cost analysis of military training marcel c. smit sas-095 workshop on cost-benefit analysis of...
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Cost Analysis of Military Training
Marcel C. Smit
SAS-095 workshop on
Cost-Benefit Analysis of Military Training
Amsterdam, The Netherlands
5-6 June 2012
Outline
Cost Analysis
Applications of Cost Analysis
Costing process
Framework of Cost Analysis
Cost Breakdown Structure
Methods
Uncertainty & Risk
Cost Effectiveness, Cost Benefit analysis
Economic Evaluation of Alternatives
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Cost analysis
• Investment decisions are supported by weighing costs against
benefits.
• A life cycle cost estimate, if done properly, is the single best metric for
measuring the value for money of defence resources.
• Cost analysis can be done in each phase of the life cycle.
Insight in not only acquisition, but also O&S costs
Not an exact science: does not provide exact figure
Merely gives an insight into the major factors of influence
Highlights the magnitude of the costs
Identifies areas for potential cost savings
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The greatest opportunity to reduce life cycle costs usually occurs during the early stages of a programme
Application of Cost Analysis
Evaluating and comparing alternative solutions
Assessing the affordability
Managing the budgets
Developing future expenditure profiles
Evaluating cost reduction opportunities
Evaluating area of financial risk and uncertainty
Benefits for stakeholders
Better insight in all costs
Identifying key cost drivers
Assist the decision making process
Methodical and consistent estimating approach
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Costing Process
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Framework Cost Analysis
Objective
Requirements
Identification of constraints
Assumptions
Cost Breakdown Structure
Data
Methods
Models
Uncertainty & Risk
Reporting & Presentation
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Cost Breakdown Structurefor Military Training
1initial investment
1.1 acquisition cost training devices
1.2 development cost course ware
1.3 acquisition cost initial logistics support
1.3.1 costs initial spare parts package
1.3.2 costs initial support equipment
1.3.3 cost of training instructors
1.3.4 costs initial documentation
1.3.5 costs computer equipment
1.3.5.1 computer equipment for training devices
1.3.5.2 cost of software
1.3.5.3 cost of secure network
1.3.6 construction costs
1.3.6.1 cost to build new infrastructure
1.3.6.2 cost to adapt infrastructure
1.3.7 preparation costs
1.3.7.1 costs of test and acceptance
1.3.7.2 project costs
1.3.7.3 costs pack/store/handle & transportation
1.3.8 other investment costs
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2 operating and support costs
2.1operating costs
2.1.1 cost of instructors 2.1.2 cost of using training devices
2.1.3cost of refreshment training instructors
2.1.4 cost of updating courseware
2.1.5cost of updates operating documentation
2.1.6operating costs new and adapted infrastructure
2.1.7cost of consumables (fuel, electricity)
2.1.8travel expenses students/personnel
2.1.9accommodation costs students/personnel
2.2support costs
2.2.1 cost of support personnel2.2.1.1 cost of maintenance personnel2.2.1.2 cost of technical personnel
2.2.2 cost of refreshment training support personnel
2.2.3 cost use of spare parts
2.2.4cost use of support equipment
2.2.5 cost of updates maintenance documentation2.2.6 cost use of computers and software2.2.6.1 cost replacements computers2.2.6.2 cost software licences2.2.6.3 cost of subscription courseware
2.2.7cost of data security
2.2.8 cost of outsourcing technical support2.2.9 cost of outsourcing maintenance
2.2.10costs to upgrade training devices
3decommissioning costs
3.1 cost of decommissioning training devices3.2 cost of decommissioning support elements3.3 cost of decommissioning infrastructure
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Estimating methods
Programme Life Cycle
Concept Development Production Utilization Support Retirement
Gross Estimates Detailed Estimates Gross Estimates
Analogy(It’s like one of these)
Parametric(This pattern holds)
Engineering(It’s made up of these)
Extrapolation(of actual costs)
Analogy(Similarities)
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Uncertainty and Risk
Requirement to identify uncertainty in results cost analysis:
Estimates are uncertain!
Uncertainty about the future
No or missing data or information
Unclear data or information
Doubts about the accuracy of data or
information
Determine bandwidths for parameters with
uncertain values
Apply Monte Carlo Simlulation to determine
probability distribution
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Baseline Probability Distribution
Costs in Millions
Lik
elih
oo
d
μ1
Modeling UncertaintyMonte Carlo Simulation
For each stochastic CBS element, choose:
Type of probability distribution Parameters of the distribution (e.g., μ, σ²) Correlation with other CBS elements
Risk-Adjusted Probability Distribution
Costs in Millions
Lik
elih
oo
d
Modeling Uncertainty & RiskMonte Carlo Simulation
μ2
μ2 –μ1 = Cost Risk
Summary Framework
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Cost Benefit Analysis (CBA)
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Cost–benefit analysis (CBA), is a systematic process for calculating and comparing benefits and costs of a project.
CBA has two purposes:• To determine if it is a sound investment/decision (justification /feasibility)• To provide a basis for comparing projects. It involves comparing the total
expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.
However, the benefits can often not be expressed in monetary terms. Then Measures of Effectiveness (MoE) are developed and the CBA
converts into a Cost Effectiveness Analysis (CEA).In a CEA the effectiveness and the total LCC are compared.
Most common methodology for building MoEs and structuring a CEA is Multiple Criteria Decision Making (MCDM).
Source: Wikipedia
Economic Evaluation of Alternatives
Buyer sends out an economic RfP, with:
All requirements and wishes to the system
And… an affordability assessment: optimistic, pessimistic and most-
likely budget (funding) for the overall programme
Vendors submit their offer based on the different budget scenarios.
Buyer can derive the response function.
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Economic Evaluation of Alternatives
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Source: Prof. Dr. Francois Melese, Naval Post Graduate School
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More information ?
TNOBehavioural and Societal SciencesStrategic Business Analysis
M.C. (Marcel) Smit, M.Sc.
Brassersplein 22612 CT DelftThe Netherlands
Phone: +31 88 866 39 09Mobile: +31 6 211 343 54Email: [email protected]
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