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.

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:

• 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.

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.

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.

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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