump was expected to require two replacements. That fact alone justified buying the more expensive production pump.

Life-cycle cost design strategies

Figure 2. This represents more detailed life-cycle cost considerations.
Figure 2. This represents more detailed life-cycle cost considerations.

The three predominate life-cycle cost design strategies are the minimum initial cost (IC) design, the minimum running cost (RC) design and the combination IC/RC reduction design (optimum cost). Regardless of strategy chosen, all acquisition and sustaining costs must be considered (Figure 2).

Figure 3. This is a schematic representation of what the initial-cost approach is trying to achieve.
Figure 3. This is a schematic representation of what the initial-cost approach is trying to achieve.

The goal of the IC design is to minimize the asset’s initial cost without raising running or operational costs (Figure 3). The positive aspect of the initial cost design is that it provides the lowest initial cost from a technically capable bid. Companies using this cost design strategy are lucky if they get only what they pay for and not a host of operations, maintenance and reliability problems.

Figure 4. This is a schematic representation of what the running-cost approach is trying to achieve.
Figure 4. This is a schematic representation of what the running-cost approach is trying to achiev

The minimum RC design attempts to minimize running and operational costs as well as the costs of unreliability without raising the initial costs (Figure 4). Unfortunately, the lowest running costs might disguise and specify the gold-plated asset when the tin-plated version would meet the mission needs. Further, estimates of running costs are notoriously unreliable when estimating the life cycle of the assets. Even if the asset life is extended, the cost of running repairs is likely to increase.

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