Page 302 - Improving Machinery Reliability

Life Cycle Cost Studies 213

introduction
Procurement costs are widely used as the primary (and sometimes only) criteria
for equipment or system selection. This single purpose criterion is simple to use but
often results in bad financial decisions. Procurement costs tell only one part of the
story-most frequently the story is so simple, the results may be damaging to the
financial well being of the business enterprise. Often the initial procurement costs,
based on simple rules, are so cheap they are not affordable. Simple tools (meaning
composed of only one thing) usually give simple results (meaning insubstantial,
superficial, and not to be taken seriously). Remember the adage: “It’s unwise to pay
too much, but it’s foolish to spend too little.” This is the operating principle of LCC.
End users and suppliers of equipment can use life cycle costs for:

.Affordability studies-measure the impact of a system or project’s LCC on long-
term budgets and operating results.
Source selection studies-compare estimated LCC among competing systems or
suppliers of goods and services.
Design trade-offs-influence design aspects of plants and equipment that directly
impact LCC.
Repair level analysis-quantify maintenance demands and costs rather than using
rules of thumb such as “. . . maintenance costs ought to be less than “x” % of the
capital cost of the equipment.”
Warranty and repair costs-suppliers of goods and services along with end-
users need to understand the cost of early failures in equipment selection and use.
Suppliers’ sales strategies-can merge specific equipment grades with general
operating experience and end-user failure rates using LCC to sell for best benefits
rather than just selling on the attributes of low, first cost.

This chapter is directed toward making LCC understandable and usable by the
average engineer. Usually the only value in the life cycle cost equation that is well
known and clearly identified is procurement cost-but that’s only the tip of the ice-
berg. Seeing the tip of an iceberg (similar to the obviousness of procurement cost)
does not guarantee clear and safe passage around an iceberg. Hidden, underlying,
substructures of an iceberg (similar to the bulk of other costs associated with life
cycle costing for equipment and systems) contain the hazards.
Life cycle cost studies gained prominence in the mid-1960s when LCC was the
subject of considerable interest and publications.
Technical societies such as the Society of Automotive Engineers include life cycle
costs in the RMS Guidebook (SAE 1995) with a convenient summary of the princi-
ples. Also, the Institute of Industrial Engineers includes a short section on life cycles
and how they relate to life cycle costs in the Handbook of Industrial Engineering
(IEE 1992).
The limitations of LCC are accepted in the same manner as are normal restrictions
on other engineering tools. Usefulness has been demonstrated by passing the test of
time with practitioners who have learned how to minimize LCC limitations. As with
all cost techniques (and typical of all engineering tools), the limitations can result in