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Dynamic Life-Cycle Costing

Asset Management of Production Equipment's With Emphasis on Maintenance

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Master Thesis






Thesis Life Cycle Costing: This chapter briefly introduces the principles of life cycle cost (LCC) and other related issues in the use of LCC in asset management. 3.1 The definition of life cycle and life cycle cost To establish a comprehensive understanding of life cycle cost calculation, the concept of LCC should be checked first. The LCC analysis begins with the clarification of the term "life cycle". Although there are many definitions used to identify the term "lifecycle", this research will focus on this concept from the perspective of asset management. The life cycle of an asset consists of several stages, which can be classified as design, development, manufacturing, operation, and disposal. Therefore, the life cycle of assets simply covers the entire period from early conceptual design to system disposal [5]. The life cycle forms the basis of LCC. The life cycle cost of an asset is the total direct and indirect costs and consequences that occur at any stage of all life cycle stages [6]. Therefore, in addition to the initial investment (such as design, development, and purchase costs), the asset's LCC also considers future costs (operation, maintenance, disposal, recovery) and system-related risks [7, 8]. Therefore, this method appears as a useful engineering tool on the basis of sustainable asset strategy for cost management. 3.2 Life cycle cost calculation in asset management The main advantage of LCC in asset management is its applicability potential in the entire life cycle of the asset. However, the success of this method depends to a large extent on the specific timeline of its application in the asset life cycle [8]. As we all know, the later the method is applied, the less effective the result [8]. Research in this field shows that 80% of committed costs are based on the early stages of the life cycle, such as conceptual design, research and development, initial testing, and process planning [9]. From this perspective; life cycle cost calculation should be the main factor in the investment decision-making stage. As shown in Figure 2, life cycle cost management in the early design stage can have an impact of up to 80% on future costs. Nevertheless, the generally accepted method in the industry is to focus on operating costs [9]. This traditional way of thinking pushes the business toward a concept called "Minimal Adequate Design (MAD)". According to this method, the initial stage cost of procurement or design is kept to a minimum, and it is expected that there will be a larger budget in the later operation and maintenance stage of the asset. But then in the later stages of life, the initial decision of the asset is not good, which will affect its entire life cycle cost. 3.4 Life cycle cost calculation methods According to the points of interest in the analysis, life cycle cost calculations can be implemented by following different methods. One of the widely preferred methods is called "overall methodology", which focuses on the interrelationships and dependencies between different cost elements [8]. Since this research will focus on the life cycle cost of production equipment and processing centers, it is related to RAMS (reliability, availability, maintainability, and safety) requirements [10]; there are inevitably many interdependencies between cost elements. Another important fact in the calculation of life cycle cost is the iterative structure of the method. Life cycle cost calculation is a continuous process and may need to be repeated until the best result is achieved. Step 1: In order to start the study of LCC analysis, the main problems of the case should first be defined in detail. When necessary, a short SWOT (strengths, weaknesses, opportunities, and threats) analysis can also help define the problem [9]. The correct definition of the problem should clearly express the nature of the system, that is, all useful information about the asset, which can be used to explain the cost driver [8]. Step 2: In the second stage, the success criteria list the solutions. Due to different goals [8, 9], the success criteria in different analyses will be different. For example, a life cycle cost analysis can be carried out to find the alternative with the lowest total cost of ownership and the least harm to the environment. [9]. Step 3: In the third stage, all alternatives should be compared and evaluated. LCC usually involves at least two alternatives that can be compared with each other. In addition, the differences between these alternatives should be explained [9]. The range of cost drivers can be expanded according to the complexity of the problem. Since LCC is usually applied for a period of time, in some cases it may be several years, so certain cost drivers may appear multiple times. This cost driver is called "recurring cost". Costs that occur only once in a lifetime, such as procurement costs, are called "non-recurring costs"*11]. Step 5: In Step 5, complete a comparative analysis between existing alternatives with the help of accessible data on cost drivers. Alternative options are evaluated based on how well they meet the success criteria [8]. All cost elements are collected in a table that constitutes a baseline assessment of key alternatives [11]. Read Less