Life Cycle Costing – predicting life cycle costs as part of maintenance management and investment planningAuthor
How does one achieve optimal plant operation in relation to maintenance? Production would like to maximise equipment performance and management would like to minimise maintenance costs. Although operational reliability is important for all, maintenance actions are often postponed, and preventive maintenance and change planning are cut in the name of cost-efficiency. Life Cycle Costing (LCC) is a tool that can be used to predict life cycle costs as part of maintenance management and investment planning.
One cornerstone of long-term maintenance is the identification and optimisation of the life cycle costs of investments as part of purchasing decision-making. The predictability of costs and the profitability of production can be enhanced by using the techno-economic LCC model for production lines and equipment.
LCC is a highly useful tool for making investments and selecting equipment and systems, as the model takes into account both the investment cost and the life cycle costs, allowing the option with the lowest overall cost to be selected. The life cycle profits of technical solutions should also be included in the comparison, if the options being compared differ in their operational reliability, capacity or quality of production.
As awareness of costs and malfunctions increases in the organisation, the LCC model can be developed further and also be used to control the maintenance of existing production lines. An LCC model based on malfunction history can be used to predict and prepare for future changes. Preparation makes for efficient preventive maintenance and stoppages, and allows the timing and amounts of spare part orders to be optimised.
The history of Life Cycle Costing begins in the 1960s, when the United States Department of Defence started improving the efficiency of weapons system investments. The significance of maintenance costs during an investment’s service life was noted time and again. In the 1990s, there was a shift towards so-called reliability-focused maintenance, where the effectiveness of maintenance was improved by utilising the experiences of an investment’s primary users. This resulted in better productivity and increased reliability.
Maintenance costs as part of production line life cycle costs
LCC can be used in manufacturing environments to estimate the life cycle costs of equipment and production lines. Budgeted life cycle costs also offer important information for product pricing purposes.
Life cycle cost can be divided into three main phases: the procurement phase, the operational phase and the decommissioning phase. Costs accumulate over each phase of the life cycle of the equipment or production line, adding up to the final Life Cycle Cost.
- design and planning costs
- initial investment
- operational costs
- maintenance costs
- decommissioning costs
At the procurement phase, the largest cost item is the initial investment, which includes the purchase price of the equipment, but also other expenses, such as installation, testing and software. However, effort should be put into the planning phase as well, as the decisions and choices made at this stage will have far-reaching effects on the whole life cycle and the associated costs.
Unlike the initial investment, operational and maintenance costs recur throughout the investment’s life cycle, comprising either relatively constant expenses – like the cost of energy, supplies and operating personnel – or cost spikes caused by for example, work, materials and lost production due to stoppages and maintenance. Modernisation and overhauls show up in the life cycle model as rare large spikes, compared to other maintenance operations.
LCC will often reveal the considerable impact that unrealised production and maintenance have on life cycle costs: unplanned stoppages caused by repairs and malfunctions, as well as planned stoppages for preventive maintenance, cleaning and so on, will incur downtime costs that add up to a significant portion of life cycle costs. For this reason, improvements targeting these events will reduce costs; the positive development of costs can be seen by monitoring the model’s results.
Increased malfunctions and losses caused by the aging of a production line can also often be discovered when maintenance and malfunction records are reviewed. Downtime and maintenance cost data is very beneficial and should be used to optimise preventive maintenance and to plan overhauls, as this helps control the overall costs. All in all, compared to a simple maintenance system, the added value of the LCC model lies in how it takes into account profits lost during downtime.
The costs at the end of an investment’s life cycle are caused by the decommissioning of the production line or equipment. The time is right for decommissioning, when maintenance costs reach a level where it is no longer profitable, based on the investment calculation.
One way to perform the investment calculation is to analyse how much a new equipment purchase could save annually in significant maintenance and downtime costs, compared to the value of the one-time investment. Naturally, decommissioning may also be necessary to increase capacity or implement new technology. There are costs associated with dismantling, scrapping and toxic waste processing, but the equipment and materials may also have a salvage value, though that is often difficult to estimate beforehand.
LCC calculation tool to manage life cycle costs
An LCC calculation tool is a useful instrument for managing life cycle costs and enhancing production. It is important that the following limits are defined at the start of the LCC calculation:
- the time span for modelling
- the number and extent of cost factors
- the level of detail for costs
For example, it is usual for costs to be calculated at the annual level and for a time span of 20 years or so. The analysis breaks down the typical significant cost factors for each phase of the life cycle, and the model is customised according to the characteristics, needs and information available in each case. For instance, maintenance costs can be divided into repairs and preventive and restorative maintenance.
The expert’s role is to identify the essential cost factors together with the customer and prepare the risk assessment based on the information they have received. The model is primarily used for planning new investments, but with sufficient maintenance and operational history available, the model can also be adapted for existing production lines and thus be used to predict their future cost trends.
The LCC model can take into account a given interest rate and inflation, and provide results already converted to their present value. The accumulation of total costs, as well as the cost of different annual phases and throughout the whole life cycle can be graphically visualised. The model gives a clear overview of the individual factors that incur the most cost; useful information for selecting investments and improving efficiency.
An overview of the calculation chart for the Elomatic LCC model. The model specifies all the major cost factors involved in different life cycle phases and functions. For example, maintenance requires several actions, materials and equipment
As predicting future costs always involves uncertainty, the calculation’s sensitivity to changes is sometimes tested using a sensitivity analysis, which is a way of testing how strongly a change in the initial data affects the result. A typical example of this would be calculations testing what effect the rate of interest has on the final result. As a rule, the impact of the cost factors selected for sensitivity analysis needs to be more than 10 % of life cycle costs.
An indicative graph of the life cycle costs for a production line. The cumulative life cycle cost is the sum of the costs related to different phases..
Challenges in applying the calculations
The calculation of LCC allows the differences of various options to be compared and a choice to be made between investment alternatives. The model is straightforward to build and utilise, particularly for new investments, where the annual operational and maintenance cost estimates should be prepared together with the equipment or system supplier. In practice, this could be an Excel file attached to the request for tenders that the supplier can fill out to indicate the required operational, preventive maintenance and spare part recommendations and estimate the equipment’s operational costs and service life.
LCC is more challenging in the case of existing production lines, when the objective is to predict the remaining service life and future maintenance costs. This requires the creation of a cost model based on sufficient records of malfunction and actual downtime.
In this case, the model is primarily used to prepare for more significant maintenance and mod-ernisation work, as well as to procure the necessary spare parts and materials. A projected cost level can be included in the model to act as a warning threshold; exceeding the threshold means that it is necessary to update the maintenance or replacement measures.
In our experience, it is an intense undertaking to create a cost model and gather information for existing production line systems. The malfunction history of an individual production line consists of its devices and components that require information to be gathered from different sources and systems.
There must also be adequate historical operational and maintenance data for the line – ten to twenty years minimum – to allow the reliable statistical prediction of trends.
Furthermore, the production units rarely specify operational costs by device or even by production line. This often results in theoretical calculations that produce a rough model. The reliability of the cost model can be improved by utilising the user experiences gained from the production line (“reliability-focused maintenance”) and the line’s efficiency data (e.g. total OEE efficiency, including disruptions and their causes) over a long period of time.
The idea of the LCC model is to analyse the costs that are critical to the efficiency of maintenance by exploring the use of personnel, downtime and material purchases. To identify changes that involve maintenance, it is important to acquire sufficient historical data to identify malfunction and maintenance frequency trends.
Automated data collection systems are recommended, once the appropriate measuring locations and methods have been specified. Effective and suitable data collection requires a good understanding of how knowledge of maintenance and malfunctions can improve the management and efficiency of operations.
Today, the life cycle of industrial investments ranges from a few years to decades. However, the funding for investments is shrinking and is focused on shorter repayment periods, i.e. return on in-vestment is sought as soon as possible. The risk here is that urgent and short-sighted decision-making is still focused on the purchase price and not on finding the investment option with the lowest life cycle cost.
This risk can be mitigated with the help of equipment suppliers. Requests for tenders should require the suppliers to estimate the life cycle costs of their solutions. This will make the proposals easier to compare and ensure the overall cost-effectiveness of the decision over the investment’s life cycle.
Furthermore, maintenance can integrate the equipment supplier’s recommendations into maintenance planning after the equipment has been purchased, ensuring that the value of fixed assets is maintained.
The experience of operating personnel and automatic data collection solutions should be used in the LCC model. It is essential that the organisation can easily update the model based on historical maintenance data.
For larger installation investments, the role of the planning phase is significant in defining the life cycle cost of the installation. The ability of different investments to be maintained should be discussed during the planning phase and the maintenance personnel included in the discussion.
Organisations use LCC to minimise life cycle costs and prepare for future cost spikes. The importance of LCC is emphasised during investment decision-making in particular, as operational and maintenance costs are often a much greater factor in the life cycle costs than the purchase price. In the end, the accuracy of the LCC model depends on how it was defined and how accurate the information is.
Even though maintenance is known to be necessary, it is still often seen as a necessary evil. Too often, organisations resort to partial optimisation of different functions, instead of taking into account the long-term overall efficiency.
Maintenance costs are a great part of a product’s life cycle costs, and it is important for everyone to identify and manage them. Without doing so, it is impossible to reach the common goal of efficient plant production (with regard to availability and cost optimisation).
Room for improvement in Finland
There is still room for improvement in Finland’s productivity and industrial competitiveness, compared to other EU countries. Economic growth can be achieved by increasing the amount of work or by improving its productivity. Productivity can be improved by employing more effective methods, more efficient machines and new products.
To celebrate Finland’s centennial, we should work together to improve the productivity of maintenance and make good use of LCC modelling in investments to minimise life cycle costs and improve the predictability of costs!
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