Handbook of Reliability, Availability, Maintainability and Safety in Engineering Design - Part 34 pps

b Life-Cycle Analysis and Life-Cycle Costs Cost modelling for design availability and maintainability needs to take into con-sideration scheduled as well as unscheduled shutdowns that in

The dependency on system A2 is:

Dep A2= 500− (900 − 1,000)

1,000 × 100%

= 60%

The dependency on system A3 is:

Dep A3= 400− (900 − 1,000)

1,000 × 100%

= 50% What is the economic loss of production in the event of systems A1 and A2 being

down for 5 days as a result of downtime?

Relative lost time cost = 5 days× $20,000/day× 10%

for system A1:= $10,000

Relative lost time cost = 5 days× $20,000/day× 60%

for system A2:= $60,000

Relative lost time cost

for systems A1 and A2:= $70,000

A point of interest is that the dependencies and relative lost time costs are calculated

from the viewpoint that first system A1 goes down, then secondly system A2 Would

there be a difference in the calculations if system A2 went down first, followed by

system A1? Thus, what is the economic loss of production in the event of system A2 being down for 5 days, and then systems A2 and A1 being down for 5 days?

In the three-system parallel configuration process:

The dependency on system A2 is:

Dep A2= 500− (1,500 − 1,000)

1,000 × 100%

= 0%.

The cost of dependency is the relative lost time cost due to functional failure of the equipment at its relative value of dependency.

Relative lost time cost = 5 days× $20,000/day× 0%

for system A2:= $0

If system A2 experiences downtime first, what is the dependency on system A1 in the two-system parallel configuration process?

The dependency on system A1 is:

Dep A1= 600− (900 − 1,000)

1,000 × 100%

= 70% What is the economic loss of production in the event of systems A2 and A1 being

down for 5 days as a result of downtime?

Relative lost time cost = 5 days× $20,000/day× 0%

for system A2:= $0 Relative lost time cost = 5 days× $20,000/day× 70%

for system A1:= $70,000

Relative lost time cost

for systems A2 and A1:= $70,000

Thus, the relative lost time cost for systems A1 and A2 remains the same irrespective

of which system goes down first

b) Life-Cycle Analysis and Life-Cycle Costs

Cost modelling for design availability and maintainability needs to take into con-sideration scheduled as well as unscheduled shutdowns that involve an indirect eco-nomic loss, such as the loss in production, as well as the direct cost of maintenance action This maintenance action implies a direct cost that includes the cost of main-tenance labour and mainmain-tenance materials such as lubricants, greases, etc., and spare parts Traditional analysis of engineering design has focused primarily on a system’s operational performance without much consideration of the costs of the manufac-turing and installation stages downstream from design In contrast, life-cycle anal-ysis of an engineered installation, particularly during its initial development, can play a crucial role in determining the installation’s overall life-cycle cost and useful lifespan inclusive of the concept of residual life The design and development of engineered installations involve balancing a series of factors to specify, manufac-ture and install systems that perform a specific set of operational functions These factors influence both the overall system definition, as well as each stage within the system’s development life cycle These design and development factors include (Lee et al 1993):

• Design requirements:

– input demand

– output volume

– required functionality

– operating environment

– design integrity

• Time constraints:

– design phases

– development stages

– manufacture lead time

– operational life

– maintenance downtime

• Operational issues:

– evolutionary/revolutionary design

– new/proven technologies

– operations experience

– development/support infrastructure

• Life-cycle costs:

– design/development

– manufacture/construction

– fabrication/installation

– operation/maintenance

– renewal/rehabilitation

– disposal/salvage

The assessment of system performance from a total life-cycle perspective (i.e across

all life-cycle stages) is defined as system life-cycle analysis System life-cycle

anal-ysis is viewed as a superset of analanal-ysis methods centred about a system’s life-cycle stages The analysis seeks to qualitatively and quantitatively measure performance both at the system and/or equipment life-cycle stages, as well as across the total engineered installation life cycle, from design to possible salvage

For system life-cycle analysis, the primary focus is on determining the opti-mal design of a system with respect to the required design criteria, while con-currently measuring the impact of design decisions on the other life-cycle stages, such as

manufacture/construction/fabrication/installation/operation/maintenance/re-newal/rehabilitation Similarly, the procedure of measuring the effects of design and development decisions on a system’s operational performance in an overall life-cycle context is defined as life-life-cycle engineering analysis (Lee et al 1993).

This is an extension of engineering analysis methods that are applied during the conceptual, preliminary and detail design phases, and are used to quantify system operational performance such as static and dynamic loading behaviour, thermal op-erational performance, system control response, etc Life-cycle engineering analysis extends current engineering analysis approaches by applying these to other life-cycle stages (such as thermal behaviour analyses under manufacturing processes and burn-in testing), and assessing life-cycle performance trade-offs, particularly at

the renewal/rehabilitation stages Engineering design project management includes life-cycle engineering analysis as the measurement of system operational perfor-mance in a life-cycle context The issues critical to life-cycle engineering analysis include system performance analysis and performance regimes, system life-cycle data modelling and analysis, performance trade-off measurement, and problems of life-cycle engineering analysis in the context of complex integrated systems

Life-cycle costs Life-cycle costs (LCC) are total costs from inception to disposal

for both equipment and projects The objective of LCC analysis is to choose the

most cost-effective approach from a series of alternatives so that the least long-term cost of ownership is achieved Analytical estimates of total costs are some of the methods for life-cycle costs (Barringer et al 1996)

LCC is strongly influenced by equipment design, installation/use practices, and

maintenance practices Life-cycle costs are estimated total costs that are incurred in the design, development, production, operation, maintenance and renewal/disposal

of a system over its anticipated useful life LCC analysis in engineering design helps

designers justify equipment and process selection based on total costs, rather than estimated procurement costs The sum of operation, maintenance and disposal costs far exceeds procurement costs Procurement costs are widely used as the primary (and sometimes only) criteria for equipment or system selection because they are relatively simple criteria, though often resulting in insufficient financial data for proper decision-making

Life-cycle costs consist fundamentally of acquisition and sustaining costs, which

are not mutually exclusive Acquired equipment always includes extra costs to sus-tain the acquisition Acquisition and sussus-taining costs are determined by evaluating the life-cycle costs and conducting sensitivity analysis to identify the relative cost drivers (Fabrycky et al 1991)

In general, acquisition costs include the following:

• Capital investment and financial management

• Research & development, engineering design, and pilot tests

• Permits, leases and legal fees, indemnity and statutory costs

• Engineering and technical data sheets and specifications

• Manufacturing/construction, fabrication and installation

• Ramp-up and warranty, modifications and improvements

• Support facilities and utilities and support equipment

• Operations training and maintenance logistics

• Computer management and control systems.

In general, sustaining costs include the following:

• Management, consultation and supervision

• Engineering and technical documentation

• Operations and consumption materials

• Facility usage and energy consumption

• Servicing and maintenance consumables

• Equipment replacement and renewal

• Scheduled and unscheduled maintenance

• Logistic support and spares supply

• Labour, materials and overhead

• Environmental green and clean

• Remediation and recovery

• Disposal, wrecking and salvage.

The cost of sustaining equipment can be from 2 to 20 times the equipment acqui-sition cost over its useful lifespan The first obvious cost of hardware acquiacqui-sition

is usually the smallest amount that will be spent during the life of the acquisition, whereas most sustaining expenses are not obvious For sustaining costs, the cate-gories most difficult to quantify are facility usage and energy consumption costs, equipment replacement and renewal costs, scheduled and unscheduled maintenance costs, and logistic support and supply costs

Most capital equipment estimates ignore major portions of the sustaining costs,

as they lack sufficient quantification to justify their inclusion Even when provisions for failure costs are included, they appear as a percentage of the initial costs, and are spread evenly as economic loss due to shutdowns throughout the typical life of the engineered installation However, for wear-out failure modes, the analysis is cen-sored by not including failures in the proper time span Most of the total estimated costs are usually fixed when the equipment is specified during design, and any de-cisions concerned with equipment selection are then based on acquisition costs that

constitute the smallest portion of total LCC (Barringer 1998).

c) Life-Cycle Cost Elements in Engineering Design

In order to estimate life-cycle costs during the engineering design process, all the

appropriate cost items must be identified As indicated previously, LCC consist fun-damentally of acquisition and sustaining costs, which are made up of a number of

cost items that can be grouped into cost categories as illustrated in Fig 4.4 A cost item is the smallest cost that is calculated or estimated as a separate entity The number of cost items used depends upon the particular phase in the engineering design process at which the calculation is carried out The set of cost items is

devel-oped in parallel with the development of a work breakdown structure (WBS), and

it is essential to tie a cost item to the design project scope of work and related de-sign work packages at a certain system hierarchy level of the WBS (Aslaksen et al.

1992)

The level is chosen so that responsibility for a cost item can be individually

as-signed to a specific task However, while a task is analysed by decomposing it into

activities chosen from a predefined set, the cost of executing a task is calculated by

decomposing it into cost types, chosen from a predefined set This set is in itself

developed in a structured or hierarchical fashion as the engineering design process develops At the highest level, there are only three cost types: labour costs, material costs, and capital costs

A cost item is thus identified by one element from each of two index sets—the

set of tasks and the set of cost types In addition, there must be an indication of when

each cost item is to be incurred in the life cycle of the engineered installation Con-sequently, a cost item is identified by three index values: the task at a certain level of

the WBS, the cost type relating to the particular task, and the occurrence of the task

in the life-cycle span of the engineered installation In other words, the representa-tion of life-cycle cost items is three-dimensional In developing the set of cost items,

the most difficult part is to develop the WBS in conjunction with the design project scope of work, as this WBS must encompass all the work associated with designing,

manufacturing, constructing, installing, commissioning, operating and maintaining

the system over its lifetime Thus, for LCC, it is not enough to consider only the

procurement costs of the equipment, or the costs of the engineering effort—instead,

all of the acquisition and sustaining costs relevant to the cost categories illustrated

in Fig 4.4 must be considered

Complementary to the acquisition and sustaining cost items listed previously,

some typical life-cycle cost items that should be identified during the engineering design process, relevant to the defined cost categories for the engineered installation

in its total life cycle, are the following

Fig 4.4 Life-cycle costs structure

Specification costs

• Research and development:

The costs of any investigations and feasibility studies carried out specifically

to support or create the technology needed for the engineered installation, an allocated share of the costs of more general R&D programs, and license fees for the use of technology

• Analysis:

The costs of financial and technical due diligence evaluations, environmental

im-pact studies, market investigations, inspecting existing systems, system analysis, and developing the system specification and initial conceptual design studies

• Design:

The costs of all activities connected with producing the complete set of system specifications, such as modelling, simulation, optimisation and mock-ups; de-veloping databases; producing drawings, parts lists, engineering reports and test requirements; and developing the specifications per se

• Integration and tests:

The costs associated with setting up test facilities, rental of test equipment, in-terface verification, sub-system tests, modifications resulting from unsatisfactory test results, system acceptance tests and test documentation

Establishment costs

• Construction:

The costs associated with site establishment, site works, general construction, support structures, onsite fabrication, inspection, camp accommodation, wet mess, transportation, office buildings, permanent accommodation, water supply, workshop facilities, special fixtures, stores, and any costs resulting from setting

up auxiliary facilities for the supply and storage of support services

• Fabrication:

The costs associated with fabricating systems and assemblies, setting up spe-cialised manufacturing facilities, manufacturing costs, quality inspections, trans-portation, storage and handling

• Procurement:

The costs associated with acquiring material and system components, including warehousing, demurrage, site storage, handling, transport and inspection

• Installation:

The costs of auxiliary equipment and facilities (e.g air-conditioning, power, lighting, conduits, cabling), site inspections, development of installation instruc-tions and drawings

• Commissioning:

The costs associated with as-built non-service inspections, in-service inspections, wet-run tests, and initial start-up costs (utilities, fuel)

• Quality assurance:

The costs of carrying out quality assurance, such as vendor qualification, in-spections and verifications, test equipment calibration, and the documentation of standards, and all types of quality assurance audits

Utilisation costs

• Operation:

All costs associated with the human operation of the system (e.g wages and salaries, social costs, amenities, transportation, transit accommodation), material and fuel costs, as well as energy costs, taxes, licenses, rents and leasing costs, and continual site preparation costs for later restoring the site to its original condition

• Maintenance:

All costs resulting from carrying-out essential warranty maintenance, as well as routine, preventive and corrective maintenance, including the costs of materials (i.e consumables and spare parts), labour, and monitoring and fault-reporting systems

• Documentation:

The costs associated with developing, producing and maintaining all documenta-tion, such as operating and maintenance manuals, spare parts lists, cabling sched-ules, etc

• Training and induction:

The costs of developing training courses, writing training manuals, conducting training, assessing training needs and providing training facilities, as well as the costs of attending induction training

Recovery costs

• Decommissioning and site amelioration:

The costs associated with decommissioning engineered installations including all payments due to termination of operations, such as dismantling and disposing of equipment, environmental protection, plus costs associated with restoring a site

to its original condition

Life-cycle cost models LCC models may vary according to different system

ap-plications in engineered installations There are thus various LCC models used to estimate costs based on the specific needs of designers, manufacturers and users of

an engineered installation In principle, the general LCC model may be formulated

as representing either acquisition and sustaining costs, or the previously defined

cost categories for the engineered installation in its total life cycle

The LCC model representing acquisition and sustaining costs can be formulated

as

where

α=∑m

i=1

m = number of acquisition cost categories

CAi = ith acquisition cost element

and

β=∑n

j=1

Total

Recurring

Non-recurring

System/process integrity

CM

Fig 4.5 Cost minimisation curve for non-recurring and recurring LCC

n = number of acquisition cost categories

CSj = jth sustaining cost element.

The LCC model representing acquisition and sustaining costs, where the acquisi-tion costs can be considered to be non-recurring costs, and the sustaining costs to

be recurring costs, has an optimum when compared to overall system or process integrity (availability and maintainability)

LCC and design integrity, as a figure-of-merit, is considered later This may be represented as a cost minimisation curve, which is illustrated in Fig 4.5 (Dhillon 1983)

The LCC model representing the previously defined cost categories for the engi-neered installation in its total life cycle can be formulated as

where:

CS = specification costs

CE = establishment costs

CU = utilisation costs

CR = recovery costs

d) Present Value Calculations for Life-Cycle Costs

It is not sensible or even very useful to simply add up all the estimated costs for the life cycle of the system Because of the cost of capital (i.e interest) and infla-tion, costs incurred at different times have a different relative value and, to compare these, they must be discounted with the appropriate discount rate To determine an effective cost of capital, the investment capital is discounted by a commercial

inter-est rate that depends on the risk associated with the project, plus any commissions

and charges These effective costs of capital, as well as ownership costs (i.e the

recurring costs of operating and maintaining the system), are not necessarily equal amounts per unit of time For simplicity, discounting by a series of equal payments

may be applied by introducing an effective discount rate.

For the purpose of optimising the LCC of an engineered installation, the ac-counting approach of discounted cash flow (DCF) is adopted There is no intrinsic

advantage in using either present value calculations or the future value However, expressing the cost of capital as a separate cost item does have advantages in that the periodic value of this cost is an accounting item that will affect the cash flow in each period, and costs associated with providing capital (e.g fees for available,

un-used credit) may be easily and consistently accounted for and included in the LCC.

In the approach to using present value calculations for a discounted cash flow analysis, the yearly cash flows are discounted back to the beginning of year 1 (or

end of year 0), using a present value factor that takes into consideration the

infla-tion rate, usually modified to reflect compound interest (calculated and added to, or

subtracted from the capital) every unit of time The result is net present value (NPV)

(Bussey 1978) A major impediment is that the magnitudes and timing of all the cash flows are not correctly taken into account This is essentially true of all but three de-cision criteria methods—net present value (NPV), internal rate of return (IRR), and

profitability index (or the benefit-cost ratio) Under certain conditions, these three

criteria can be properly applied to the design project acceptance problem This is

particularly the case with estimates of NPV and IRR of estimated life-cycle costs during the engineering design stage These criteria are the so-called rational criteria

because they take into account the two attributes most often absent in other criteria:

• The entire cash flow for the life of the project

• The time value of money.

The net present value criterion The general expression for net present value

(NPV), P0, is the following

P0=∑N

t=0

Y t

where:

Y t = the net cash flow at the end of period t

i j = the interest (discount rate) for period j

N= the life of the project

j = points in time prior to t (i.e j = 0,1,2, ,t)

t = the point in time (i.e t = 0,1,2, ,N).

Thus, in the general form, it is not necessary for the interest rates to be equal, which permits a period-by-period evaluation in which the interest rate can take on different values Usually for project evaluation, however, the interest rate is assumed to be

constant throughout, whereby the general expression for NPV reduces to

P0=∑N

t=0