Life Cycle Costing - the underlying issues and what we can do about them

John Woodhouse
CEO, TWPL Chair of Faculty, IAM

The Woodhouse Partnership Ltd 2010

Normal LCC weaknesses

Poor data Poor understanding of subject, elements & maths. No quantification of risk/reliability/performance elements Asset life or horizon is predetermined (e.g. NPV) Difficult to compare options with different lives Taxation & capex/opex definitions & impact

Capital rationing & budgeting process

Complexity & selling of LCC-based recommendations Contracts & KPIs reinforce short-termism (e.g. cheapest solution)

The Woodhouse Partnership Ltd 2010

BSI PAS 55:2008 requirements to optimise asset life cycles

The Woodhouse Partnership Ltd 2010

A 3-year R&D programme to develop best practice guidance, decision tools and case studies in

The optimal management of aging assets

www.SALVOproject.org
The Woodhouse Partnership Ltd 2010

Phases needing a Life Cycle view

ISO15663
Business impact Acquisition CAPEX OPEX, Risks &
Minor Changes CAPEX

Asset health & utilisation benefits

SALVO

Degradation &/or obsolescence: technology overtake & demand changes

Normal Operation & Maintenance

The Woodhouse Partnership Ltd 2010

During life asset care options

(Bath-tubs & Hand-basins)

Age of Asset
Maintenance-induced Risks Degradation Risk

Maintenance Tasks, Shutdowns, Modifications etc.

6
The Woodhouse Partnership Ltd 2010

Asset life cycle decisions

Costs & Risks (/year)

a) Pre-purchase: optimal life cycle or design A vs. B

Costs & Risks (/year)

b) Existing equipment upgrading: justification & payback

Costs & Risks (/year)

c) Equipment upgrade: life extension options

Costs & Risks (/year)

d) Optimal replacement timing for current equipment

The Woodhouse Partnership Ltd 2010

End of useful economic life is inherently fuzzy

Asset health, performance, condition, value

2. Renewal options & timing optimisation

Uncertain mix of random/external and age- or use-related damage mechanisms

1. Various options to repair, refurbish & extend life

3. Upgrade, change or dispose?

Asset age

Uncertainty compounded by
Variable deterioration rates Quality of measurement/knowledge Variable functional demand & usage
The Woodhouse Partnership Ltd 2010

Net Present Value

Good for considering future cash flows Can also include risks & performance values Needs pre-chosen horizon Cannot safely be used if lifespan is a variable

Life Cycle NPV

A M1
i 2

p i 1M i

p n Sn

A = Acquisition cost. Mi = Operating & Maintenance cost in year of life i. Sn = Resale value at age n r = Discount rate p = 1/(1+r) i.e. the discount factor
The Woodhouse Partnership Ltd 2010

Equivalent Annual Cost

Good for considering future cash flows Can also include risks & performance values Handles any combination of horizons Represents total life cycle cost of ownership
n

r A M1

p i 1M i p n S n
i 2

Life Cycle EAC

1 pn

A = Acquisition cost. Mi = Operating & Maintenance cost in year of life i. Sn = Resale value at age n r = Discount rate p = 1/(1+r) i.e. the discount factor
The Woodhouse Partnership Ltd 2010

Constructing a Life Cycle Total Cost of Ownership

Tacit knowledge capture (deterioration, performance, risks, costs etc)

APT-MAINTENANCE
Decision Support Tools Ltd 2009
The Woodhouse Partnership Ltd 2010

Optimizing Life Cycles

a) for existing asset
Optimal time to replace current asset

Net impact of delaying replacement

The Woodhouse Partnership Ltd 2010

Optimizing Life Cycles

b) like-for-like renewal or upgrade?
Total cost of ownership for new asset also affects urgency to replace the existing asset
Optimal time to replace current asset

APT-LIFESPAN Decision Support Tools Ltd 2009

The Woodhouse Partnership Ltd 2010

Prioritising an investment programme & optimising work bundles based on LCC

AFTER: optimized for costs, risks & downtime sharing APT-SCHEDULE

Decision Support Tools Ltd 2009

The Woodhouse Partnership Ltd 2010

1. Group assets into families for management strategy:

Asset health, performance, condition

5. Asset portfolio total costs & risks

e.g. Capital investment plans, resourcing needs, risk & cost forecasts

a) Asset types & health (age, condition, performance etc.) b) Asset roles/criticality

?
Asset age

The SALVO Smiley

2. Identify possible interventions for each asset or asset family
Decision tree for Inspection, maintenance, modification and renewal options
2. Various renewal options & timing optimisation (reset the clock)

4. Work programme integration and bundling optimisation

a) b) Optimal blend of insp, mtce and renewal for specific asset family Work programme optimisations (e.g. shutdowns, travel)

Asset health

1. Various options to repair, refurbish & extend life

(Slowing the degradation)

3. Upgrade, change or abandon?

Asset age

AFTER: optimized for costs, risks & downtime sharing

3. Evaluate & optimize individual interventions and action timing.

The Woodhouse Partnership Ltd 2010

Merging hard data & tacit knowledge, creating quantified cost/risk audit trail

Participants and opportunities

Scope to join as Industrial Associate

GB5k cost (1-off) Introductory training in cost/risk optimisation Workshops on methods, case studies etc. Peer review of materials & guidance Big discount on emerging tools Contact: enquiries@SALVOproject.org
The Woodhouse Partnership Ltd 2010