Life Cycle Costing by State Governments
Coe, Charles K.. Public Administration ReviewWashington:Sep/Oct 1981. Vol. 41, Iss. 5, (6 pp.)
Life cycle costing (LCC) is a purchasing procedure that considers the total cost of ownership of a commodity or building. LCC consists of the following steps: 1. estimating the useful life of an item, 2. estimating the total costs of owning an item, 3. estimating the salvage value of an item, 4. subtracting the salvage value from the cost of ownership and discounting this amount to present value, 5. obtaining the total LCC by adding the acquisition cost to the amount calculated in step four, 6. comparing LCC totals of all items under consideration, and 7. purchasing the least expensive item. Barriers to inhibiting state governments from using LCC include: 1. psychological resistance and fear of change, 2. decentralized purchasing systems, and 3. procedural barriers. State governments can overcome these barriers by: 1. passing statutes, 2. centralizing purchases, and 3. initiating modified LCC. LCC offers an excellent means of doing more with less.
Industrial Marketers Should Heed Shift in Purchasing Emphasis with 5 New 'Tools'
Hill, Richard M.. Marketing NewsChicago:Jun 12, 1981. Vol. 14, Iss. 25, (2 pp.) Five new tools which affect buying decisions among industrial marketers' customers are: 1. evaluated pricing, 2. life cycle costing, 3. equipment profitability analysis, 4. materials requirements planning, and 5. supplier capacity planning. The industrial buyer initiates the contact, advances the proposal, and makes the price offer in some techniques. The inclusion of terms of sale with a supplier's price and judging them as a whole is referred to as evaluated pricing. Amortizing total operating, maintenance, and repair costs over the useful life of a machine is life cycle costing, and it has been a source of significant cost savings for buying firms. Buyers often measure the profitability of alternatives in equipment profitability analysis using methods such as payback analysis. Some companies use materials requirements planning to eliminate or minimize production inventory by buying based on production schedules. When buyer and seller coordinate purchase plans, the result is supplier capacity planning.
29
A Cost-Effective Automated Materiel Distribution System
Dundon, Daniel R.. Hospital Materiel Management QuarterlyRockville:Nov 1980. Vol. 2, Iss. 2,
There are 4 bulk material distribution systems popular with hospitals: 1. manual system, 2. inject-eject lift, 3. overhead track system, and 4. electronic vehicles using guidewires. There are many advantages to an automated material distribution system (AMDS) including: 1. reduced or eliminated cart traffic in public areas, 2. reduced cross-contamination, and 3. reduced impact of labor-related problems. When a project, such as AMDS has high initial costs, significantly reduced operating expenses, and a relatively long productive life, an excellent evaluation tool is life cycle costing (LCC). An analysis of 3 different hospitals showed an advantage for an AMDS in each, but every hospital must be evaluated separately. Institutional differences which can affect the usefulness of an AMDS include: 1. physical layout, 2. existing building restrictions, and 3. length of distribution day. An AMDS needs to be part of the initial hospital design.
Energy Managers Gain Power
Johnson, Greg. Industry WeekCleveland:Mar 17, 1980. Vol. 204, Iss. 6,
The energy manager is coming of age as boardrooms are realizing the benefits of cost-efficient use of expensive energy resources. Top corporate support is essential to an energy management program, and energy managers assert that while pressure from above helps draw reluctant conservationists into programs, the manager's most effective tool is economics. Demonstrations of effective energy usage are a good way to elicit cooperation. Individuals must be motivated to conserve, and must be convinced of the worth of a non-corporate payback.An energy audit can demonstrate where direct and inexpensive gains can be made (known as housekeeping measures); the real battle comes when those measures are exhausted, and the energy manager must fight for corporate capital. Top management is starting to realize the benefits of spending for conservation, particularly with wider use of life-cycle costing. Long-range planning is becoming more and more important, and the horizons of energy managers are becoming expanded.
Selling to the Government: Out of the Maze
S & Mm. Sales & Marketing ManagementNew York:April 1979. Vol. 122, Iss. 5, Many marketers consider selling to the government to be more painful than profitable. A host of problems are scaring away companies that ought to be selling to the government. This situation results in numerous contracts being let with few, or worse,
30
just one bid. A reaction to this problem is the Federal Acquisition Act, now in hearing before a Senate subcommittee. The bill is designed to streamline government procurement policies. Various agencies, on their own initiative, are streamlining their programs. The White House Office of Management and Budged is simplifying procurement procedures for 19 executive agencies. Off-the-shelf purchases, rather than special orders, are being experimented with by the Pentagon's Defense Logistics Agency. Life-cycle costing is being introduced in lieu of original purchase price methods by the Government Services Administration. At present, the government is actively trying to attract suppliers in numerous ways. Competition, especially in government contracts, is good business.
Designing to a Cost: An Update on Navy Initiatives
Grosson, Joseph F.. Defense Management JournalWashington:Jan. 1979. Vol. 15, Iss. 1,
When evaluating acquisitions or programs under design to cost or design to life-cycle concepts, operational and support costs must be identified as early as possible. As various steps in a program are completed, cost and schedule performance are evaluated and forecasts for remaining tasks are revised. In a typical program sponsored by the Navy, program planning includes initial product development, testing of operational and support logistics, personnel training, and program management costs. Problems typically develop when incomplete logistical costs are used or when the full scope of the project is not considered. The Naval Material command is committed to using design to life-cycle costs as a basis for cost analysis and estimating procedures. They are making specific organizational changes to make this system work. The guidelines for specific procedures are found in various federal and Defense Department regulations and directives.
Manufacturer Puts Technology to Work to Curb Cost Overruns Caused by Technology Advances
ComputerworldFramingham:Oct. 16, 1978. Vol. 12, Iss. 42,
The Flight Systems Div. of the Bendix Corp.'s Aerospace-Electronics Group has put computers to use to solve the technological problems caused by the sophistication of aircraft subsystems. An IBM 370/158 is in use to get the quickest and most accurate estimates possible, and it also makes it easier to incorporate subsequent iterations and modifications to any proposal. Previous manual and service bureau systems were adequate for the difficult tasks. The present system runs under IBM's Time Sharing Option and has cost estimators writing programs in VS Basic. A primary strong point of the system
31
is that it is able to handle \figuring of complicated projects has been invaluable. Operation of the system is enlarged upon. It has been especially useful in meeting government regulations for
cost-estimating forms for government bids, and it also takes on the job figuring life cycle costing.
Techniques of Life Cycle Costing
Griffith, J. W., Keely, B. J.. Cost EngineeringSept./Oct. 1978. Vol. 20, Iss. 5, Optimal energy utilization and conservation can be improved through application of the techniques of life cycle costing to energy problems. This cost benefit analysis methodology is well suited to the solution of energy management problems. Managers will be required to evaluate alternative sources of energy during a given time period. Application of present value techniques allows development of a time value relationship for the various alternatives. Development of a systematic analysis technique assures maximum utilization of the scarce resources. The life cycle analysis assumes all resources to have a time value, which is expressed as interest. Using varying interest rates, the rate of return on investment alternatives can be determined and compared. It would also be possible to determine the rate of return required from any extra investments.
Practical Innovation Can Mean Lower Life-Cycle Costs
Schlosser, Lucille S.. Defense Management JournalWashington:Sept. 1978. Vol. 14, Iss. 5,
Although much has been written about life-cycle cost management and how operations and support costs must be considered with development and production costs, the question of what is being done in this area arises. The Air Force is trying to control the costs of its major systems as early in the planning cycles as possible. Relevant, significant, and predictable elements of life-cycle costing are being used to evaluate alternatives and to budget and plan for the most economical ways to aquire and support defense systems. A data bank of lessons is being created at Wright-Patterson Air Force Base to concentrate on some of the predictable areas that have historically driven costs. Prudent changes must be made in its normal way of doing business. Contractors need to be convinced that the Air Force really wants alternatives. They can be motivated by special monetary incentives awarded for their accomplishments in life-cycle cost management.
32
