Life Cycle Costing through the whole life cycle provides best return on investment

16 December 2015

Systecon's President Robert Hell highlights how working systematically with LCC throughout a system’s life provides increased benefits around the world.

Previously, I have drawn attention to the growing interest in Life Cycle Cost based procurement from our customers. In this column, I want to focus on how working systematically with LCC throughout a system’s life provides increased benefits around the world.

LCC is often associated with procurement. Perhaps it is also during this stage when LCC methods offer the greatest impact. By setting the right requirements and choosing the product that is best placed to deliver low LCC early in the procurement process you can achieve significant savings. But you must also ensure that these aspects are consolidated throughout the process, including delivery and commissioning. This is an important prerequisite, but unfortunately it is not enough. There is also a need for continuous work during the whole life cycle of a system, in which LCC is constantly used to evaluate the decisional situations that are faced. It applies regardless of whether we are talking about modifications, changes in operating scenarios or pure cost-cutting initiatives. LCC also needs to be constantly balanced against the operations, or production, that you want to achieve. Only then can you claim that you have fully embraced Life Cycle Management (LCM).

In our latest newsletter you will find examples of what it takes to succeed with LCC procurement and LCC analyses in later stages of the system's life cycle. But to begin with, I would like to share with you my reflections on the growing interest in LCC and LCM.

Global outlook

This fall we have made several trips around the world to talk about Life Cycle Management and Opus Suite, perform workshops and teach courses. Wherever we go we feel a growing interest in our issues. This is the case here in the Nordic countries as well as in Asia, the United States and in other parts of the world. The concepts, approach and maturity of organizations differ from one country to another, but the core – the search for ways to be more cost-effective – is the same. We recently conducted two seminars in Korea where we met about 200 people mainly from the railway and defense industries. The defense authorities are trying to implement an approach from the United States called IPS - Integrated Product Support. The aim is to achieve a more sustained approach during the lifecycle, which balances operational capabilities against life cycle costs. In other words, Life Cycle Management. The growing Korean interest is the main reason why we now, together with our partner in Korea, Moasoft, have agreed to jointly establish Systecon Korea.

In connection with one of our trips to Korea we also took the opportunity to make a side trip to Tokyo and meet representatives from the Society of Japanese Aerospace Companies (SJAC). In Japan, there is also a focus on improving LCM, and one method in which they are investing is PBL (Performance Based Logistics). The Japanese defense industries are therefore looking for methods and approaches to do this. Setting up PBL agreements is also an important strategy to achieve cost effectiveness. To succeed also requires a capability to analyze, understand and influence the parameters that determine LCC and the ability to meet operational objectives.

In Europe our contacts in Austria tell us that in the Austrian implementation of the EU defense procurement directive (Directive 2009/81/EC) there are mandatory requirements to use System Life Cycle Management, with the result that LCC methodologies are becoming increasingly important.

In the United States the US Department of Defense is making big bets on creating integrated data solutions with decision support functionality to be able to support Life Cycle Management. For example, the US Navy has developed two different integrated systems for LCM: one for Sea Systems Command, NAVSEA, and one for Air Systems Command, NAVAIR. I am proud that Opus Suite forms the analysis engine in both of these solutions. A couple of years ago, the US DoD started the initiative Better Buying Power aimed at more "affordable systems" and RTOC (Reduced Total Ownership Cost), both of which also put the focus on LCC.

What can we expect in Sweden? The Swedish Ministry of Defence  has begun to increase requirements on the defence authorities to account for Total Cost of Ownership (TCO). A working group at the Swedish Defence Material Administration (FMV) is developing a model specifically for this purpose. I hope that this is not just a question of budget planning, but that we are also going to see a more systematic LCM work with LCC in focus.

LCC as an evaluation and improvement tool

In addition to the increased need for cost-effectiveness, I think another reason for the increased interest in LCM is that defense equipment, to a greater extent than in the past, will evolve continuously during their life cycle. Various subsystems are developed gradually and the platforms will be upgraded on a regular basis. We have long used this approach in Sweden for our fighter aircraft, but in many other areas a more static approach has been used where changes have been accumulated in so-called mid-life upgrades. This new change makes it more relevant to see LCC work as an ongoing evaluation and improvement tool. In many quarters LCC analyses have often only been dealt with early to produce budget estimates using high-level parametric methods. We are now beginning to see more sustained and engineering LCC approaches, which also establishes a basis for how to make informed decisions and influence the parameters that determine what the LCC will be.

Read more about Systecon's view of LCC in our latest newsletter

As an example of how LCC methodology can be used as support for decision-making during a system's entire life cycle, I recommend this article by Andreas Viberg. It describes how BAE Systems evaluated different technologies in the face of a modification of the combat vehicle 90.

While the defense authorities around the world are working to develop strategies, processes and system solutions, we see in the railway industry that train operators, despite the absence of complete ILS standards, are increasingly using LCC as the central evaluation criteria in acquisition. Pär Sandin, Systecon's and perhaps Sweden's most experienced LCC purchaser of trains, explains his views on the key success factors to be successful with such contracts in this article.

In our latest modeling tips we choose to focus on our LCC tool CATLOC. In the upcoming release of the Opus Suite CATLOC will be more closely integrated with OPUS10 and SIMLOX. Similarly, you could view CATLOC as a Cost Workbench. We illustrate this with some examples.

Robert Hell
President, Systecon

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