Life Cycle Cost Analysis
The purchase price of a product may be the start of the cost of ownership.
Maintenance and repairs may cost many times the initial purchase price. An efficient maintenance process and low-cost spare parts may help minimize cost, yet a design that optimizes the total cost of ownership is the most effective method.
Consider a simple example, a ball point pen.
Let’s say it cost $100 to purchase. It is comfortable to hold, writes very well, and is stylish. If the replacement ink cartridge cost $5 and last a couple of years of daily use that would be a reasonable life cycle cost experience. On the other hand, if the cartridge cost $50 and lasted only a month I may want to find a new pen soon.
There are many other elements to the lifecycle cost including:
- Manufacturing costs
- Purchase price
- Transportation costs
- Installation costs
- Start up costs
- Training costs
- Maintenance costs
- Repair/Spares costs
- Replacement/Warranty Costs
- Decommissioning costs
- Recycling costs
Each cost, including initial purchase price, is to some extent controlled by the design. Depending on the product and the agreement with the customer the costs may be incurred by the customer or shared between the manufacturer and customer. The total cost, in part, influences the customer expectations and satisfaction.
For complex systems, system engineering teams address each of the elements of the life cycle and include reliability analysis as necessary. For simpler systems, the burden falls to the design and development teams. In either case, the ability to estimate the durability of components and systems allows the design team to make appropriate design decisions that will minimize total cost of ownership.
In some cases, the design team may balance the cost of shipping a heavier product that will survive longer with the cost of maintenance of a lighter overall product.
Summary
As you may imagine, there are many possible tradeoffs that permit minimizing life cycle costs. When these costs are estimated and considered during the design process, the ability of the team to optimize life cycle costs increases.
When all costs are considered and and converted to “net present value” then you can make a decision
Cost Benefit Analysis (CBA) is an economic analysis that basically compares the Life Cycle Costs (LCC) of the system with and without the warranty to determine if warranty coverage will improve the LCC. Sufficient time must be allowed for preparation of a warranty CBA since detailed work is required for accomplishment. CBAs should be initiated as soon as the cost data is available.
Sensitivity analysis may also be performed to see the effects of changes to program parameters on warranty cost effectiveness. These parameters may be length of the warranty, system activation schedules, projected utilization rates, repair turnaround times, or system performance elements