Life Cycle Costing

Life Cycle Costing Dr. M.Hodkiewicz, August 2006 University of Western Australia

Notes adapted from courses developed by Dr. M.Hodkiewicz and Dr.J.Sikorska, University of Western Australia

Learning Outcomes • After this session you will be able to: – Perform life cycle cost calculations using the 12 Step Plan – Identify and estimate the main costs during pump life – Justify pump selection based on life cycle not just purchase cost – Adapt the concepts learned to other equipment

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Session Content • • • • • •

Background & introduction to life cycle costing Systems Engineering approach Translation to Asset Management Pump case study example Calculations Summary

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Text Resources [1] Pump Life Cycle Costs: A Guide to LCC Analysis for Pumping Systems, Hydraulic Institute and Europump. Ed. L.Frenning et al.Hydraulic Institute and Europump. [2] Systems Engineering and Analysis 4th ed. 2006, Blanchard & Fabrycky, Prentice Hall. [3] Asset Management Part 1: Specification for the optimised management of physical infrastructure assets, PAS 55-1, 2004, Institute of Asset Management, UK [4] Maintenance, Replacement & Reliability. 2006. Jardine & Tsang. CRC Taylor Francis Group. [5] Life cycle cost tutorial. 1996. Barringer & Weber, Hydrocarbon Processing Hodkiewicz, UWA – “AM Life Cycle Costing”

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Software Resources • Papers on LCC from Barringer http://www.barringer1.com/ • Examples of software: LCCware (ARMS), Perdec (OMDEC) , Relex LCC, Cost commander. • For demos http://www.plantmaintenance.com/freestuff/index1.shtml

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Background Lifecycle Costing – An Introduction

Notes developed by Dr. M.Hodkiewicz and Dr.J.Sikorska

What is life-cycle? • “Time interval that commences with the

identification of the need for an asset and terminates with the decommissioning of the asset or any liabilities hereafter” [3]

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What is life-cycle costing? • Life cycle management philosophies consider the cost contribution from all phases when making decisions on equipment selection and operation. • LCC refers to all costs associated with a system as applied to the defined life cycle.

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IDENTIFY LIFE CYCLE PHASES

IDENTIFY FUNCTIONS IN EACH PHASE

COST THESE FUNCTIONS

APPLY COSTS BY FUNCTION TO YEAR BY YEAR SCHEDULE

LCC Process summary

APPLY COSTS BY FUNCTION TO YEAR BY YEAR SCHEDULE

ACCUMULATE COSTS FOR SPAN OF LIFE CYCLE

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History of LCC • Integral part of Systems Engineering • Traditionally associated with the design and development of new products • Principles translate to Asset Management decisions, such as – Equipment or service selection comparison – Design trade-offs for plant/equipment – Maintenance policy selection, – Inspection frequency Hodkiewicz, UWA – “AM Life Cycle Costing”

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Systems Engineering view

DEFINE NEED CONCEPTUAL DESIGN

ADVANCE DEVELOPMENT

DETAIL DESIGN/ PROTOTYPE

PRODUCTION/ CONSTRUCTION

UTILIZATION & SUPPORT

RESEARCH

PHASE OUT & DISPOSAL

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Systems Engineering – ‘12 Step Plan’ in LCC analysis [2] DEFINE SYSTEM REQUIREMENTS & PERFORMANCE MEASURES

IDENTIFY DATA REQUIREMENTS

DEVELOP COST PROFILE & SUMMARY

IDENTIFY PRIORITIES FOR PROBLEM RESOLUTION

SPECIFY SYSTEM LIFE CYCLE & IDENTIFY ACTIVITIES BY PHASE

ESTIMATE COSTS FOR EACH CATEGORY

IDENTIFY HIGH COST CONTRIBUTORS & CAUSE-EFFECT RELATIONSHIPS

IDENTIFY ADDITIONAL ALTERNATIVES

DEVELOP COST BREAKDOWN STRUCTURE (CBS)

SELECT COST MODEL FOR ANALYSIS

CONDUCT SENSITIVITY ANALYSIS

EVALUATE FEASIBLE ALTERNATIVES & SELECT OPTION

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Timing

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Consider existing assets

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Definition of Asset Management • Asset Management is – “Systematic and coordinated activities and

practices through which an organization optimally manages its assets, and their associated performance, risks and expenditures over their lifecycle for the purpose of achieving its organizational strategic plan” [3] Hodkiewicz, UWA – “AM Life Cycle Costing”

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Asset Management phases • • • • •

The AM life cycle is initiated by a business need which determines the equipment required. This is followed by the design and/or select phase Acquisition phase In-service phase (also known as asset utilization) Finally equipment disposal phase.

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Question? • Give examples of typical AM utilization (maintenance) decisions?

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Typical AM utilization/ maintenance decisions • • • • • • • •

Evaluate the LCC of different RCM outputs Repair, replace decisions Design decisions eg redundancy Upgrade decisions Inspection and repair frequency Spare parts holding Capital equipment purchase Action due to increased operating and maintenance costs Hodkiewicz, UWA – “AM Life Cycle Costing”

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Constraints on using traditional Systems engineering 12 step approach • Existing plant • Existing management, purchasing practices • Existing accounting cost methods • Preferred suppliers

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Adapt the 12 Step Plan (from [2]) to AM DEFINE REQUIREMENTS/ FUNCTIONS & PERFORMANCE MEASURES

IDENTIFY DATA REQUIREMENTS

DEVELOP COST PROFILE & SUMMARY

IDENTIFY PRIORITIES FOR PROBLEM RESOLUTION

IDENTIFY LC ACTIVITIES BY PHASE

ESTIMATE COSTS FOR EACH CATEGORY

IDENTIFY HIGH COST CONTRIBUTORS & CAUSE-EFFECT RELATIONSHIPS

IDENTIFY ADDITIONAL ALTERNATIVES

IDENTIFY COST CATEGORIES

SELECT COST MODEL FOR ANALYSIS

CONDUCT SENSITIVITY ANALYSIS

EVALUATE FEASIBLE ALTERNATIVES & SELECT OPTION

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Step 1: Define strategic requirements • What is the context of the analysis? • What is the business need? • How will this ‘project’ assist with meeting strategic business unit goals?

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Define functional requirements? • What are the technical (operational, safety, reliability) functions that the project must fulfill/meet? • What are the constraints?

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Example •

Business need: Improve profit before tax by 15% within 3 years.

•

Organizational Strategic Plan: To achieve profit improvements through expanding capacity so as to meet increased demand, funded through private finance, which will be repaid through future profits.

•

AM strategy: To upgrade the core infrastructure, to meet the increased demand, by efficiently investing up to $2m over the next 5 years and the development/adoption of optimal operating and maintenance strategies.

BUSINESS NEED

ORGANISATIONAL STRATEGIC PLAN

ASSET MANAGEMENT STRATEGIC PLAN

PROJECT PLAN

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Link between project plan & Business Need BUSINESS NEED ORGANISATIONAL STRATEGIC PLAN

ASSET MANAGEMENT STRATEGIC PLAN

PROJECT PLAN

•

AM strategy: To upgrade the core infrastructure to produce x t/hr product with y quality at $ z/t.

•

Project Plan: Replace or upgrade the A pumps to produce w l/s for with a minimum of 95% availability and 60% efficiency over 5 years.

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Identify performance measures • How will you assess the project? • Typical assessment measures include: – Costs (capital, operating, maintenance) – Life cycle costs – Availability – Production

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Step 2: Identify LC phases

• • •

Select appropriate phases, not all may be relevant for the situation or contribute significantly to the LCC. Select significant sub-phases. For in-service phase may need breakdown to separate installation, commissioning, operation, repair, logistics categories.

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Step 3: Identify cost categories • Most Asset owners have existing cost breakdown structures (CBS). • The cost breakdown structure required for the LCC analysis must be aligned with the existing CBS, if one exists. However it may need to be tailored to the needs of the LC exercise. • If the project is new then the CBS can be tailored to the project.

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Examples • Examples for in-service AM include – Spare parts holding and logistics costs – Operating costs – Energy costs – Maintenance costs (Repair/Replace/Inspection/Condition Assessment) – Quality control costs – Training costs – Engineering support costs – Disposal costs Hodkiewicz, UWA – “AM Life Cycle Costing”

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General Recommendations • All LCC should be considered and identified in the LC cost breakdown structure. • Cost categories in the CBS must be well defined. • Manager, accountants and engineers should have a common understanding about what is included in a given cost category. • CBS must be at sufficient level of detail to identify high cost areas.

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Recommendations concerning maintenance costs • The maintenance policy for the equipment should be clearly defined so reasonable assumptions about failure frequency/ repair costs etc can be made. • Assumptions about downtime costs and lost production should be clearly defined.

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Step 4: Identify data requirements • What data do you need for the LCC analysis? • Where is it located? • What accuracy is required?

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Step 5: Estimate costs • Estimate costs in each category (from Step 3) using data sources identified in Step 4. • Record assumptions

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Sources of data (adapted from [2]) Engineering design data

Management planning data

CMMS data

Reliability data

LIFE CYCLE COST DATA

Accounting data

Logistic support data

Customer/ Market data

Production data Construction data

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Visibility of elements of life-cycle costs

Source: [2] B.S. Blanchard and W.J. Fabrycky, Systems Engineering and Analysis, Prentice Hall, 2006.

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Challenges with LC Cost data • Cost visibility • Existing accounting procedures • Different interpretations may exist about what constitutes the life cycle. • Uncertainty over assumptions concerning failure frequency and failure effects on production.

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Slide 35 MH4

Possible inclusion of discussion on Activity based costing

Melinda Hodkiewicz; 2006/07/15

Step 6: Select Cost Model • This step depends on the complexity of the problem. • Simple LCC comparisons may be done with standard LCC software/spreadsheets. • Complex problems involving assumptions concerning reliability distributions, spare parts models etc may require a more complex solution.

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Modeling considerations • We can work in: – Nominal (actual/inflated) dollars – value of dollars in the year in which they are spent (or received) – Real dollars – dollars having present day value. • Assuming inflation is constant, same total discounted cost is obtained provided the interest rate for discounting used is appropriate to the type of dollars we are working in.

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Economic life calculations •

Discount factor:

•

Present value:

•

Future value:

•

Repetitive expenditure:

1 r= 1+ i

PV =

i=interest rate n=number of years (≥0)

FV

(1 + i )

n

= FV ⋅ r n

FV = PV (1 + i ) ⎡1 − r n +1 ⎤ PV = A ⎢ ⎥ − r 1 ⎣ ⎦

PV = n r

n

A is repetitive expenditure

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Comparison of present and future values

PV =

FV

(1 + i )

n

= FV ⋅ r n

FV = PV (1 + i )

n

PV = n r

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Net present value •

Net present value for a project is the ‘present’ value of the income/proceeds minus ‘present value’ of the outlays

Truck costs $75000 Interest = 15%

Maintenance Costs:

PV = 75000 + 5000 +

Year 0: $5000 Year 1: $10000 Year 2: $15000

10000

(1 + .15)

1

+

15000

(1 + .15)

2

= $100, 038

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Example: Equipment A $5000 $100 0

$100

$100

$100

1

2

3

$3000

Interest rate = 11%, What is Net Present Value) = ? NPV = 5000 + 100 + 100/(1+0.1)1 + 100/(1+0.1)2 + 100/(1+0.1)3 – 3000/(1+0.1))3 = $ 3150

PV =

FV

(1 + i )

n

= FV ⋅ r n

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Step 7: Develop cost table • Develop a format (table) for recording the costs from each activity/ category in the CBS for each year. • Record and sum categories as appropriate • Ensure that a common method of recording costs is used, either in ‘money of the day’ or in ‘present value’ terms. • Spreadsheets and LCC software are commonly used.

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Step 7: Identify high cost contributors • Review results and identify high cost contributors. • Pareto analysis is commonly used. • Objective is to determine causes for these high costs and review their underlying assumptions. • Relate high cost factors back to the function that is being performed. • Ask – are there alternative system selections/designs that can be implemented to produce a similar outcome at a lower LCC? • If so, evaluate these candidate solutions Hodkiewicz, UWA – “AM Life Cycle Costing”

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Step 8: Conduct sensitivity analysis • Determine ‘sensitivity’ of the result to key assumptions. • Ask – how sensitive are results to variations in uncertain input factors? • Ask – to what extent can selected input parameters be varied without changing the result of the analysis?

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Review results of sensitivity analysis • Examine the output of the sensitivity analysis • Identify those outputs which change significantly • Revisit the assumptions that determine these outputs and attempt to improve input data confidence.

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Step 10: Identify priorities • Evaluate and prioritize the problem areas identified in Steps 8 and 9. • Use a Pareto chart to show the relative contributions of the different categories. • Relative importance can be measured as the LCC but can also include measures of risk and criticality.

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Step 11: Identify feasible alternatives • Investigate alternative ways that the functions can be accomplished • Compare LCC profiles and Net Present value calculations. • Consider risk factors of alternatives

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Factors that affect Life Cycle Costs

Figure adapted from International Infrastructure Management Manual – V2.0 2002 Hodkiewicz, UWA – “AM Life Cycle Costing”

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Step 12: Evaluate alternatives and select approach • List options • Identify criteria for decision making • Consider effect of assumptions on the selection of the preferred option. • Evaluate risks • Summarize and record results

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LCC example I Pump example – from Reference [1]

Step 1: Define requirements •

Calculate cost of continuing to repair CV on failure and examine alternatives to the existing pump-control valve arrangement to recommend lowest LC cost solution.

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Case study Background • Single pump circuit from storage tank to pressurised tank through a Heat Exchanger. The Control Valve (CV) regulates flow into pressurised tank at 80 m3/hr. Fluid has contained solids. • Desired Process flowrate – 80 m3/hr for 6000 hr/yr. • Historically the CV fails every 10-12 months as result of erosion caused by cavitation. Cost of each failure is~ $4000.

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Step 2: Identify LC phases – – – –

Acquisition Installation & commissioning Operation & Maintenance Disposal

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Step 3: Identify cost categories (from [1]) LCCpump= Cic+ Cin+ Ce+ Co+ Cm+ Cs+ Cenv+ Cd Cic = initial cost, purchase price Cin = installation and commissioning cost Ce = energy costs Co = operating cost Cm = maintenance and repair cost Cs = downtime and loss of production cost Cenv = environmental cost Cd = decommissioning and disposal

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Initial costs • May need to include – Engineering (design & drawings, regulatory issues) – Bid process – Purchase order administration – Testing and inspection – Inventory of spare parts – Auxiliary equipment for cooling and sealing water

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Initial cost considerations • Initial cost considerations – Small fitting/pipe diameters reduce purchase costs but increase energy costs as more power is required due to increased line velocity and friction losses. – Small inlet pipes increase NPSHA, risking earlier onset of cavitation. – Material selection may affect repair frequency – Seal selection is important

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Installation and commissioning costs • May need to include – Foundations – Connection of process piping, electrical wiring and instrumentation, auxiliary systems and utilities. – Provision for system flushing and commissioning on water – Performance evaluation at start-up – Training

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Energy costs • Often the largest cost element in a pump life cycle cost. • May need to consider – Is use constant or variable? – How to determine pump efficiency or energy consumption reliably over time? – How to estimate efficiency when system conditions/load vary? – Throttling control valves, pressure relief and flow by pass reduce operating efficiency and increase energy consumption – Consider energy costs of auxiliary services Hodkiewicz, UWA – “AM Life Cycle Costing”

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Operating costs • Operating costs are labour costs related to the operation of the pumping system. • Vary widely but may need to be considered for example for hazardous systems requiring daily checks for emissions and performance. • Other costs may relate to performance monitoring tests, vibration, noise, pressure, power consumption.

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Maintenance and repair costs • •

Consists of number and cost of routine preventative maintenance, routine repairs/ overhauls and corrective (unscheduled repairs) Repairs can include – Labour costs – Costs of replacement parts – Consumables – Cost of loss production or requirement for temporary replacement. – Cost of removal. transportation, inspection and reinstallations

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Alternative sustaining cost category structure (from [5]) SUSTAINING COST TREE

SCHED & UNSCHED MAINTENANCE

FACILITY USAGE COSTS

DISPOSAL COSTS

LABOUR, MATERIAL & OVERHEAD

ENERGY & FACILITY USAGE COSTS

PERMITS & LEGAL COSTS - DISPOSAL

REPLACEMENT & RENEWAL

SUPPORT & SUPPLY COSTS

WRECKING/ DISPOSAL

REPLACE/ RENEW TRANSPORTATION

OPERATIONS COSTS

REMEDIATION

SYSTEM/EQUIPMENT MODIFICATIONS

ONGOING TRAINING FOR MAINT & OPS

WRITE OFF/ ASSET RECOVERY

ENGINEERING DOCUMENTATION

TECHNICAL DATA MANAGEMENT

GREEN & CLEAN COSTS

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Step 4: Identify data required • • • • •

Cost factors for items in Step 3 Present energy price ($/kWh) Expected equipment life (n Years) Interest rate % (i) Inflation rate % (f)

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Step 5: Estimate costs • • • • • • • • • •

Valve repair - $ 4000/yr Pump repair - $2500 every 2nd yr Routine maintenance - $500/yr Energy cost – 0.08 $/kWh Motor efficiency – 90% Pump efficiencies –75.1% Pump power consumption - 23.1 kW No. of years – 8 Inflation rate – 4% Interest rate – 8 %,

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Step 6: Select cost model • Need to know: – When costs are incurred – What the costs are – Are they single or recurring? – Is the model in ‘nominal’ (adjusted for inflation)’ or ‘real’ (Present Value) $? – What costs are inflated and what are the inflation rates?

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Step 7: Develop cost profile (nominal – inflated $)

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Example in ‘real $’

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Step 8: Identify high costs

66% of the total costs over the 8 year period are for energy consumption

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er V a gy C lve os t M P u r ep ai m nt p air e r In na epa iti nc ir al e in co ve s s t In tme O st p e al nt ra lati D t o En ow ing n vir nti co on me st m en cos D isp tal t os cos al t co st

En

PV $ 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 100 90 80 70 60 50 40 30 20 10 0

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% of total PV cost

Comparison graph

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Step 9: Sensitivity analysis • Test model to determine sensitivity to energy costs (kWh/t) • Other options include inflation and interest rates

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Step 9: Identify problems for resolution • •

Energy costs and the annual valve repair cost are high, are there alternatives? Consider the situation shown below

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Investigation 1. What were the original design specifications and how do they compare with current operational requirements? 2. What is the maintenance history? 3. What are the desired operating parameters for the system? 4. Determine how the system is currently operating 5. Investigate why the CV fails 6. Determine the effect of the failure

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Examine pump & system curves System Curve with valve 15% open to get 80 m3/hr

Desired flowrate 80 m3/hr

Ref:[1] Hodkiewicz, UWA – “AM Life Cycle Costing”

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Identify issues • To achieve 80 m3/hr the valve is at 15% open • Results in high differential pressure across the valve. • What do we conclude from this? – Valve is throttled – Increases energy consumption – High DP causes cavitation through the valve.

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Options •

A. Purchase a new CV that will handle the high ΔP

•

B. Trim the pump impeller to 375 mm

•

C. Install a VFD and remove the control valve

•

D. Leave system as is Hodkiewicz, UWA – “AM Life Cycle Costing”

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Estimate costs required for options A, B, C (1 of 2) Cost $

Change CV (A)

New Valve

5000 (Yr 0)

Modify impeller

Trim Impeller (B)

VFD (C)

Repair CV (D)

2250 (Yr 0)

VFD

20000 (Yr0)

Installation of VFD

1500 (Yr 0)

Maintain VFD

500 (All yrs)

Valve repair

4000 (All yrs) Hodkiewicz, UWA – “AM Life Cycle Costing”

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Estimate costs required for options A, B, C (2 of 2) Change CV (A)

Trim Impeller (B)

VFD

Repair CV

(C)

(D)

Impeller diameter

430 mm

375 mm

430 mm

430 mm

Pump Head

71.7 m

42.0 m

34.5 m

71.7 m

Pump efficiency

75.1%

72.7%

77%

75.1%

Flow

80 m3/hr

80 m3/hr

80 m3/hr

80 m3/hr

Power consumed

23.1 kW

14.0 kW

11.6 kW

23.1 kW

Energy cost/yr

$11088

$6720

$5568

$11088

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Results of analysis Cost $

Change CV (A)

Trim Impeller (B)

VFD (C)

Repair CV (D)

Present LCC value

$91,827

$59,481

$74,313

$113,930

Initial investment cost

$5000

$2250

$21500

$0

Total PV Energy cost

$88704

$53760

$44544

$88704

Total PV Cost

$107704

$70010

$84044

$134704

Energy as % Total Cost

82%

77%

53%

66%

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Step 11: Evaluate alternatives • Lowest Present value cost is Option B - trim the impeller • This reduces the pump head to 42 m at 80 m3/hr, reducing the ΔP across the control valve to 10m (to match the valve design). • This results in significantly lower energy cost. • Option C – results in lowest energy costs. • If the impeller is trimmed, difficult to respond quickly to calls for production increase. Limited flexibility. Hodkiewicz, UWA – “AM Life Cycle Costing”

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Step 12: What option would you

recommend?

Cost $

Change CV (A)

Trim Impeller (B)

VFD (C)

Repair CV (D)

Present LCC value

$91,827

$59,481

$74,313

$113,930

Initial investment cost

$5000

$2250

$21500

$0

Total PV Energy cost

$88704

$53760

$44544

$88704

Total PV Cost

$107704

$70010

$84044

$134704

Energy as % Total Cost

82%

77%

53%

66%

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Reflections • Proper pumping system design is the single most important element in minimizing the LCC [1] • Consider the effect of maintenance policies on the cost and frequency of repairs & replacements. • Consider the effect of decisions on the efficiency of the pump and resulting energy consumption.

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Operating ‘duty’ point Pump duty point for 438mm impeller: 120 l/s at 58 m head

System Curve

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Best efficiency point Throttled valve, pump operating at less than BEP efficiency

System Curve with valve 15% open to get 80 m3/hr

Best efficiency point for pump

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Losses resulting in efficiency reduction IMPELLER DISCHARGE SHROUD-CASING SPACE DISCHARGE RECIRCULATION LEAKAGE FLOW THROUGH THE WEAR RING

Effect of reduced flow on the flow field of an end-suction pump (Makay 1980).

IMPELLER SUCTION

SUCTION RECIRCULATION

SHAFT CENTRELINE

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Pump energy consumption • •

The energy required to drive the motors on centrifugal pumps can account for 50-85% of the lifecycle cost. A 2001 study by the EU concluded that 14% of all industrial and commercial electricity in the EU was consumed operating pumps.

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LCC example 2 Pump example – from Reference [5]

Identify problem • An ANSI pump is operating without a spare • At pump failure, downtime costs are incurred at US$ 4000/hr. • Find an effective LCC solution • Assumptions: – Plant has 10 year life. – 100 HP ANSI pump, 1750 rpm, 250 psi, 70% efficiency, fluid SG 1 Hodkiewicz, UWA – “AM Life Cycle Costing”

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Consider alternatives (from [5]) • 1. Do nothing. Continue to operate solo ANSI pump. • 2. Add a 2nd ANSI pump in parallel at purchase cost of $8k, installation of $2.5k and $3k for valves. • 3. Remove solo ANSI pump and replace with API pump at purchase cost of $18k, installation of $3.5k plus 4 hours production loss.

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Identify cost categories • Acquisition costs • Sustaining costs – see next slide for breakdown • Disposal costs

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Identify cost categories SUSTAINING COST TREE

1 SCHED & UNSCHED MAINTENANCE

FACILITY USAGE COSTS

DISPOSAL COSTS

2 LABOUR, MATERIAL & OVERHEAD

ENERGY & FACILITY USAGE COSTS

PERMITS & LEGAL COSTS - DISPOSAL

REPLACEMENT & RENEWAL

SUPPORT & SUPPLY COSTS

WRECKING/ DISPOSAL

3

All (1,2,3) REPLACE/ RENEW TRANSPORTATION

OPERATIONS COSTS

REMEDIATION

SYSTEM/EQUIPMENT MODIFICATIONS

ONGOING TRAINING FOR MAINT & OPS

WRITE OFF/ ASSET RECOVERY

ENGINEERING DOCUMENTATION

TECHNICAL DATA MANAGEMENT

GREEN & CLEAN COSTS

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Steps …by 12 step plan • • • •

Step 4: Identify data required – see previous slide Step 5: Collect cost data Step 6: Select cost model method: Spreadsheet. Step 7: Develop model – see next slide

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For Option 1: Do nothing (ANSI) (from [5])

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ec tri

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Cost/yr

% of total

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Lo st G El ro ec ss tri M ca ar lp gi n ow er Co co st st fo s rL ab ,M at Pa rt co Lo st gi st ics co st

p

ci ty S be e Co ar i al up ngs Ho ling u s M Im sin ai nt pe g en M ll e an ot r ce o O pe V P S rs ra ibr M ha tio at vi ft n io si Tr s P n d t s ai M ep ni v t ng isi co ts st s

Pu m

El

Cost/yr

40000 35000 30000 25000 20000 15000 10000 5000 0

Hodkiewicz, UWA – “AM Life Cycle Costing”

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

92

% of total

For Option 1: Do nothing (ANSI)

Total Sustaining cost= $ 54,827/yr

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Total Sustaining cost= $ 21,493/yr Hodkiewicz, UWA – “AM Life Cycle Costing”

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% of total

Cost/yr

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

Lo st G El ro ec ss tri M ca ar lp gi n ow e Co rc os st ts fo rL ab ,M at Pa rt co Lo st gi st ics co st

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

% of total

40000 35000 30000 25000 20000 15000 10000 5000 0

Lo st G El ro ec ss tri M ca ar lp gi n ow er Co co st st fo s rL ab ,M at Pa rt co Lo st gi st ics co st

Cost/yr

Comparison of Option 1 and 2

NPV Option comparison (adapted from [5])

Assuming interest rate of 12% and 10 year life Hodkiewicz, UWA – “AM Life Cycle Costing”

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Breakeven chart by option (from [5]) 350000 300000

NPV

250000 200000 150000 100000 50000 0 0

1

2

3

4

5

6

7

8

9

10

Years Option 1

Option 2

Option 3

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Sensitivity analysis • What are some of the considerations for sensitivity analysis? – Failure rates and reliability – Electrical power and assumptions on pump efficiency (If an 80% efficient pump were selected the power cost would reduce from $16500/yr to $14438)

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Conclusion • Selection of parallel, redundant strategy with 2nd ANSI pump (Option 2) is preferred. – Avoids process failure – Increases system reliability • Aim to purchase equipment with high electrical power efficiency • Aim to purchase a pump that is correctly sized for the system to achieve optimal hydraulic efficiency

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Useful Calculations

Notes developed by Dr. M.Hodkiewicz and Dr.J.Sikorska

Economic life calculations •

Discount factor:

•

Present value:

•

Future value:

•

Repetitive expenditure:

1 r= 1+ i

PV =

i=interest rate n=number of years (≥0)

FV

(1 + i )

n

= FV ⋅ r n

FV = PV (1 + i ) ⎡1 − r n +1 ⎤ PV = A ⎢ ⎥ − r 1 ⎣ ⎦

PV = n r

n

A is repetitive expenditure

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Real rate of interest •

Discount factor:

•

Real rate of interest:

r=

1 1+ i

t = (i – p)/(1+p)

i=interest rate p = inflation rate

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Infinite expenditure Consider the situation where the same expenditure, A, is made every year for an infinite (or very long) period of time:

1 Let r = 1+ i ⎡1 − r n +1 ⎤ PV = A ⎢ ⎥ ⎣ 1− r ⎦

n starts from 0

A As n → ∞, PV → 1− r Hodkiewicz, UWA – “AM Life Cycle Costing”

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Economic life calculations ANn = (1-rn)/i

•

Annuity factor

•

Capital recovery factor:

•

CRF =

Equivalent Annual Cost:

i (1 + i ) n

(1 + i )

n

−1

EAC = CRF × PV i = Interest rate r = 1/(1+i) = discount factor n = number of years AN = 1 /CRF Hodkiewicz, UWA – “AM Life Cycle Costing”

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Comparing life costs To compare different options: 1. Bring all future costs to their present value 2. Compare all cycles over the same period of time 3. Consider all relevant life-cycle costs (e.g. What are the individual elements of costs. Do they change each year? If so, how?)

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Economic Life Calculations • We can work in: – Nominal dollars – value of dollars in the year in which they are spent (or received) – Real dollars – dollars having present day value. • Assuming inflation is constant, same total discounted cost is obtained provided the interest rate for discounting used is appropriate to the type of dollars we are working in.

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Summary • You should be able to: – Identify components of the LCC equation – Develop a framework for comparative analysis – Feel comfortable to access and use LCC software tools to perform calculations – Assess and use results of LCC analysis as part of the decision-making process. – Consider the potential to improve decision making for repair/replace process equipment using LCC Hodkiewicz, UWA – “AM Life Cycle Costing”

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Applications and benefits of LCC • Alternative technical solutions (as in the pump example) • Alternative system or operating profiles • Alternative maintenance and logistics support concepts • Alternative designs and system configurations

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Benefits of LCC • Principles can be applied to a variety of AM problems • Provides more robust solutions than those based only on capital cost. • Focuses attention on the consequences of the initial design/acquisition/repair decision • Identifies high cost items • Focuses on long-range planning

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Current trends • • • • • • •

Complexity of systems is increasing Current systems may not meet user needs New technologies Duty cycles are being extended Pressure to reduce development times Reduced availability of resources Greater emphasis on efficiency

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Take-away message • Think about the relationship between the issue being assessed and the goals of the strategic business unit • Think economics/costs • Think efficiency • Think life cycle

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Backup data from pump life cycle example

Data for Option A

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Data for Option B

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Data for Option C

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Data for Option D

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End Thank you