Page 304 - Improving Machinery Reliability

Life Cycle Cost Studies 275

Why Use LCC?

LCC helps change provincial perspectives for business issues with emphasis on
enhancing economic competitiveness by working for the lowest long-term cost of
ownership. Too often parochial views result in ineffective actions best characterized
by short-term cost advantages (but long-term costly decisions). Consider these typi-
cal events observed in most companies:

Engineering wants to meet capital budgets. Hence, the engineering function
avoids specifying cost effective, redundant equipment needed to accommodate
expected costly failures.
Purchasing buys lower grade equipment to get favorable purchase prices.
Project engineering builds plants with a view towards successfully running the
plant only during startup and a few months beyond rather than taking the long-
term view of low-cost operation.
Process engineering employs the philosophy that all equipment is capable of
operating at 150% of its rated condition without failure and other departments will
be responsible for remedying equipment abuse.
Maintenance defers required correctivelpreventive actions to reduce budgets.
Long term costs increase because of neglect and for the sake of meeting short-term
management gains.
Reliability engineering is assigned improvement tasks with no budgets for
accomplishing the goals.

Management is responsible for harmonizing these potential conflicts under the
banner of operating for the lowest long-term cost of ownership. The glue binding
these conflicts together is a teamwork approach for minimizing LCC. When properly
used with good engineering judgment, LCC provides a rich set of information for
making cost-effective, long-term decisions. LCC can be used as a management deci-
sion tool for:

Costing discipline-concerned with operating and support cost estimates.
Procurement technique-used as a tool to determine cost per usage.
Acquisition tool-concerned with balancing acquisition and ownership costs.
@ Design trade-off-integrates effects of availability, reliability, maintainability,
capability, and system effectiveness into x-y charts that are understandable for
cost-effective screening methods.

Be aware that financial performance measures are as numerous as engineering
measures. What really counts for owners and shareholders is return on capital
employed and economic profit derived from the enterprise. If too much is spent for
capital, achieving appropriate returns on the capital is more challenging and likewise
economic profit is too low for generating adequate cash returns.
Every business has a minimum rate of return for projects and this rate of return
should be substantially higher than borrowing rates for money. If the minimum attrac-
tive rate of return is set too high, then many reasonably good projects get disqualified.
If the minimum rate of return is set too low, then too many marginal projects get