Essay on Why life cycle costing is important
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CAPEX procurement is often decided on its First
cost or Purchase cost. It is the main criterion when making choices between
different systems. However, it is possible to demonstrate that a lower initial
investment can turn out to be more costly from the whole life-cycle viewpoint.
With life-cycle cost (LCC) calculations, it is
possible to get better overview of the total cost.
UPS is a Critical Equipment for a Data Center
which is the heart of any IT Company. LC costs of two possible options of UPS
system were analyzed based on its acquisition & Sustaining Cost in this
case-study. The study touches various Aspects of Costing like Fixed Costing,
Recurring Cost, Overhead Distributions, Process Costing, NPV etc.
Definition:
LCC are summations of cost estimates from
inception to disposal for both equipment and projects as determined by an
analytical study and estimate of total costs experienced in annual time
increments during the project life with consideration for the time value of
money
It can also be defined as;
Life cycle cost is the total cost of ownership
of machinery and equipment, including its cost of acquisition, operation,
maintenance, conversion, and/or decommission
LCC is an economic model over the project life
span
LCC is a planning technique
LCC can be used as a management decision making
technique, a decision making tool and a philosophy
Why is it important?
The visible costs of any purchase represent only
a small proportion of the total cost of ownership. In many departments, the
responsibility for acquisition cost and subsequent support funding are held by
different areas and, consequently, there is little or no incentive to apply the
principles of LCC to purchasing policy. Therefore, the application of LCC does
have a management implication because purchasing units are unlikely to apply
the rigors of LCC analysis unless they see the benefit resulting from their
efforts.
There are 4 major benefits of LCC analysis:
• Evaluation of competing options in purchasing
• Improved awareness of total costs
• More accurate forecasting of cost profiles
• Performance trade-off against cost.
Option Evaluation:
LCC techniques allow evaluation of competing
proposals on the basis of through life costs. LCC analysis is relevant to most
service contracts and equipment purchasing decisions.
Improved Awareness:
Application of LCC techniques provides
management with an improved awareness of the factors that drive cost and the
resources required by the purchase. It is important that the cost drivers are
identified so that most management effort is applied to the most cost effective
areas of the purchase.
Improved Forecasting:
The application of LCC techniques allows the
full cost associated with a procurement to be estimated more accurately. It
leads to improved decision making at all levels, for example major investment
decisions, or the establishment of cost effective support policies. Additionally,
LCC analysis allows more accurate forecasting of future expenditure to be
applied to long-term costing assessments.
Performance Trade-off Against Cost:
In purchasing decisions cost is not the only
factor to be considered when assessing the options. There are other factors
such as the overall fit against the requirement and the quality of the goods
and the levels of service to be provided.
Advantages/ Disadvantages of Life Cycle Cost
Analysis (LCCA)
Advantages of LCCA:
Helps you compare projects “apples to apples”
financially even if they have different timing and magnitude of costs and
savings.
Provides you with a more complete financial
picture by considering first cost, and all costs and benefits over the entire
lifetime of the project.
Enables you to compare different combinations of
measures and choose the one that will maximize your savings and financial
return.
Allows you to present the financial benefits of
your proposal in terms used by your CFO - for example, net present value (NPV),
internal rate of return (IRR), and cash flows.
Reduces your investment risk by projecting a
more complete picture of the future.
Disadvantages of LCCA:
Is harder to learn and apply.
Getting input data can be challenging.
Principles
The cost of ownership of an asset or service is
incurred throughout its whole life and does not all occur at the point of
acquisition. The Figure gives an example of a spend profile showing how the
costs vary with time. In some instances the disposal cost will be negative
because the item will have a resale value whilst for other procurements the
disposal, termination or replacement cost is extremely high and must be taken
into account at the planning stage.
• Acquisition costs are those incurred between
the decision to proceed with the procurement and the entry of the goods or
services to operational use
• Operational costs are those incurred during
the operational life of the asset or service
• End life costs are those associated with the
disposal, termination or replacement of the asset or service. In the case of
assets, disposal cost can be negative because the asset has a resale value.
A purchasing decision normally commits the user
to over 95 per cent of the through-life costs. There is very little scope to
change the cost of ownership after the item has been delivered.
The Process
LCC involves identifying the individual costs
relating to the procurement of the product or service. These can be either
"one-off" or "recurring" costs. It is important to
appreciate the difference between these cost groupings because one-off costs
are sunk once the acquisition is made whereas recurring costs are time
dependent and continue to be incurred throughout the life of the product or
service.
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Examples of one-off costs include:
• Procurement
• Implementation and acceptance
• Initial training
• Documentation
• Facilities
• Transition from incumbent supplier(s)
• Changes to business processes
• Withdrawal from service and disposal
Examples of recurring costs include:
• Retraining
• Operating costs
• Service charges
• Contract and supplier management costs
• Changing volumes
• Cost of changes
• Downtime/non-availability
• Maintenance and repair
• Transportation and handling
The Methodology of LCC
LCC is based on the premise that to arrive at
meaningful purchasing decisions full account must be taken of each available
option. All significant expenditure of resources which is likely to arise as a
result of any decision must be addressed. Explicit consideration must be given
to all relevant costs for each of the options from initial consideration
through to disposal.
The degree sophistication of LCC will vary
according to the complexity of the goods or services to be procured.
The following fundamental concepts are common to
all applications of LCC:
Investment Strategy by Behavioural Finance
• Cost breakdown structure
• Cost estimating
• Discounting
• Inflation
Cost breakdown structure (CBS)
CBS is central to LCC analysis. It will vary in
complexity depending on the purchasing decision. Its aim is to identify all the
relevant cost elements and it must have well defined boundaries to avoid omission
or duplication. Whatever the complexity any CBS should have the following basic
characteristics:
• It must include all cost elements that are
relevant to the option.
• Each cost element must be well defined for
better understanding.
• Each cost element should be identifiable
• The cost breakdown should be structured to
allow analysis of specific areas.
• The CBS should be designed to allow different
levels of data within various cost categories.
Cost Estimating
Having produced a CBS, it is necessary to
calculate the costs of each category. These are determined by one of the
following methods:
• Known factors or rates: are inputs to the LCC
analysis which have a known accuracy.
• Cost estimating relationships (CERs): are
derived from historical or empirical data.
• Expert opinion: it is often the only method
available when real data is unobtainable.
Inflation
Inflation for all costs is approximately equal,
it is normal practice to exclude inflation effects when undertaking LCC
analysis.
However, if the analysis is estimating the costs
of two very different commodities with differing inflation rates, for example
oil price and man-hour rates, then inflation would have to be considered.
SIMPLE PAYBACK V/S LIFE -CYCLE COST ANALYSIS:
SPB is how long it will take for cumulative
energy savings and other benefits to equal or “payback” your initial
investment. For relatively less expensive, simpler projects and measures,
calculating the simple payback (SPB) can be enough to make a sound decision.
Advantages of Simple Payback:
A simple way to screen relatively low-cost
measures based on payback (or return on investment (ROI)
Easier to communicate to a non-technical
audience
Disadvantages of Simple Payback:
You can’t compare complex projects and measures
where costs and savings vary in both magnitude and timing (e.g. a condensing
boiler and a standard boiler).
It does not account for (1) maintenance,
interest on loans, and disposal costs; (2) time value of money, and (3)
volatility of utility costs.
It can actually make economically sound
improvements and project efficiency look economically unviable.
The figure above compares the savings for a
small and a large energy-efficiency project both with 20-year lives.
The small project costs $200,000 and saves
$100,000 annually (two-year simple payback) for five years before an additional
investment of $200,000 is needed.
The large project costs $700,000 and saves
$184,000 annually (3.8-year simple payback) for 20 years, with replacement
costs of $200,000 every five years.
Which is a better investment & more
cost-effective?
Based on simple payback, the smaller project
looks better. The larger project generates significantly more savings but the
savings are in the future. Is it worth the investment?
Life-cycle analysis can transform these future
savings into today’s dollars using the concept of “time value of money.”
Considering the 3% inflation rate, the smaller
project saves only $550,000 in today’s dollars, while the
large project saves $1,400,000! Would you pass
up $850,000?
Life Cycle Costing : UPS for Data Centers
Introduction
What is UPS ?
An uninterruptible power supply, also
uninterruptible power source, is an electrical apparatus that provides
emergency power to a load when the input power source, typically the utility
mains, fails.
Disclaimer
This essay has been submitted to us by a student
in order to help you with your studies. This is not an example of the work
written by our professional essay writers.
A UPS differs from an auxiliary or emergency
power system or standby generator in that it will provide instantaneous or
near-instantaneous protection from input power interruptions by means of one or
more attached batteries and associated electronic circuitry for low power users,
and or by means of diesel generators and flywheels for high power users.
The on-battery runtime of most uninterruptible
power sources is relatively short 5–15 minutes being typical for smaller
units—but sufficient to allow time to bring an auxiliary power source on line,
or to properly shut down the protected equipment.
Typical UPS (Offline / Stand by UPS )
The Offline / Standby UPS (SPS) offers only the
most basic features, providing surge protection and battery backup. With this
type of UPS, a user's equipment is normally connected directly to incoming
utility power with the same voltage transient clamping devices used in a common
surge protected plug strip connected across the power line.
Typical UPS (Online)
Online ("True") UPS
The online UPS, sometimes called a true
UPS, is the best type you can buy. Paradoxically, it is both very similar
to, and totally opposite to, the least-expensive type, the standby UPS. It is
very similar to it in that it has the same two power sources, and a transfer switch
that selects between them. It is the exact opposite from the standby UPS
because it has reversed its sources: in the online UPS the primary power source
is the UPS's battery, and utility power is the secondary power source!
Project Definition:
This project will examine two scenarios:
2 x 250 kVA + 1 x 60 KVA UPS with 30 minutes of
runtime
1 x 400 kVA + 2 x 80 KVA UPS with 30 minutes of
runtime.
The system design life is 10 years as per the
Manufacturers Datasheets.
Both UPS Alternatives will be compared in three
steps based on the following Task Structure.
The data indicates that purchase cost
comparisons alone are insufficient predictors of lifecycle cost and
that outside and variable costs must be
examined.
LCC Working
Life Expectancy
The life expectancy varies with UPS type. Table
1 shows the UPS lifetime based upon experience at
Emersons Network Power and resulting from many
years of UPS installations. These values will be used in the lifecycle costs.
Step 1 – Acquisition Costs
In this step the costs associated with the UPS
purchase cost, and other items or services specifically
related to the UPS. Tables 2 and 3 only account
for the UPS System Cost. The tables in Step 2 account for
UPS infrastructure costs and adjusted lifecycle
costs.
Acquisition Costs
Research & Development Cost < Not
considered as it is Common for both Variants>
Non Recurring Investment Cost.
Recurring Investment Cost.
Total UPS System Cost : INR 6,806,209
Table 2 indicates that a UPS solution for the
Life time period includes;
Non Recurring Cost: Purchase Cost.
Non Recurring Cost: Installation Cost :
Recurring Cost: Annual Maintenance costs.
Recurring Cost: Battery Replacement cost every 3
years.
Recurring Cost: Monitoring Cost.
Table 3 indicates that a UPS solution for the
Life time period includes;
Non Recurring Cost: Purchase Cost.
Non Recurring Cost: Installation Cost :
Recurring Cost: Annual Maintenance costs.
Recurring Cost: Battery Replacement cost every 3
years.
Recurring Cost: Monitoring Cost.
Step 2 – Sustaining Cost
In addition to the costs clearly associated with
the purchase of components and services for the UPS
system, there are a number of facility
infrastructure costs that are not always recognized as a cost
associate with the UPS system. These costs are
estimated in Tables 4 and 5, and an adjusted lifecycle
cost including the UPS system costs and the
facilities costs is computed.
Labour, Material & Overheads.
Replacement & Renewal Cost (including
Transportation)
System Modification Cost.
Documentation Cost.
Labour, Material & Overheads : would be Nil
as;
Maintenance Order is released to the Vendor.
Is already covered under Acquisition Cost.
Replacement & Renewal Cost (including
transportation).
UPS system is generally not prone to Frequent
Breakdowns as it has to be designed for Uninterrupted Power Supply. Major
Component Considered for Break Down are;
Transformer Failure Cost:
Transformer in the UPS is the Heart of UPS
system and a Breakdown in a Transformer would lead to complete system Shutdown.
However the Failure Rate is very Rare 7-8 Years.
For Calculations Purpose we taking the following
assumptions;
Transformer Failure Rate : 7.5 Years
Capacitor/Controller Failure Rate : 3.5 Years.
This essay is an exa
PCB is not considered as the Cost is too low for
Consideration.
Cost of Transportation : INR 6000
Production Loss : INR 750,000 Per Hr.
Administrator Man hour Rate : INR 1000.
Transformer Failure Cost Working
Cost Incurred:
1 / (failure Rate) * No. of Failure * { ( Cost
of Component + Transportation Cost)+(Production Loss)+(Man hour consumed)}
For UPS 1: Transformer Failure Cost: INR 2.28L
per Year
For UPS 2: Transformer Failure Cost: INR 2.31L
per Year.
Capacitor / Controller Failure Cost Working
Cost Incurred:
1 / (failure Rate) * No. of Failure * { ( Cost
of Component + Transportation Cost)+(Production Loss)+(Man hour consumed)}
For UPS 1: Failure Cost: INR 8.84L per Year
For UPS 2: Failure Cost: INR 8.86L per Year.
System Modification cost.: would be NIL as;
No Modification is involved during its span of 8
Years.
Documentation Cost.
No Documentation Cost, as all necessary
Permission/PO etc has been covered in the Acquisition Cost.
Infrastructure Cost generally comprises of the
following Cost
Facility Usages Cost
Operation Cost
On Going training Cost
Technical Data Management Cost
Space Usage Cost (Rent)
Disposal Cost generally comprises of the
following Cost
These are Lump sum cost applicable on the last
year.
Permit from STPI for Disposal
(de-bonding)…………………………INR 35000
Legal Cost / Visits for Disposal from Chartered
Engineer………INR 45000
Wrecking & Disposal Cost………………………………………………………INR
65000
Part 3 – Adaptability
In this step we cover the costs that are often
taken for granted or not considered when installing a UPS solution. These costs
vary dramatically and the value must be estimated on a case-by-case basis
depending on the circumstances of the installation. A rigid design that cannot
adapt to changing requirements creates an “Adaptability Penalty” that should be
understood and considered when comparing the life cycle costs of alternative
UPS technologies for a given installation.
Speed of Deployment: An engineered design, by
nature takes a long time to implement. A modular
adaptable UPS solution is easier to design and
implement, with less risk to delays. This time to implementation may have large
cost in certain circumstances.
If there is a deadline driven by unforeseen
circumstances such as an earthquake, hurricane, or a terrorist attack.
If there is a possibility that the system must
be moved prior to its expected lifetime.
Standard rating UPS system which is pre-tested
can be wheeled into standard office space and operational in hours whereas UPS
2 which is Non-Standard system design, specification, fabrication, and
installation can take months. In some cases, this time difference is
unimportant and no value can be assigned. In other cases, the cost of time may
be Lakhs of Rupees per week. The value of time must be assessed on a
caseby-case basis.
Equating Supply and Demand: A rigid design is
difficult to change after installation and is normally built
out to its ultimate plan configuration up-front.
The plan value is often unknown as it requires determining the power
requirement years in advance. Since under sizing a rigid design is not
acceptable, this means that the design configuration of the system must be
larger than the mean expected value in order to assure that the system can meet
the high-side estimates. Managing risk in this way is part of good decision
making given the options available, but the result is that the average data
center and network room spends most of its life loaded to a small fraction of
its design value.
The average data center or network room has its
UPS infrastructure oversized to 4X of its required UPS capacity. This means
that the lifecycle cost of the average UPS system is 4 times what is needed. In
return for this large cost the system has a very long UPS run time and has the
ability to accept a very large increase in load.
Commercially available Standard UPS Modules
(250kVA, 60 kVA, 80 kVA) systems can be transported simply via truck and normal
elevators, wheeled into unimproved space, connected to a DC bus in minutes and
meet all the requirement necessary to ensure adaptation to changing UPS needs.
In contrast, Non-Standard UPS systems (400 kVA)
require long range up-front planning including specialized physical space,
Cranes/Service Lifts, ventilation, safety planning, and engineering. The costs
associated with incrementally expanding systems are so large that it is
normally less expensive to simply build out the entire system upfront.ay writers.
Conclusion
Though the Acquisition Cost of UPS 2(1 x 400
kVA+ 2x80 kVA, 30-minute solution) is lower the life cycle cost of the system
is much higher than UPS 1(2 x 250 kVA+ 1x60 kVA, 30-minute solution).
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