might be used to address issues involving the life-cycle costs of proposed systems and systems under development. Defense systems incur costs during the development process (including testing costs), costs in production, costs through use and repair, and sometimes redesign costs. Maintenance, repair, and redesign costs increase with the decreased reliability of a system and its components. Today there is a widespread perception within DoD that the percentage of the costs of defense systems that is incurred after production is too large, and thus that greater resources should perhaps be expended during the design and development stages to reduce postproduction costs, thereby reducing life-cycle costs. Estimating life-cycle costs and their contributing components can help in evaluating whether this perception is true and what specific actions might be taken to reduce lifecycle costs to the extent possible.

An introduction to the session was provided by Michael Tortorella of Bell Laboratories, who discussed some general issues concerning warranties and life-cycle costs. Systems with different reliabilities can have substantially different production costs. In industry, given a cost model that is sufficiently precise, it is possible to offer maintenance contracts or warranties that can be profitable to the producer.

Two primary areas of focus in the field of reliability economics are risk analysis and spares management. Risk analysis involves a supplier who needs to assess the probability that a product and a warranty will be profitable, which requires estimation of system life-cycle costs. A way to think about risk analysis is that every time a supplier produces a product or warranty for sale to a customer, the supplier is placing a bet with the company’s money that the product or warranty will be profitable. Reliability engineering represents an attempt to improve the odds on that bet. Spares management involves inventory investments, storage costs, transportation costs, and the consequences of outages during delays. Two approaches used are (1) stocking the spares inventory to a service continuity objective, which means stocking an inventory to ensure that, with some designated probability, a spare will be available; and (2) the preferred approach of taking into consideration the various costs associated with different stocking strategies and minimizing those costs while meeting the availability objective of the system. (For more information, see Chan and Tortorella [2001], Blischke and Murthy [1998], Murthy and Blischke [2000], and a variety of papers in Tortorella et al. [1998].)

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