Documente Academic
Documente Profesional
Documente Cultură
Raymond P. Covert
MCR, LLC
2000 Corporate Ridge, Suite 400
McLean, Virginia 22102
(703) 506-4600
www.mcri.com
E-mail: rcovert@mcri.com
1
© 2005 MCR, LLC
Cost Drivers Learning Event, 2nd November 2005
Agenda
z Introduction
z Cost Improvement Factors
z The Plant Model
z Nonrecurring and recurring costs
z Nonrecurring cost improvement
z Recurring cost improvement
z Example hardware cost improvement model
z Summary
z Acronym List
z References
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Cost Drivers Learning Event, 2nd November 2005
Introduction
z This presentation is intended for an audience with an
intermediate understanding of cost analysis methods
z We will discuss the phenomenon of “cost
improvement”, which is loosely defined as the
observed reduction of cost of successive units or
projects 400
350
Recurring Cost, $
300
250
200
150
100
50
0
0 10 20 30
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Unit Number
Cost Drivers Learning Event, 2nd November 2005
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Cost Drivers Learning Event, 2nd November 2005
Engineering 1 2 3 4 5
Manufacturing
Yards Fee
Material quantities $
Gallons
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Linear Feet 2005 Material Overhead 5
Cost Drivers Learning Event, 2nd November 2005
z Between Programs
Nonrecurring cost improvements between successive programs
Recurring cost improvements continuing to the subsequent
programs
z Within programs
Recurring cost improvements
z The next step is to define these terms precisely and show how
to model them
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Cost Drivers Learning Event, 2nd November 2005
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Cost Drivers Learning Event, 2nd November 2005
* NASA / Air Force Cost Model (NAFCOM) Includes subsystem hardware, systems engineering, program management,
integration, assembly and test, ground test equipment, launch and orbital operations support
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Cost Drivers Learning Event, 2nd November 2005
2.0
0.4 Min Mods 0.8 1.5
0.5 1.3 1.0
0.6 Moderate Mods 1.7 0.5
0.7 2.1 0.0
0.8 Major Mods 2.5 0.0 0.2 0.4 0.6 0.8 1.0
0.9 2.8 % New Design
1.0 New Design 3.0
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* For earth orbiting spacecraft
Cost Drivers Learning Event, 2nd November 2005
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Cost Drivers Learning Event, 2nd November 2005
i = unit number
Cost, $
0.60
Unit
LCS = learning curve slope 0.40
ln = natural log
0.20
0.00
0 2 4 6 8 10 12
Observations on Learning
z Can be measured in hours and dollars (Euros and Pounds are
OK as well!)
z This implies that it covers the same work content
Accounting standards need to include NR and REC cost definitions
z True learning should be independent of other factors such as:
Reuse of existing designs, materials, equipment, effort, or products
Skill Mix changes
Process shortcuts that eliminate effort or expenses
Yield improvements that reduce cost
Production Rate increases allowing for amortization of pooled
costs and greater efficiency
Technological advances allowing greater yield and efficiency
Inflation which measures the time variable cost of a “basket of
goods”
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Cost Drivers Learning Event, 2nd November 2005
0.8
Cost, $
0.6
0.4
Increase
0.2
fixed costs
0.0
0 2 4 6 8 10 12
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Units
Cost Drivers Learning Event, 2nd November 2005
Yield
z "Yield" is the fraction of units that meet specifications
Unit cost = $ fixed + $ var iable
$unit =
N * yield
1.2
Unit Cost
1.0
Unit Cost, $
0.8
0.6
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Fail = Does Not Meet 15
Specifications
Cost Drivers Learning Event, 2nd November 2005
Sensitivity Analysis
z What affects cost improvement the most?
Reuse?
Amortization (production rate)?
Yield?
z Depends on the scenario (looked at 5 scenarios)
Small quantity satellite production
Medium quantity satellite production
Large quantity satellite production
Electronic box production
Integrated circuit production
z Use plant model with uniform distributions of quantity,
reuse, amortization and yield to show sensitivity
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Cost Drivers Learning Event, 2nd November 2005
Results of Scenarios
z Model results tell us what we probably already know
Scenario Quantities Primary Cost Improvement Factor:
Small quantity satellite production 1-3 Reuse (New design)
Medium quantity satellite production 4-10 Reuse & Learing curve slope
Large quantity satellite production 20-40 Learning curve slope
Electronic box production 20-80 Amortization (production rate)
Integrated circuit production 800-1200 Yield
Summary
z Many factors affect cost improvement
z Cost improvement can be obtained between
subsequent programs or subsequent production units
z Use plant model to show sensitivities of these factors
z We chose reuse, learning, amortization (production
rate) and yield
z Effects are scenario dependent
Depends on quantity of production and production volumes
Also depends on amount of process automation and external
factors such as plant amortization
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Cost Drivers Learning Event, 2nd November 2005
Acronym List
z NR = Nonrecurring cost
z T1 = Theoretical first unit recurring cost
z T2 = Theoretical second unit [recurring] cost
z P1 = Theoretical first prototype unit cost
z REC = Recurring cost
z LCS = Learning curve slope
z ML = Most likely
z NR/T1 = Ratio of NR to T1 costs
z N = number of units
z i = unit number
z ln = natural log
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Cost Drivers Learning Event, 2nd November 2005
References
1. Stewart, R. and Wyskida, R., “Cost Estimator’s Reference Manual”, 1997, John Wiley and
Sons, New York.
2. “Pricing Handbook: Cost Accounting Standards”, Federal Aviation Administration,
http://fast.faa.gov/archive/v1198/pguide/98-30C14.htm
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