GROUP MEMBERS

Abhirup Ubale 02

Manish Jadhav 23

Mansi Kumar 25

Sushil Padhi 51

PRODUCT LIFE CYCLE COST MANAGEMENT

INTRODUCTION

Product life cycle involves multiple stages Objective of product life cycle cost

management Manufacturer’s costs include the costs of

activities carried outUser costs Society costs

IMPORTANCE OF AN ANALYSIS OF PRODUCT LIFE CYCLECOST

Important part of product life cycle management.

Product idea stage to termination of its life cycle

Product costs throughout the various stages of its life span

Incorporating life cycle costsProduct life cycle cost analysis is always

needed System development parameter

Calculation of product life cycle costs

Step 1: Determine time for each cost elementStep 1: Determine time for each cost element

Step 2: Estimate value of each cost elementStep 2: Estimate value of each cost element

Step 3: Calculate Net Present Value of each Step 3: Calculate Net Present Value of each element, for every year (over its time period)element, for every year (over its time period)

Step 4: Calculate LCC by adding all cost element, Step 4: Calculate LCC by adding all cost element, at every yearat every year

Step 5: Analyze the results.Step 5: Analyze the results.

Step 1: Determine time for each cost Step 1: Determine time for each cost elementelement

Determination of life cycle of the product (i.e. equipment, in this case).

This Life cycle is not similar to conventional concept of Product Life Cycle.

Conventional concept of Product Life Cycle implies to the time span based on demand of the product in the market, starting from launch of the product up to the time when company withdraw the product from the market. That is purely a marketing concept.

In LCC analysis of an equipment, life cycle means the life of the product that is installed in the plant, i.e. productive life time of the product.

Contd…

The product supplier provides the life cycle depending on design calculation and experience.

Based on supplier’s data, customer decides the Life Cycle, i.e. how long he/ she wants to use the machine. Customer considers the effect of available maintenance facility, technological obsolescence and economic uncertainty factor, also.

After that, company decides the time span for each component.

Example, say, a company decides that total life cycle of the product will be 10 years from the allocation the fund, among which first one year will be initial cost zone and remaining 9 years will be under operation and maintenance cost zone.

Step 2: Estimate value of each cost Step 2: Estimate value of each cost elementelement

Estimate monetary value for each cost element.This estimated value will be incurred in every year.

This value is basically future income at each year, which is estimated.

To estimate the value, various source can be used; e.g. calculation based on facts and experience, MIS report for similar existing machines, etc.

Step 3: Calculate Net Present Value of Step 3: Calculate Net Present Value of each element, for every yeareach element, for every year

Money has a time value. The present value of future income or future cost can be

calculated by using discounting factor and inflation factor.

Discount factor The discount rate is an interest rate, a central bank charges

depository institutions that borrow reserves from it. For example, let's say Mr. Ram expects Rs. 1,000 in one

year's time. To determine the present value of this Rs. 1,000 Ram would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the Rs. 1,000 in a year's time would be equivalent of Rs. 909.09 to Ram today (i.e. 1000/[1+0.10]).

Contd…

Inflation factor The inflation rate is the percentage by which prices of goods and

services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period.

Formula for Net Present Value (NPV)Formula for Net Present Value (NPV)  

C (1+i/100) C (1+i/100) (n-1)(n-1)

PV= -----------------------PV= ----------------------- (1+d/100) (1+d/100) nn

where,where,C = any cost element at nC = any cost element at nthth year yearI = inflation rateI = inflation rated = discount rate/ interest rated = discount rate/ interest rate

Step 4: Calculate LCC by adding all cost Step 4: Calculate LCC by adding all cost element, at every yearelement, at every year

PVs of each cost elements is calculated for an PVs of each cost elements is calculated for an equipment (at every year).equipment (at every year).

PVs of each cost element in a year are added.PVs of each cost element in a year are added.

The process is done for every year over the life The process is done for every year over the life cycle, i.e. LCC is calculated for every year.cycle, i.e. LCC is calculated for every year.

Step 5: Analyze the results.Step 5: Analyze the results.

The datas collected from LCC are analyzed.

If one product has to be selected among multiple equipments, then LCC is calculated for every product.

Datas for every product are analyzed, and the lowest LCC option become preferred.

But lowest LCC option may not necessarily be implemented when other considerations such as risk, available budgets, political and environmental concerns are taken into account.

METHODS OF PRODUCT LIFE CYCLE COST ESTIMATION

Intuitive methodsAnalogue methodsParametric methodsAnalytical methods

CONCLUSIONS

Lack of motivation

Management problems

Implementation of the life cycle costing methodology

On the basis of factors and methods analysis for calculating life-cycle costs of products the length of product life cycle the assessment of the sale volume of the product throughout the

life cycle the expected development of price the assessment of the total costs associated with the product

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