5.2.2. Life-Cycle Costs (LCC) and Product Support Business Case Analysis (BCA)
LCC is the cost to the government to acquire and own a system over its useful life. LCC includes all life-cycle management costs (e.g. development, acquisition, operations, support, and disposal). As such it consists of the elements of a program's budget, as well as supply chain or business processes costs that logically can be attributed to the operation of a system. Section 3.1.5 provides additional information but generally LCC includes direct program costs as well as any allocable "indirect cost" elements. This can include such costs as delivering fuel/batteries, recruiting/ accession training of new personnel, individual training, environmental and safety compliance, management headquarters functions, etc.
Early program decisions ultimately determine and drive the LCC, the majority of which is incurred after a system is deployed. Consequently beginning with the requirements determination and during each life-cycle phase, LCC estimates should play a major role in the program decision process for evaluating affordable alternatives during the design and trade-off processes. (See DoD Directive 5000.01, E1.1.4, E1.1.17, and E1.1.29.) As a result, the operating and support portion of the LCC is now treated as a military requirement via the JCIDS's Ownership Cost KSA. For this reason, LCC analysis should be performed to the level appropriate for the decision and alternatives considered. However, since projections are based on assumptions, cost estimates shall include an assessment of confidence levels and should also include the associated cost drivers.
The Product Support Business Case Analysis (BCA) is used to assist in identifying the product support strategy that achieves the optimal balance between Warfighter capabilities and affordability. (Other names for a BCA are Economic Analysis, Cost-Benefit Analysis, and Benefit-Cost Analysis. Regardless of the name, is it a structured analytical process that aids decision making in identifying and comparing alternatives by examining the mission and business impacts (both financial and non financial), risks, and sensitivities.) The PSM should prepare a Product Support BCA for major product support decisions, especially those that result in new or changed resource requirements. The BCA should consider organic and commercial alternatives when determining the optimal support solution (e.g. DLA, TRANSCOM, Service activities and commercial options). Each of the key stakeholders should be informed of the BCA process and support the analysis by providing the information needed to make an informed decision. To aid this process, the Product Support BCA Guidebook provides an analytic, standardized, and objective foundation upon which credible decisions can be made.
In general, traditional life-cycle cost estimates are adequate in scope to support decisions involving system design characteristics, with indirect cost elements being handled via standard cost factors/surcharges/burdened rates. However, in special cases depending on the issue, the broader perspective may be more appropriate than just the traditional life-cycle cost elements a program can directly influence. For example, when determining the materiel solution to meet requirements (e.g., manned vs. unmanned, or space based vs. ship based, etc) cost elements dealing with the supply chain will need to be considered since each materiel solution has a significantly different cost impact to the tax payer. During the design and sustainment phases, indirect cost elements may also be broken out rather than using cost factors when considering decisions directly impacting the wholesale logistics infrastructure processes. Examples of these types include decisions dealing with required skill levels to maintain the system, alternative system support concepts and strategies, reengineering of business practices or operations, and competitive sourcing of major supply chain activities.
Life-cycle cost analysis can be very effective in reducing the LCC of the system and its support strategy. (Within DoD, reduction and control of LCC is also done through a variety of initiatives including Will-Cost and Should-Cost Management, etc.) However, one cost model is not sufficient to address all of the alternatives a PM must consider. The level of detail, analysis process used, and LCC elements considered should be tailored to the decision being made, focusing on cost drivers and costs that will be incurred by the government and not just on direct program office costs. The objective is to seek and eliminate low-value added ingredients of program costs.
For most decisions, the sunk costs, costs that will not be impacted by the alternatives and absolute value of the alternatives can be ignored. The analysis should be focused instead on the relative cost element differences between the alternatives considered and the cost drivers for each. Consequently, the cost analysis should include appropriate key performance measure, such as O&S cost-per-operating-hour, cost-per-pallet miles, cost-per-seat miles, etc, when assessing alternative solutions. The Cost Analysis Requirements Description (see section 3.4.4.1) reflects the life-cycle sustainment requirements for preparing the LCC estimate and the Cost Analysis Improvement Group Operating and Support Cost Estimating Guide also provides useful information relative to the cost estimating process, approach, and other considerations.
5.2.3. Sustainment Modeling and Simulation (M&S)
M&S can be an effective tool in the supportability analysis and evaluation process in implementing life-cycle management principles because all the sustainment/materiel readiness driver metrics can be considered in parallel (also see section 4.3.19.1). Consequently, the sustainment M&S objective should be to use validated models to consider materiel availability/readiness implications when assessing the merits of alternatives throughout the life cycle. M&S should be used in assessing the alternatives for major decisions affecting the design and deployment of both the end item and its support system. Properly applied M&S encourages collaboration and integration among the varied stakeholders (including the test and transportation communities) facilitating materiel availability and system effectiveness.
The models should be used throughout the life cycle and should include the multiple materiel availability stakeholder contribution and funding streams for the supply chain components. (The level of detail used varies based on several factors including, but not limited to, the system's complexity, criticality to the user, program phase, and risk.) In all cases, M&S efforts should consistently and credibly look at/trade off life-cycle alternatives in a repeatable fashion. In addition, the underlying assumptions and drivers for the values of each of the sustainment metrics should be documented as thresholds, objectives, and estimates evolve through the life cycle. (See the RAM-C Guide for additional information.)
5.2.4. Process Models
M&S and continuous process improvement initiatives are dependent on defined processes. The government and industry have undertaken a series of initiatives to define generic multi level processes with associated metrics that might prove useful when developing new analysis models. The following general models have been developed.
The Supply Chain Operations Reference (SCOR) model, figure 5.2.4.F1, captures a consensus view of the supply chain plan, source, maintain/make, deliver, and return, processes in a framework linking business process, metrics, best practices, and technology features into a unified structure for effective supply chain management and for improving related supply chain activities. In this context, the supply chain includes the transportation and maintenance chains as well as the spare/repair parts chain required to provide the user flexible and timely materiel support during peacetime, crises, and joint operations. Most of these supply chain activities are governed by DoD regulation 4140.1-R, Supply Chain Materiel Management Regulation which provides further DoD guidance and information. Maintenance requirements within the supply chain are governed by DoD Directive 4151.18, Maintenance of Military Materiel.
Building off the SCOR efforts, the Design Chain Operations Reference (DCOR) model links business process, metrics, best practices and technology features into a unified structure to support communication among design chain partners and to improve the effectiveness of the extended supply chain. The model is organized around five primary management processes which focus on product development and research & development. As is in the case of SCOR, this consensus model can be used to describe design chains can be simple or complex using a common set of definitions.
The Customer Chain Operations Reference (CCOR) model captures a consensus view of the feedback processes including the health and welfare of the customer supplier relationship. This model is the least mature and also undergoing refinement by practitioners. However, combined and tailored, the 3 models can provide an end to end view of the entire enterprise wide process covering processes, activities and metrics.
Figure 5.2.4.F1. The Supply Chain Operations Reference (SCOR) Model
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