COCOMO Forum – November 2009 Innovative design Manufacturing Research Centre (IdMRC) “...

COCOMO Forum – November 2009

Innovative design Manufacturing

Research Centre (IdMRC)

“World-leading research in engineering design, manufacture and verification.”

Cost Modelling

Linda Newnes, Head of Costing ResearchUniversity of Bath


Presentation Outline

• Present the IdMRC what we do.• Overview of the work undertaken at Bath in

cost modelling.• Costing for availability

– Product Costing– Availability Contracting– Service Costing– Costing for Availability


Innovative design and Manufacturing Research Centre (IdMRC)

• One of 16 specialised research centres.• Focus of the activity at Bath is the integration of

Design and Manufacturing.• IdMRC leads a 3 year Grand Challenge in through life

information and knowledge (KIM project – Knowledge Information Management).

The vision is to be an internationally leading research Centre in the synthesis of design,

manufacture and product verification


IdMRC – Four themes to realise our vision

• Constraint Based Design and Optimisation. (CBDO)

• Advanced Machining Processes and Systems. (AMPS)

• Metrology and Assembly Systems and Technology. (MAST)

• Design Information and Knowledge (DIAK)


Through Life Costing

• Our focus is on concept design through to disposal.• Emphasis on knowledge information and

management for cost modelling.• Importance of ‘servitisation’ cost modelling (PSS).• Current collaborators include companies such as;

Ministry of Defence, BAE Systems, GE Aviation, Airbus UK, Spirax Sarco.

The overall aim is to provide methods and tools for managing TLC from concept design to

in-service/disposal.


Why is cost modelling important

• NAO (2008) highlights key areas– MOD projects late delivery and over budget– 20 largest projects on average 96 months late and

£205M over budget

• Deloittes (2008)– Cost overruns in defence and aerospace in next

10 years 26% increase– Equates to 46%.

• MOD DES– 2007/8 the in-service costs were £10b– Availability contracting


Through Life Costing

Feedback to inform future design


Some cost modelling techniques

• Synthetic Cost Modelling Here the ‘experts’ do their best ‘guestimate’ on what the Cost Estimating Relationships (CER) are.

• Generative Cost Modelling (as design progresses detail improves and cost models e.g. material, processes etc – lots of detail required).

• Parametric Cost Modelling (using past knowledge to predict cost e.g. weight of material used in aerospace and injection moulding). In otherwards you find a CER.


Uncertainty in cost modelling

• Different options:– Sell the product and spares– Lease the product (computers)– Availability contracting

• Future contracting of some aerospace/defence products – availability contracts.

How do you cost for through life availability?


Why is the utilization phase important?

Up to 75%


Costing for Availability – current modelling

• Cost modellers have focused on costing products.• Commercial systems are in general still product

based.• Little evidence of in-service/utilisation modelling.• However product and services debated since 1776 by

Smith*

• Availability contracts already in place, however benefitted with transition between products and service.

*Smith, Adam. (1776). The Wealth of Nations, Books I-III, Chichester: Wiley.


Key Changes in the Definition of Goods (G) & Services (S)

Smith (1776) clarified labour in

terms of productive (e.g.

Goods) and non-productive

(e.g.Services)

Smith (1776) identified unique

G&S characteristics

Say (1803)first introduced the concept of Materialability

Senior (1863)classified G as an object and S as a

performance/act

Hicks (1942)Identified another

key G&S characteristics

Shostack (1977)among the first to

argue that intangibility can no

longer be the distinction to

separate S from G

Hill (1999)

among the first to recognised

the ambiguity to separate S from

G based on Perishability

Delaunay&Gadrey (1987,

cited in Araujo&Spring,

2006)formed producer-user interaction as

the basis to distinguish between

G&S

Axelsson & Wynstra (2002)

Rather than distinguishing services and goods explicitly, it

would be more helpful to organising & managing

firms with complex product-service offerings

Araujo & Spring (2006)

The current trend is to integrate

manufacturing into service to provide

solutions throughout the lifecycle of the

product


Aim of availability research

To provide an approach or solution to the challenge of modelling and analysing the provision of through-life costing for a service

• To analyse the differences and similarities between product cost estimating techniques and service cost estimating techniques

• To design and evaluate an appropriate cost model for product service systems by identifying in-service activities and applying estimating rules

• To provide a framework for the provision of service through-life-costing


Challenge

How do you cost for through life availability or capability?

• How can industry estimate the TLC for their products? In particular,– How can you predict the in-service (utilization/operations

support) costs for the products at the concept design stage to enable informed decision making?

– Model the cost of decisions e.g. last time buy – how many parts are stored in warehouses from last time buys

• Uncertainty modelling to aid decision making


Through Life Cost

• Decision making for the acquisition, development and ongoing support of complex engineering systems with extended life – Most meaningful at early stage but highly

uncertain– Quantitative and objective estimating of TLC

taking into account of uncertainty in estimate– Use uncertainty modelling for decision making

through the supply chain


The Framework


Uncertainty and Decision Making

• Aleatory uncertainty– Irreducible randomness associated with the physical system

or the environment– e.g. repair time, failure rates– Decision making under risk

• Epistemic uncertainty– Reducible uncertainty due to a lack of knowledge of

quantities or processes of the system or the environment– e.g. future decisions– Decision making under uncertainty

• Important to make a distinction– Different theories and methods to model these uncertainties– Can be updated as knowledge is accumulated


Current Approach

• Probabilistic cost risk analysis– Three-point estimate is common, most likely, min and max to

describe triangular distributions– Subjective probability is often used to represent uncertainty

• Commercial software incorporate probabilistic modelling technique– Monte Carlo with various types of distributions (e.g. uniform,

triangular, normal)

Cost ModelCost ModelCost ModelCost Model


Cost Models Uncertainty

More important to characterise aleatory uncertainty

More important to characterise epistemic uncertainty

Estimation Methods Sources of Uncertainty Uncertainty to Characterise

Intuitive/expert opinion Judgement Epistemic

Analogical Selection of benchmark model (qualitative characteristics)

Epistemic

Parametric Cost drivers/parameters CER choice Goodness-of-fit Data uncertainty Extrapolation

Epistemic and aleatory

Analytical/engineering Scope Level of details Available data


Extrapolation from actual costs

Changes in conditions Limited data



Cost Data Uncertainty

Data Uncertainty

Source Type Example

Variability Inherent

randomnessAleatory

Repair time, Mean Time Between Failure, labour cost.

Statistical errors Lack of data Epistemic Reliability.

Vagueness Linguistic

uncertainty Epistemic

The component may need to be replaced every 2 to 3 months.

AmbiguityMultiple sources

of dataEpistemic

Expert 1 and expert 2 provides different values to end-of-life costs.

Subjective judgement

Optimism bias EpistemicOver confidence in schedule

allocation.

Imprecision Future decision

or choiceEpistemic Supplier A or B.


Scenario Uncertainty

• A scenario is a conceptual model that is developed (with assumptions) to approximate the actual TLC of the artifact– new technologies or legislation, supply chain disruptions,

design changes

• Typical scenarios are the

most likely, worst and best

cases, and the outcomes

of these are then used as

3-point estimates• No distinction between risk

and uncertainty£

Probability density (1/£)

Pessimistic Optimistic Most likely


0

0.2

0.4

0.6

0.8

1

0 5 10 15 20 25 30 35

Imprecise probability

• When both variability and imprecision is present, e.g. uncertain about the distribution parameters e.g. reliability

0

0.2

0.4

0.6

0.8

1

0 5 10 15 20 25 30 35

0

0.2

0.4

0.6

0.8

1

0 5 10 15 20 25 30 350

0.2

0.4

0.6

0.8

1

0 5 10 15 20 25 30 35

0

0.2

0.4

0.6

0.8

1

0 5 10 15 20 25 30 35

Normal Mean St Dev

Upper bound

12 2

Lower bound

20 2

Probability Bounds

Probability Bounds

PDF CDF


Probability vs Imprecise Probability

There is 90% probability that in service cost is within £23M.

F(x)

There is 90% probability that cost is within £22M-£24M. Use this information to set contingency budget, best case £22M worst case £24M.

F(x)

_F(x)


Conclusions

• Uncertainty important in the context of decision making in TLC

• Separating epistemic and aleatory uncertainty in costing– Can update the model when imprecision is

reduced/eliminated, e.g. deciding on alternative– Allows reuse of objective data e.g. repair time

independent of the probability of repair events

• More transparent decision making under uncertainty and risk


References

Goh, Y.M, Newnes L.B., Mileham A.R., McMahon, C.A and Paredis, C. A framework for considering uncertainty in quantitative life cycle cost estimation. ASME 2009, San Diego, 30th August – 2nd September 2009.


Current Requirements

• We know the literature and approaches of commercial systems.

• We have some industrial views of how they model in-service/utilisation costs.

• Need further industrial feedback.• Complete questionnaires to ascertain the type

of modelling you undertake.


Innovative design Manufacturing

Research Centre (IdMRC)

“World-leading research in engineering design, manufacture and verification.”

Any Questions

COCOMO Forum – November 2009 Innovative design Manufacturing Research Centre (IdMRC) “...

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