National Academies Press: OpenBook

Optimal Replacement Cycles of Highway Operations Equipment (2018)

Chapter: Chapter 3 - Life Cycle Cost Analysis

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Suggested Citation:"Chapter 3 - Life Cycle Cost Analysis." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 3 - Life Cycle Cost Analysis." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 3 - Life Cycle Cost Analysis." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 3 - Life Cycle Cost Analysis." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 3 - Life Cycle Cost Analysis." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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52 Life Cycle Cost Analysis LCCA is used in many asset management applications, including pavements, bridges, culverts, buildings, and other assets. For highway operations equipment, LCCA is used to determine optimal life cycles and to analyze the cost history of individual equipment units. While conceptually similar to other applications, LCCA for equipment uses a slightly differ- ent approach that considers cost and other replacement factors specific to equipment operations. The LCCA approach for equipment is illustrated in Figure 1. The approach is summarized as follows: • Equipment costs consist of two main components: owner- ship and operating. – Ownership cost is the capital investment in equipment, which is determined from depreciation. Depreciation is the original price paid for a unit less the amount that is realized from its resale. For example, if the cost of a unit is $20,000 but sells for $1,500, then the ownership cost (depreciation) would be $18,500. Ownership costs per mile/hour go down over the life of an equipment unit. – Operating cost is the cost to operate and maintain a unit. Operating cost consists of out-of-pocket expen- ditures for maintenance, repair, and fuel. Operating cost also includes downtime and obsolescence, which are not out-of-pocket expenditures, but are nonethe- less real costs that must be factored into LCCA. Oper- ating costs per mile/hour go up over the life of an equipment unit. • LCCA is performed by calculating the life-to-date cost (the LTD) per unit of utilization either in miles or in hours for both the ownership and operating cost components. • The two main cost components are plotted against age. The point at which the total cost (the sum of ownership cost and operating cost) is lowest is when a unit has reached its economic life. C H A P T E R 3 When LCCA is used to determine optimal equipment life cycles, the analyst should consider some key aspects of the methodology and its outcomes: • Optimal replacement is seldom a single point in time, but rather a window of time. A number of real-world considerations come into play when making replace- ment decisions and the point at which a vehicle reaches its lowest LTD cost may not necessarily be the optimal time for replacing the equipment. This guide presents a systematic process for making equipment replacement decisions. • The smooth curves depicted in Figure 1 rarely occur. Equip- ment maintenance and repair costs often fluctuate consid- erably from year to year as does utilization. • The life cycle costs of similar equipment units can be very different depending on where and how they are used in highway operations, the effectiveness of the equip- ment maintenance program, and operator training and skill. • Good equipment data are essential for obtaining reliable LCCA results. The research reported in Part I of this report found that agency equipment data are not always com- plete, consistent, and accurate. A considerable effort is required before beginning the cost analysis, to ensure that good, clean data are used for performing LCCA. Chapter 7 discusses the types of data errors commonly found and provides guidance on correcting the data before using to perform LCCA. The guide presents two levels of LCCA: class-level LCCA and unit-level LCCA. The class-level LCCA determines opti- mal life cycles by using average LTD cost for all vehicles in a specific equipment class. This method will be the one most often used by highway agencies because it does not require annual cost data for each year of a unit’s life; many highway

53 agencies do not have complete annual cost data for all equip- ment units. The unit-level LCCA looks at a single piece of equipment and analyzes life cycle cost based on annual cost and utiliza- tion data. This method is a very good approach for analyzing life cycle cost but the optimal life cycle of an equipment unit cannot be known until after the unit has passed its lowest LTD cost. Only when the total cost curve has bottomed out and begins to rise has the unit reached its optimal life. The replacement process discussed in Chapter 6 uses unit-level LCCA to analyze cost of individual units as one input to the decision-making process. 3.1 Class-Level LCCA for Determining Optimal Life Cycles The class-level LCCA determines optimal life cycles for the various equipment classes such as ½-ton pickups, tandem dump trucks, or end loaders. The class-level LCCA analyzes LTD cost by averaging the operating history of all units in the class. For example, if there are 657 units in the ½-ton pickup class, the class-level LCCA looks at all 657 units to determine the average operating cost for the class. Table 2 lists the data elements needed for class-level LCCA. Quality data are key to obtaining reliable LCCA results, and it is important to ensure adequacy of the equipment data before inputting data into the optimization tool. After the equipment data are downloaded from an agency’s data sources, verified, and input into the optimization tool, the tool will produce LCCA results like that shown in Figure 2. The optimization tool’s user manual provides step-by-step instructions for performing class-level LCCA. In this example, the optimization tool computed the opti- mal life cycle for the ½-ton pickup class to be 7 years and approximately 95,000 miles. The LCCA estimates the LTD total cost per mile based on the averages of all units of the same age. For example, the average LTD cost per mile for the 64 pickups at 7 years of age is $0.71. The optimization tool shows the results in tabular form by year and provides a graph to the right of the tabulated results. Note the erratic nature of the operating and total cost curves in the graph. This type of variation going up and down from year to year naturally occurs over the equipment life cycle. This variation occurs because of the practical way in which maintenance is performed on equipment. In some years, only preventive maintenance or minor repairs are performed and, in other years, major maintenance such as brakes or transmission services are performed at a high cost. Left as they are, the erratic nature of the curves would make it difficult to determine when the LTD cost per mile is at its lowest point and to determine the optimal life cycle. The Figure 1. Stylized LCCA approach. Equipment Number Agency Class Code Description In-Service Year LTD Miles or Hours LTD Maintenance and Operating Costs LTD Downtime Hours Replacement Cost Data Elements for Class-Level LCCA Table 2. Class-level LCCA data elements.

54 optimization tool is designed to develop a trend line to model the total cost curve that is used to determine the optimal life cycle (7 years in this case). The trend line costs are displayed in the last column of the LCCA page. It is important to recognize that class-level LCCA deter- mines optimal life cycles at the class level based on averages of all units in the class. Unit-level LCCA is used to analyze cost for individual equipment units. 3.2 Unit-Level LCCA Class-level LCCA answers the question of optimal life cycles but does not identify if a specific unit should be replaced. Making replacement decisions is a process, and although optimal life cycles are key inputs to the process, there are a number of factors to be considered. Unit-level LCCA analyzes the cost performance of indi- vidual equipment units. It is similar to the class-level LCCA, but requires different data. In the unit-level analysis, the costs must be broken down year by year. Unit-level LCCA must have cost history for each year of the unit’s life. If annual cost data are not available for all years, the optimization tool will not produce reliable LCCA results. Data requirements for unit-level LCCAs are shown in Table 3. The annual costs and not the LTD costs are required for the unit-level LCCA. Historical annual costs are sometimes prob- lematic because the data are not available or compiled into a lump sum amount when an agency switches to a new equipment information system. If annual data are available and loaded into the optimization tool, the tool will produce the unit-level analysis results in a form similar to the one shown in Figure 3. The output from the optimization tool is similar to a class- level LCCA, with a tabular report and graph. The unit-level Figure 2. Example of class-level LCCA. Equipment Number Agency Class Code Description In-Service Year Annual Miles or Hours Annual Maintenance and Operating Costs Annual Downtime Hours Replacement Cost Data Elements for Unit-Level LCCA Table 3. Unit-level LCCA data elements.

55 LCCA is preset to predict a 25-year cost trend regardless of the age of the equipment. In this example, only 15 years of data are available; the trend for the entire 25 years is projected. The unit-level LCCA results are displayed a little differ- ently from the class-level LCCA results. In the example in Figure 3 for a tandem dump truck that is 15 years old, the optimization tool calculates the “Lowest Cost Year, To-Date” as Year 13. That might not be the optimal life cycle. However, the trend line in the graph suggests that the unit may be on an upward cost trend and that it may be past its economic life. On the other hand, the actual total cost curve has lev- eled out and the future trajectory cannot be known with cer- tainty, as maintenance costs are not always predictable. The replacement process outlined in Chapter 6 proposes a condi- tion assessment process that considers mission criticality to help predict future maintenance costs and make informed replacement decisions. 3.3 Using LCCA in Replacement Decisions Making sound replacement decisions can be an art as much as a science. In real life, equipment cost trends seldom follow the graphic depicted previously in Figure 1. The cost curves are more often erratic and not smooth as shown in Figures 2 and 3. From a practical viewpoint, optimal replace- Figure 3. Example of unit-level LCCA. ment times seldom occur at an exact point of age or utiliza- tion, but rather over a window of time. Performing equipment cost analysis and making replace- ment decisions are intricate tasks. They can be time consum- ing and demand dedicated resources. The following guidelines will help an agency gain maximum benefits and ensure the analysis yields the best and most reliable results: • Start with good quality data. In nearly all cases, the equip- ment data downloaded from agency systems will contain some errors. Research shows that the error rate can be as high as 10%; thus the data for a number of equipment units should be errors corrected or be eliminated from the cost analysis. • Determine if there are outliers. Invariably, maintenance costs for some equipment units fall outside the norm. These cost data do not represent typical cost trends, and should not be used to compute optimal life cycles. • Assess the number of units. Make sure that there are enough units in the class to provide a statistically valid sample of units for the class-level LCCA. If the number of units in a specific class is too small, with wide variations in age and miles/hours, determining a class average optimal life cycle is not realistic. In this case, analyze each unit separately by using the unit-level LCCA if the data are available. An

56 example would be a bridge snooper truck; an agency might only have one or two units in the fleet: one may be 2 years old and the other 12 years old. A meaningful class-level LCCA cannot be performed with such a low number of units with disparate ages. • Analyze similar units together. Carefully consider the makeup of each equipment class so that similar units are analyzed together. The optimization tool contains 40 equipment classes representing the majority of equipment types in a typical highway operations fleet. For example, the tool has a class for ½-ton pickups, which includes all types of vehicle configurations such as 2WD, 4WD, regular cab, and extended cab. It is unnecessary to break the ½-ton pickup class into these more specific types to perform LCCA. However, the analysis may be performed on sepa- rate equipment classes if a user determines that the cost model for the preset classes should be broken into a finer set of class descriptions.

Next: Chapter 4 - Equipment Classification Structure »
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TRB's National Cooperative Highway Research Program (NCHRP) Research Report 879: Optimal Replacement Cycles of Highway Operations Equipment acts as a handbook on equipment replacement concepts and an instruction manual for making cost-effective replacement decisions. The research report presents a process for determining replacement needs for highway operations equipment, identifying candidate equipment units for replacement, and preparing an annual equipment replacement program. The products include a guidance document and an Excel-based replacement optimization tool to support the equipment replacement process and facilitate its implementation.

Disclaimer - This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences, Engineering, and Medicine or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

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