Life Cycle Cost Model for Acquisition of Automated Systems

Ney M. de Vasconcellos Junior

Kyoto University, Graduate School of Engineering
Department of Precision Engineering
and
Masataka Yoshimura*

Kyoto University, Graduate School of Engineering

Department of Precision Engineering
Sakyo-ku, Kyoto 606, Japan
TEL. +81(75) 753-5224, FAX +81(75) 771-7286
e-mail: yoshimura@prec.kyoto-u.ac.jp

*
Author to whom correspondence should be addressed.

Abstract

The analysis of the feasibility for acquiring automated systems requires the
engineer to estimate the future costs and benefits through forecasts and/or predictions.
The uncertainty of the future makes the engineer consider a set of alternative capital
investments so that the best solution to the problem can be obtained and implemented.
The best solution can be obtained by evaluating the active life cycle cost of the
automated system to be acquired. System active life cycle includes procurement,
operation, maintenance, and retirement (phase-out) activities. The objective of this paper
is to, (i) propose a breakdown structure identifying the main activities and sub-activities
for the active life cycle of automated systems, and (ii) construct a discounted cost model
to calculate the total cost for the active life cycle of automated systems. Comparison
between the results obtained using the proposed cost model and the real cost for the
system active life cycle shows a difference error of fifteen percent.

Key words: Active Life Cycle, Automated System (AS)

1. Introduction

1.1 Background

Investments are distributed over a period of time, and time has a monetary
value. These investments include machinery, equipment, facility, and so on. The analysis
of the feasibility of these investments requires the engineer to estimate the future costs
and benefits through forecasts and/or predictions. The uncertainty of the future makes
the engineer consider a set of alternative capital investments, so that the best solution to
the problem can be obtained and implemented. The best solution will answer questions
as: best investment alternative (e.g., buy a new equipment or repair the old one, degree
of automation versus labor employed, and so on).
Determining the worth of any capital investment alternative, several variables
must be defined. In general managers consider the following variables in the decision
making process of capital investment: (i) system total cost; (ii) expenditure and
benefits/revenues, and the time when they will occur; (iii) the economic life of the
alternative (life cycle planning); (iv) and the satisfaction with the investment. The
definition of most of these variables is accomplished by identifying and evaluating the
cost for the activities of the system active life cycle. The system active life cycle starts
after the system leaves the supplier’s facility, and ends when the system retires. System
active life cycle includes system procurement activity, system operation activity, system
maintenance activity, and system retirement (phase-out) activity. Gaimon (1985)
proposes an optimization model focusing on the continuous acquisition of automation
that is used to enhance the productivity of an organization’s existing workforce. Hegde
(1994) proposes a life cycle cost model to estimate the life cycle of durable products.
Their cost models are very general, and do not identify the main active life cycle
activities, and how to calculate their costs.

1.2 Objective

In general, there are two categories of cost estimating: the “top−down”

approach (parametric), and the “ bottoms-up” approach ( engineering approach). The
top-down approach uses historical data from previous system and forecasts the costs of
new system based on cost determining variables, such as increased or decreased
production quantity, reliability, weight, and so on−see Naylor (1979). The bottoms-up
approach requires estimation of material needed for the system, labor-hours, support

2
equipment, maintenance, and so on. These two approaches are usually used in different
stages of the system purchase planning, where the top-down approach is used in the
early stage and the bottoms-up approach is used in the later stage. Both approaches
require the identification of several activities, that per se are related to several cost
categories.
In this study, a breakdown structure is presented identifying the main activities
for the active life cycle activities of automated systems−Chapter 2. Chapter 3 proposes a
discounted cost model to calculate the cost for each activity of the breakdown structure,
that is presented in Chapter 2. Chapter 4 presents a numerical example, and Chapter 5
the conclusion of this study.

2. Active Life Cycle Activities

Estimating the cost for the active life cycle of automated systems (AS) is a very
complex task, that includes the cost evaluation of several activities. Figure 1 depicts a
three level breakdown structure for the active life cycle of AS. All activities of the
breakdown structure have two subscripts. The first subscript indicates the activity level,
and the second subscript is the activity number. For example, the activity X2,3 is at level
two, and its identification number is 3. Each level 3 activity may include the following
cost categories: labor cost, utility, support equipment, consumable material, support
tools, material/equipment for personnel, facility, and computer software.

3. Discounted Cost Model for the Active Life Cycle of Automated

Systems.

In this chapter a discounted cost model is proposed. Considering that the

present worth is known, it is desired to know the costs in the future. The factor eρη
converts a single amount P to a future amount S, with continuous interest at nominal
decimal rate ρ per year, η years with the calendar. The proposed cost model can be used
to calculate the cost for each activity of the AS active life cycle.

3
 Active Life Cycle

Procurement (X1,0) Operation (Y1,0) Maintenance (Z1,0) Retirement (W1,0)

Administrative (X2,1) Administrative (Y2,1) Administrative (Z2,1) Administrative (W2,1)

- review specification (X3,1) - operation planning (Y3,1) - maintenance planning (Z3,1) - retirement planning (W3,1)
- identify alternatives (X3,2) - documentation prep. (Y3,2) - documentation prep. (Z3,2) -environmental plan (W3,2)
- evaluate alternatives (X3,3)
- documentation preparation (X3,4)

Installation (X2,2)
- facility preparation (X3,11)
- unpack system (X3,12)
- assemble system (X3,13)
Operation actions (Y2,2)
- setup the AS (Y3,11)
- check the AS (Y3,12)
- start, adjust, operate AS (Y3,13)
Maintenance actions (Z2,2) Retirement actions (W2,2)
- maintain support equip. (Z3,11) - disassemble the AS (W3,11)
- preventive maintenance (Z3,12) - recycle (W3,12)
- corrective maintenance (Z3,13) - disposal (W3,13)
- perform overhaul (Z3,14)

Initial inspection (X2,3) Personnel training (Y2,3) Personnel training (Z2,3) Personnel training (W2,3)
- check AS (X3,21) - literature preparation (Y3,21) - literature preparation (Z3,21) -literature preparation (W3,21)
- check environment (X3,22) - seminars (Y3,22) - seminars (Z3,22) -seminars (W3,22)
- check support equipment (X3,23)

Testing/Activate AS (X2,4) Quality control (Y2,4) Inventory (Z2,4) Safety (W2,4)

- test each AS subsystem (X3,31) - QC planning (Y3,31) - buy (Z3,31) - inspections (W3,31)
- test AS (X3,32) - design review (Y3,32) - receive (Z3,32) - information prep. (W3,32)
- data collection (X3,33) - review specification (Y3,33) - stock (Z3,33) - data collection/prep.(W3,33)
- corrective action (X3,34) - collect, analyze QC data (Y3,34)

Personnel training (X2,5) Safety (Y2,5) Safety (Z2,5) Tech. data prep. (W2,5)
- literature preparation (X3,41) - inspections (Y3,41) - inspections (Z3,41) - data collection (W3,41)
- seminars (X3,42) - information prep. (Y3,42) - information prep. (Z3,42) - data update (W3,42)
- data collection/prep. (Y3,43) - data collection/prep. (Z3,43)

Safety (X2,6) Technical data preparation (Y2,6) Technical data preparation (Z2,6)
- inspections (X3,51) - data collection (Y3,51) - data collection (Z3,51)
- information prep. (X3,52) - data update (Y3,52) - data update (Z3,52)
- data collection/prep. (X3,53)

Transportation (X2,7) Transportation (Y2,7) Transportation (Z2,7) Transportation (W2,6)

- transportation action (X3,61) - transportation action (Y3,61) - transportation action (Z3,61) - transportation action (W3,51)

Handling/Packaging (X2,8) Handling/Packaging (Y2,8) Handling/Packaging (Z2,8) Handling/Packaging (W2,7)

- handling AS (X3,71) - handling material (Y3,71) - handling material (Z3,71) - handling material (W3,61)
- unpacking AS (X3,72) - handling equipment (Z3,72) - handling equipment (W3,62)

Technical data preparation (X2,9)

- data collection (X3,82)

Initial Transportation for AS (X2,10)

Figure 1. Breakdown structure for the active life cycle of AS

3.1 Cost Category Models

An overall set of cost category models is proposed in this section, and it

includes: labor cost, utilities, support equipment, consumable material and spare/repair
parts, support tools, material/equipment for personnel, facility, and computer software.
Nomenclature for the cost category models is provided in the Appendix.
3.1.1 Labor Cost (L4,0)
Labor cost includes all types of personnel (e.g., managers, engineers,

4
technicians, non-technical workers, and so on). Personnel benefits are also included (e.g.,
bonus, holidays, sickdays, social security, health insurance, legal costs, vacation,
company contribution of profit sharing, and so on). The labor cost category can be
calculated by

 n  L  m  p 
∑( )( ) ( )( )
L4,0 =   L5,1 ⋅ L5,2 + L5,3 + L5, 4 ⋅ L5,5 + L5,6 +  5, 2  ⋅
 L5, 7 
∑( L ) 5, 8 j  + ∑( L ) 5, 9 k ⋅e
ρη
(1)
 i =1  j =1  i k =1 

i = 1,2,3,…, n, where n is the number of different personnel types

j = 1,2,3,…, m, where m is the number of different benefit types
k = 1,2,3,…, p, where p is the number of different extra cost types

In general, there are four types of labor: administrative, engineering, technical,

and general labor. Each labor type can be divided into three categories: senior, medium,
and junior.

3.1.2 Utility Cost (U4,0)

Utility cost includes telephone, electric, water, gas, oil, and steam bills, city
taxes (facility taxes, waste disposal, etc.) and so on. Although the payments are usually
due every month, companies compute the utility costs on year basis. The total utility cost
per year is given by

 n  ρη
∑[ ( ) ] + ∑[ ( U ) ⋅ ( U ) ]
m
U 4, 0 = 
 i =1
)(
U5,1 ⋅ U 5, 2
i
5, 3 5, 4
j
⋅e (2)
j =1 

i = 1,2,3,…, n, where n is the number of different utilities

j = 1,2,3,…, m, where m is the number of different government taxes

3.1.3 Support Equipment Cost (E4,0)

Support equipment can be rented/purchased, and includes computers,
telephones, fax machines, copy machines, cleaning equipment, lifting machines, lathes,
drilling machines, water pumps, oil pumps, vehicles, et cetera. The total support
equipment cost per year is given by

  ρη
∑[ ( ) ] + ∑[ ( E ) ⋅ ( E ) ⋅ ( E ) ]
n m
E4, 0 = 
 i =1
) ( ) (
E5,1 ⋅ E5,2 ⋅ E5,3
i
5, 4 5, 5 5, 6
j
⋅e

(3)
j =1

5
i = 1,2,3,…, n, where n is the number of different rented equipment
j = 1,2,3,…, m, where m is the number of different purchased equipment

The term E5,2 is the total rental time for the equipment, which is different from
the total usage time for all activities (Tt). The reason is that sometimes support
equipment may not be in use ( E5,2 ≤ Tt ), and still be under the user’s possession.

3.1.4 Consumable Material and Spare/Repair Parts Cost (M4,0)

Consumable material cost includes office material (e.g., stationery, computer
paper, etc.), cleaning material, operation material (lubricant oil, fuel, screws, etc.),
maintenance material, and phase out material. Spare/repair parts include all mechanical,
electrical, spare parts for the AS and support equipment. Consumable material and
spare/repair parts cost can be obtained by

  ρη
∑[ ( ) ] + ∑[ ( M ) ⋅ ( M ) ] + ∑ ( M )
n m p
M 4, 0 = 
 i =1
)(
M5,1 ⋅ M5, 2
i
5, 3 5, 4
j
5, 5 k ⋅e

(4)
j =1 k =1

i = 1,2,3,…, n, where n is the number of different consumable materials

j = 1,2,3,…, m, where m is the number of different spare/repair parts
k = 1,2,3,…, p, where p is the number of different extra costs

The second term of Equation (4) should be included only when calculating the
cost for the inventory activity (Z2,8).

3.1.5 Support Tools Cost (T4,0)

Support tools can be rented or and purchased, and includes measuring
instruments, mechanical tools, et cetera. Support tools cost can be obtained by

 n n 
T4, 0 =  ∑[
 i =1
] ∑ [ (T
(T5,1 ) ⋅ (T5, 2 ) ⋅ (T5,3 ) i +
j =1
5, 4 ]
) ⋅ (T5,5 ) ⋅ (T5, 6 ) j  ⋅ e ρη

(5)

i = 1,2,3,…, n, where n is the number of different rented support tools

j = 1,2,3,…, m, where n is the number of different purchased support tools
3.1.6 Material/Equipment Cost - for Personnel - (P4,0)
Material/equipment for personnel includes all types of clothing, protection

6
equipment, or any kind of device that is used/worn by any personnel to perform a
particular task. The equipment considered in this category are non-depreciable
equipment. Material/equipment cost can be calculated by

n m 
P4,0 = ∑ ( P5,1 ) ⋅( P5, 2 ) + ∑ ( P5,3 ) ⋅( P5, 4 )  ⋅ e ρη
 i =1 j =i 
(6)

i = 1,2,3,…, n, where n is the number of different material type i

j = 1,2,3,…, m, where m is the number of different equipment type j

3.1.7 Facility Cost (F4,0)

Facility cost includes cost to buy/rent land, build/expand, and maintain all
facilities to keep the AS operational. Facility cost can be calculated by Equation (7). The
allocation factors F5,6 and F5,10, are defined by the ratio of occupied facility area over the
total facility area. Facility city taxes are considered in the utility cost category.

∑{ [ ( F ) ⋅ ( F ) + ( F ) + ( F ) + ( F ) ] ⋅ ( F )} + ∑{ [ ( F ) + ( F ) + ( F ) ] ⋅ ( F )}
 n m  ρη
F4, 0 =  5,1 5, 2 5, 3 5, 4 5, 5 5, 6 5, 7 5, 8 5, 9 5,10 ⋅e (7)
 i = i
j =1
j

i = 1,2,3,…, n, where n is the number of different purchased facilities
j = 1,2,3,…, m, where m is the number of different rented facilities

3.1.8 Computer Software Cost (S4,0)

Computer software cost includes the cost of leased software, purchased
software, and software support. Software purchase/lease contract can be of two types:
type I, the cost is based on the number of installed copies of software type i; and type II,
the cost is based on each type of software regardless the number of installed copies. For
cost type II, the value for S5,3 and S5,6 is 1.0. The cost for computer software can be
calculated by

 n  ρη
∑[ ( ) ( ) ( ) ( ) ( ) ] + ∑[ ( S ) ⋅ ( S ) ⋅ ( S ) + ( S ) ]
m
S4, 0 =  S5,1 ⋅ S5,2 ⋅ S5,3 ⋅ S5, 4 + S5, 5 5, 6 5, 7 5, 8 5, 9 ⋅e (8)
 i =1 i
j =1
j


i = 1,2,3,…, n, where n is the number of different leased software

j = 1,2,3,…, m, where m is the number of different purchased software

7
3.2 Cost Model Formulation

3.2.1 Model Assumptions and Definitions

For the proposed model the following assumptions are made:
1. The acquisition strategy of automated systems can be (i) discrete timing strategy, or
(ii) a continuous timing strategy where a certain facility is slowly converted, totally or
partially, from manual to automatic. In this study the acquisition strategy is considered to
be discrete.
2. The characteristic of the automation being considered can be of two types: (i) the new
system substitutes the manual labor to increase production (e.g., packaging machines,
automobile assembly lines, etc.); (ii) the new system aids the manual labor to increase
production (e.g., computer aided design systems). In this study the automation
characteristic is considered to be the substitute type.
3. An AS, composed of independent workstations connected in series by a material
handling device (e.g., conveyor), is considered.
4. The system has n workstations (i.e., w1, w2, w3,…, wn), and all workstations are
subjected to fail.
5. Only one workstation is allowed to fail at certain time t.
6. The entire system stops when one workstation fails, and it remains in down state until
corrective maintenance actions are completed.
7. Idle workstations are not considered as in down state.
8. Renewal cycle ρ is the elapsed time that includes the time between failure (operating
time) plus the downtime.
9. Probability of failure at time α : Assumption #5 states that only one workstation fails
at time α . Thus,
P ( w1 ∩ w2 ∩...∩ wn ) = ∅ (9)

In words, Equation (9) means that all workstations are disjoint (mutually exclusive). For
any number of disjoint events (workstation failures),
P ( S ) = P ( w1 ∪ w2 ∪...∪ wn ) . (10)
Then,
P( S ) = P ( w1 ) + P ( w2 ) +...+ P ( wn ) (11)

where, P(S) = system probability failure, P(α ) ≥ 0

P(w1) = probability of failure for workstation #1

8
 P(w2) = probability of failure for workstation #2

P(wn) = probability of failure for the nth workstation

10. One of the main objectives of the proposed model is to obtain the system up time
(operation time) and the down time (preventive maintenance actions, corrective
maintenance actions, and when overhauls are needed), to calculate the cost to operate
and maintain the system. It is assumed that data from a similar system is available.
11. Preventive maintenance actions depend on the number of operating hours. For
example, for every one hundred hours of operating time, preventive maintenance type I
must be performed, for each two hundred hours of operating time preventive
maintenance type II is performed, and so on.
12. As the system ages, the failure rate λ increases, due to wear out of components, and
so on. So there is a point in time that the system failure rate will reach a high value λMax,
and a normal preventive maintenance action will not be enough to make the system
operate efficiently. So a more detailed preventive maintenance (overhaul) is required.
The overhaul Ov is required periodically during the system life cycle and it can be also
planned in advance.

3.2.2 Operation and Maintenance Time

The cost for the procurement and retirement activities is obtained by estimating
all the terms for each cost category model. The duration of each procurement/retirement
activity is very short, so predictions and estimations can be easily done. System
operation (up-time) and maintenance (downtime) occur throughout the AS active life
cycle, and to make an accurate estimation, a more complex analysis is required.
Reliability of a system is the probability that the system will survive during a
period of time. There are several reliability models that have been developed −see
Haviland (1964) and Kapur & Lamberson (1977). They all assume that the reliability
function is exponential distributed. In this paper a more general model is proposed to
determine the operation time α , preventive maintenance time p, corrective maintenance
time β, and overhaul time Ov.

3.2.3 Life Cycle of Automated Systems

It is well known that the failure rate of an equipment decreases in the very
beginning of its life cycle, due to material or manufacturing defects. Then it is nearly
constant for a period of time, and finally it increases due to wear out of parts, and so on−

9
see Kapur & Lamberson (1977). Figure 2 depicts the life cycle of AS. The system starts
with an initial failure rate λi , which can be determined by using data from a similar
system, testing, and/or computer simulation. After certain time the failure rate reaches a
high value λMax. At this time tOv overhaul is performed. During the system life cycle
several overhauls will be required to maintain the system operating efficiently. As the
system ages, the time between two overhauls gets smaller. At time tR, an overhaul will
not bring back the system to an efficient operating status. This is the retirement time or
phase-out.
The system life cycle is composed of n renewal cycles ρ, periodic preventive
maintenance and overhaul. The life cycle is given by

( )
t R = α + β ⋅ n + t p + tOv (12)

where tR = total life cycle

α = mean time between failure (MTBF)
β = mean corrective maintenance time ( Mct )
n = number of renewal cycles
tp = total preventive maintenance time
tOv = total time to perform all overhauls

λMax( R )
r(t) λMax λMax λMax
λi

t0 t1 t2 tOv(1) tOv(2) tOv(R-1) tR

Time

Figure 2. Hazard function r(t) over the system life cycle. λ = r(t)

3.3 Proposed Model

Table 1 shows the cost category models that apply to each active life cycle
activity, and the activities that are time dependent. There are three activities that are time
dependent: operation action activity Y2,2, that depends on operation and maintenance
time; corrective maintenance action Z2,2, and inventory Z2,4, that depend on maintenance
time. The variables for each time dependent activity is given bellow:

10
 Operation action activity (Y2,2): L5,2, L5,3, U5,2, M5,2, M5,4.
Corrective maintenance activity (Z2,2): L5,2, L5,3, U5,2, E5,4, E5,7, M5,2, M5,4, P5,1, P5,3.
Inventory− spare/repair parts (Z2,3): L5,2, L5,3, U5,2, E5,4, E5,7, F5,6, F5,10.

The cost for these activities is obtained by first determining the expected operational
time, expected maintenance time, preventive maintenance time, and overhaul time.
Second, a relationship between each variable and the expected times must be realized.
For example, (i) U5, 2 = b ⋅ α (t), where b is the amount of consumed energy (utility type
i) per operating and/or maintenance hour (e.g., m3/hour); (ii) L5, 2 = a ⋅ α (t), where a is
the proportional labor rate, that determines the percentage of labor hours for all labor
types−for example, if α = 100 hours and 5 hours goes for management, 10 hours goes
for supervision, and 85 hours goes for operation, then am = 0.5 , as = 0.15 , and
ao = 0.85 ; and so on. Third, plug back the variables’ values into their respective cost
category models. Finally, calculate the activity cost adding up the cost category models
that should be considered, according to Table 1 (e.g., Y2,5 = U4,0 + E4,0 + T4,0 + P4,0 + F4,0 +
S4,0).
If data from a similar system is available (testing, and/or computer simulation)
density functions for α and β can be obtained, and finally their respective expected
values Eα and Eβ. It is desired to obtain the expected values for each year, to compute
the annual cost for the active life cycle of AS.

3.3.1 System Operating Time α

The density function u(t) of α, for the entire system, can be obtained from
Equation 11. Thus,
n
u( t ) system = ∑ u( t ) wi , t [ l ] ≤ t ≤ t [ u ] (13)
i =1

where u( t ) wi is the density function of operating time (time to failure) for ith
workstation, and t[l] , t[u] are the lower and upper bound, respectively.
The expected value for α is given by

n ∞ 
Eα ( system ) ( T ) = ∑  ∫ t ⋅ u(t ) dt  , i = ,2,3, … , n (14)
i =1  0 i

where t [ l ] ≤ T ≤ t [ u ] , and n is the number of different workstations. Eα is the number of

11
operating hours ( t [ l ] = 0, t [ u ] = 12 months ).

Table 1. Time dependent activities

Activities Cost Category

L4,0 U4,0 E4,0 M4,0 T4,0 P4,0
F4,0 S4,0
X2,1
X2,2
X2,3
X2,4
Procurement X2,5
X2,6
X2,7
X2,8
X2,9
X2,10
Y2,1
Y2,2 ✔ ✔ ✔
Y2,3
Operation Y2,4
Y2,5
Y2,6
Y2,7
Y2,8
Z2,1
Z2,2 ✔ ✔ ✔ ✔ ✔
Z2,3
Maintenance Z2,4 ✔ ✔ ✔ ✔
Z2,5
Z2,6
Z2.7
Z2,8
W2,1
W2,2
W2,3
Retirement W2,4
(Phase-out) W2,5
W2,6
W2.7
✔ Function of the time to failure α , preventive maintenance p, corrective
maintenance β , and overhaul Ov.
Estimated according to information of a similar system
Do not apply

3.3.2 System Preventive Maintenance Time p

The preventive maintenance time can be planned in advance, according to
supplier’s instructions. Thus,
n
psystem = ∑ m p ⋅ p
i =1
( ) i

(15)

12
where p = elapsed time for preventive maintenance type i
mp = number of preventive maintenance type i (year basis)

3.3.3 Corrective Maintenance Time β

Corrective maintenance action takes place when system fails. In other words, it
depends on the occurrence of the failure event. Thus,

P( α ∩ β )
P( β α ) ≡ , P(α) > 0 (16)
P( α )

The random variables α and β are strictly continuous. The conditional density function of
β given α is
f ( α, β)
f ( β α) ≡
f1 ( α )
(17)

tβ [ u ]

where f1(α) > 0, f(β α) ≡ f(β), and f1 ( α ) = ∫ f (α , β ) dβ .

tβ [ l ]

For the entire system Equation (17) becomes

 
 
n 
f (α,β) 
f ( β α ) system ≡ ∑  t [u ]  , i = 1,2,3,…, n (18)
i =1  
β

 ∫ f1 ( α , β ) dβ 
 t β [ l ]  i

In Equation (18), f(α,β) is the joint function of α and β for workstation i, and
tβ [ u ]

∫ f (α , β ) dβ is the marginal density function of α for workstation i.

tβ [ l ]

The conditional expectation or conditional mean of β given α is given by

tβ [ u ]

E( β α ) = ∫ β ⋅ f ( β α) dβ
tβ [ l ]

(19)

13
where α is to be interpreted as αl < α < αu (αl = lower bound, αu = αl + dα = upper
bound).
Finally the expected value for the corrective maintenance, for the entire system,
is given by
n tα tβ 
[ u]

[u]
 
Eβ ( system ) (T ) = ∑  ∫  ∫ β ⋅ f ( β α ) dβ  ⋅ f1 ( α ) dα 
i =1  tα [ l ]  t [ l ] 
 β i (20)

Eβ is the number of corrective maintenance hours.

3.3.4 Overhaul Time Ov

According to Figure 2, the hazard function r(t) changes over the system life
cycle. The first portion of the hazard curve decreases, the second portion is almost
constant, with a small positive slope, and finally the third portion of the curve increases.
Experience has shown that the first and third portions are nonlinear, and the second
portion can be approximated to a linear function. The occurrence of an overhaul Ov
depends on the system failure rate λ. In other words, overhaul is needed when λ reaches
a critical value. In Figure 2, system overhaul is performed when λ = λMax. The time that
overhaul occurs can be obtained from the hazard function r(t). In Shooman (1968), a
model, piecewise linear bathtub hazard function, is presented. In Kapur & Lamberson
(1977), several models are proposed, e.g., power function model, exponential model,
etc. In this study data from a similar system is considered to be available, so overhaul is
planned in advance, and it is given by

( )
n
Ov ( system ) = ∑ mOv ⋅ Ov
i
i =1

(21)

where Ov = elapsed time for preventive maintenance type i

mOv = number of overhauls type i (year basis)

4. Numerical Example

The following example demonstrates the decision making process for

acquisition of AS using the cost analysis that is proposed in this study. Three AS suppliers
are considered (i.e., system A, B, and C), where each supplier offers an AS that should

14
match the buyer’s specifications and requirements. The criteria to choose the best system
are: (i) lowest active life cycle cost, that includes system acquisition cost, procurement
cost, operation cost, maintenance cost, and retirement cost; (ii) lowest system total
downtime; (iii) and highest production rate.
A utility function U ( x ) −see Keeney and Raifa (1993)−will be used to select the
best system, which is the one with the highest utility value.

4.1 System Characteristics and Cost

The life cycle data for system A is an actual data from a Japanese company that
builds packaging machines. Table 2 is obtained by using the cost model presented in
Chapter 3. It shows the annual cost (end of year ) for the active life cycle of system A (all
figures in US$). The values are not discounted (present worth). A spreadsheet software
was used to perform the calculations.

Table 2. Annual (end of year) active life cycle cost for system A
Active Begin. 1st 2nd 3rd 4th 5th
Life Cycle of 1st y year year year year year
Initial cost 4000000 0 0 0 0 0
Procurement 0 11849 0 0 0 0
Operation 0 99996 100331 100386 100307 99847
Maintenance 0 74587 74732 75013 75328 75193
Retirement 0 0 0 0 0 46415
Salvage Value 0 0 0 0 0 -1000000
TOTAL 4000000 186432 175063 175399 175635 -778545

The life cycle data for system B was provided by a supplier, from USA, that
uses computer software to simulate the system life cycle of AS. Table 3 shows the annual
cost (end of year ) for the active life cycle of system B (values are not discounted).

Table 3. Annual (end of year) active life cycle cost for system B
Active Life Begin. 1st 2nd 3rd 4th 5th
Cycle of 1st y year year year year year
Initial cost 3700000 0 0 0 0 0
Procurement 0 8500 0 0 0 0
Operation 0 112500 113300 111779 110128 109628
Maintenance 0 85876 86432 88987 90765 89978
Retirement 0 0 0 0 0 95780
Salvage Value 0 0 0 0 0 -520000
TOTAL 3700000 206876 199732 200766 200893 -224614

The life cycle data for system C was provided by a third supplier, also from
USA, that uses the same method that supplier of system B uses (computer simulation) to
generate data for the system life cycle. Table 4 shows the annual cost (end of year ) for
the active life cycle of system C (values are not discounted).

15
 Table 4. Annual (end of year) active life cycle cost for system C
Active Life Begin. 1st 2nd 3rd 4th 5th
Cycle of 1st y year year year year year
Initial cost 3200000 0 0 0 0 0
Procurement 0 6200 0 0 0 0
Operation 0 115890 117146 118685 116788 117890
Maintenance 0 93987 94059 96986 98890 97002
Retirement 0 0 0 0 0 75900
Salvage Value 0 0 0 0 0 -600000
TOTAL 3200000 216077 211205 215671 215678 -309208

4.2 Systems Selection

4.2.1 Comparing Systems A, B, and C

Figure 3 depicts the discounted accumulative annual cost for the active life cycle
of systems A, B, and C. Cash flow is discrete and the annual interest rate is considered to
be five percent− continuously compounded. System initial cost and salvage values are
included. System C has the lowest accumulative cost at the fifth year. This may explain
why system C has the highest active life cycle cost. In other words, systems with a low
initial cost tend to have a high life cycle cost and low salvage value.
Sometimes the accumulative costs, for two or more competing systems, are the
same at certain time of the system life cycle. For example, suppose that the intersection
point between system A and B (see Figure 3−between the fourth and fifth year) had
occurred during the third and fourth year. Then the buyer could consider a life cycle
reduction, and choose the system that satisfies other criteria besides the total cost, since
the total cost is the same for the competing systems. This approach will require a new
analysis, since a new system will be required earlier than planned to substitute the
previous system.

4.2.2 Utility Analysis and System Selection

Utility analysis is a very useful tool for choosing the best alternative, when
several alternatives are being considered (e.g., project alternatives, equipment suppliers,
etc.). More details about utility analysis can be found in Keeney & Raifa (1993).
The total utility value can be obtained by

[
Ui ( x ) = ∑ ( w1 ⋅ x1 ) + ( w2 ⋅ x2 ) + ( w3 ⋅ x3 ) +  + ( wn ⋅ xn )
j =1
] (22)
j

16
where Ui ( x ) = total utility value for system i, 0 < Ui ( x ) ≤ 1
x = normalized attribute vector x1, x2, x3, … , xn
wj = normalized weight value for attribute xj

DISCOUNTED ACCUMULATIVE COST FOR THE ACTIVE LIFE CYCLE

OF SYSTEMS A, B & C

6000000
5755896
5500000 5,257,265 (B)
5271119 5427775 5,051,335 (A)
Discounted Cost ($)

5000000
4820197 4971964 4,901,211 (C)
4883111
4538504
4500000
4401075 4394376

4000000 4107186
3974907 System A
3700000 System B
3580145
3500000
System C
3200000
3000000
0 1 2 3 4 5
Life Cycle (years)

Figure 3. Plot for the accumulative annual cost for the active life cycle of systems
A, B & C.

The systems’ attributes considered in this study are: (i) system accumulative
cost, x1 (total life cycle cost); (ii) system up time, x2; and (iii) high quality operation, x3.
Table 5 shows the values for the utility analysis of systems A, B, and C. The last
column shows the total utility value for system A, B, and C (0.36, 0.33, and 0.31
respectively). System A has the highest total utility value.
The objective is not only to choose the system with lowest cost, but to choose
the system that will satisfy all criteria (i.e., attributes x1, x2 , and x3) simultaneously.
Although system A has the highest life cycle cost, its total utility value is the highest.
Thus, the final decision is to choose system A. The discounted cost model, proposed in
Chapter 3, was used to evaluate the total cost for the active life cycle of systems A, B,
and C.
Using real data for the active life cycle of each system, an error analysis was
performed, and the percentage error was found to be 15 percent.

17
 Table 5. Utility analysis values for systems A, B, and C
System x1 w1 x2 w2 x3 w3 Ui
A 0.33 0.5 0.37 0.2 0.40 0.3 0.36
B 0.32 0.5 0.34 0.2 0.35 0.3 0.33
C 0.35 0.5 0.29 0.2 0.25 0.3 0.31

5. Conclusion

Many cost models have been developed in the last decade, and most of them
consider only operation and maintenance activities, disregarding other main activities and
their sub-activities. Those cost models are very general and do not allow one to define
specifically the cost for an activity alone. Hegde (1994) proposes a life cycle cost model.
The objective of his study is towards estimating life cycle cost of automated systems
considering discounting issues and nonlinear costs of product failures, and not to
investigate, which he calls, the variable cost C(t) −that includes operation and
maintenance. Gaimon (1985) also does not investigate the active life cycle, but the
relation between acquiring AS and reduction of labor. The same does Houtzeel (1981)
and Tombari (1978).
In this paper a cost analysis was proposed with the intent to support AS
purchase strategy. The proposed model allows one to evaluate the cost of any active life
cycle activity and/or sub-activity, at any level. The necessary data, to apply the proposed
cost model, can be obtained by a previous similar system, testing, and/or computer
simulation. The proposed cost model have not been compared with other cost models.
Actually, real data, from three different companies, were used to check the results that
were obtained by applying the proposed model. The results differed by 15 percent
(existing models have an average percentage error that ranges from 10 to 20 percent).
The percentage error can still be reduced if more activity levels are added to the
proposed breakdown structure in Figure 1.
Next step is to develop a windows oriented software (e.g., Visual Basic, Visual
C++, etc.), that will reduce the data input time, and allow one to reuse the current cost
analysis for different AS. This task is underway.

Acknowledgments

This work was made possible by Kyoto University and by the Japanese Ministry
of Education (Mombusho).

18
Appendix
Nomenclature
E5,1 = rent cost per unit of time ($/hour) for equipment type i
E5,2 = total rental time for equipment type i in one year (all activities)
E5,3 = allocation factor for rented equipment type i. The allocation factors E5,3 and E5,6,
are used when the support equipment/tool can be used in different activities (e.g.,
a crane can be used during system operation and also during system maintenance
action). The allocation factor value can be determined according to the time of
use in each activity. For example, if an equipment is used in the operation activity
only, the allocation factor should be 1.0; if the equipment is used 100 hours in the
operation activity and 30 hours in the maintenance activity, during the current
year, then the allocation factor should be 0.77 for operation activity and 0.23 for
maintenance activity.
E5,4 = cost per unit of equipment j (equivalent annual cost). This value should be
allocated throughout the support equipment life cycle. It should be equivalent to
the cost of using the equipment in one year (equivalent annual cost).
E5,5 = total number of purchased equipment type j (in one year)
E5,6 = allocation factor for purchased equipment type j (see E5,3)

F5,1 = rate cost per square meter of land/building for facility i (equivalent annual cost)
F5,2 = total amount, in m2, for facility i
F5,3 = cost for building facility i (equivalent annual cost)
F5,4 = cost for maintaining facility i (equivalent annual cost)
F5,5 = cost for restoration/expansion of facility i (equivalent annual cost)
F5,6 = allocation factor for using facility i
F5,7 = rent cost for facility i (equivalent annual cost)
F5,8 = cost for restoration/expansion of facility i (equivalent annual cost)
F5,9 = cost for maintaining rented facility i (equivalent annual cost)
F5,10 = allocation factor for using rented facility i

L5,1 = labor rate cost ($/hour) for personnel type i

L5,2 = regular labor time in hours for personnel type i, (regular labor time for the current
task in one year).
L5,3 = idle labor time, due to system failure, for personnel type i (during this time the
personnel that operates the system do not perform any task due to full/partial

19
 system failure/maintenance actions). This term applies only to personnel that
operates the AS.
L5,4 = overtime rate cost ($/hour) for personnel type i
L5,5 = overtime labor in hours for personnel type i (overtime for the current activity in
one year.
L5,6 = idle overtime time, due to system failure, for personnel type i (during this time the
personnel that operates the system do not perform any task due to full/partial
system failure/maintenance actions). This term applies only to personnel that
operates the AS.
L5,7 = the total number of worked regular hours in one year for personnel type i (usually
1920 hours, 40 hours per week) per worker.
L5,8 = cost of benefit type j per year, for personnel type i
L5,9 = extra cost (it includes all extra costs not covered anywhere else)

M5,1 = cost rate per unit of material i (e.g., $/m3, $/m2, $/m, $/liter, $/Kg, etc.)
M5,2 = quantity of material i needed per year (e.g., m3, m2, m, liter, kg, etc.)
M5,3 = cost rate per unit of spare/repair part type j
M5,4 = number of spare/repair part type j
M5,5 = extra cost, which includes cost for insurance, taxes, obsolescence, and spoilage
of loss.

P5,1 = quantity of material type i needed per year

P5,2 = rate cost per unit of material type i
P5,3 = quantity of equipment type j needed per year
P5,4 = rate cost per unit of equipment type j

S5,1 = cost type I: lease cost per hour per computer for software type i
($/hour/computer); cost type II: lease cost per hour for software type i.
S5,2 = total lease time for software type i (total time in one year)
S5,3 = number of computers with software type i installed (only for cost type I)
S5,4 = allocation factor for using software type i (see E5,3 Equation 3)
S5,5 = cost of software support for software type i (for one year)
S5,6 = cost for one software type j (equivalent annual cost)
S5,7 = number of computers with software type j installed (only for cost type I)
S5,8 = allocation factor for using software type j (see E5,3 Equation 3)
S5,9 = cost of software support for software type j (for one year)

20
T5,1 = rent cost per unit of time ($/hour) for support tool i
T5,2 = total rental time for support tool i (in one year)
T5,3 = allocation factor for rented support tool i (see E5,3 Equation 3).
T5,4 = cost per unit of support tool j
T5,5 = total number of purchased support tool j (in one year)
T5,6 = allocation factor for purchased support tool j (see E5,3 Equation 3)

U5,1 = cost rate for utility type i, e.g., $/kWh (electric bill), $/m3 (gas), etc.
U5,2 = amount of utility type i spent in one year
U5,3 = property tax type j (total for the current year)
U5,4 = allocation factor, which is equal to F5,6 and/or F5,10 (Equation 7)

References
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Jarret, J., 1991, Business Forecasting Methods (Basil Blackwell, Inc., Cambridge).
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Keeney, R. L. and Raifa H., 1993, Decision with Multiple Objects−Preferences and
Values Tradeoffs, Cambridge University Press.

Naylor, T., 1979, Corporate Planning Models (Addilson-Wesley Publishing Company,

Inc., Massachusetts).
Shooman, M. L., 1968, Probabilistic Reliability: An Engineering Approach (McGraw-
Hill, NY).
Tombari, H. A., 1978, Factors to be Considered When Evaluating the Purchase and
Use of Numerically Controlled Machine Tolls, Production and Inventory
Management, 19, 52−61.
Vasconcellos, N. M., 1997, Integrating the Elements of Logistics in the System Life
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automated assembly systems. Thesis for the International Graduate Course in

21
 Mechanical Engineering, Graduate School of Engineering, Kyoto University,
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About the author:

The author obtained his bachelor degree in Mechanical Engineering, at State

University of New York at Stony Brook, New York; worked for Giorgio Consulting
Engineering (New York), as cost analyst, for two years; obtained his master degree in
Industrial Engineering, at Kyoto University, Japan; and worked for Kyoto Seisakusho
Co., Japan, senior cost analyst (planner) for two years.

22