Cycle Cost Analysis Lcca the Importance of Such an Analysis

¶ … Life Cycle Cost Analysis (LCCA) and the Importance of Such an Analysis

In essence, life-cycle cost analysis, LCCA, is an important tool that aids in the qualification of a specified project's alternative investment options differential costs. Its relevance, therefore, in logistics management and operations cannot be overstated. In addition to highlighting the factors of a life cycle cost analysis, this text will also concern itself with relevance of such an analysis.

There are various definitions that have been offered for LCCA. Sanchez-Silva and Klutke (2015, p. 233) define LCCA as " ....an economic assessment of completing design alternatives, considering all costs of ownership over the economic life of each alternative, expressed in equivalent dollars." This is the definition that will be adopted in this discussion.

It is important to note that LCCA can be utilized in a wide range of capital investment decisions, particularly in those instances where costs (initial) end up being traded for minimized cost estimates. Sanchez-Silva and Klutke (2015, p. 233) point out that "LCCA can be seen as an economic alternative for project evaluation and to support long-term cost-based decisions." Further, LCCA could come in handy in the evaluation of various project alternatives that can meet and perhaps exceed the relevant performance levels. It would, therefore, be quite in order to point out that in comparison to other economic methods that concern themselves with only the cost related operations or first costs, LCCA presents a more viable way of assessing a project's long-term effectiveness. As Blanchard (2007, p. 38) observes, "in addressing the issue of cost-effectiveness, one often finds that there is a lack of total cost viability ... "

LCCA can, and should, be contrasted with other economic analysis methods such as the payback method. Unlike the payback approach, LCCA does not ignore the various costs as well as cost savings that take place on reaching payback. Further, unlike other economic analysis methods, LCCA allows for the differentiation of project alternatives whose lives vary. A method like payback typically makes use of an arbitrary payback threshold. LCCA does not, also, ignore the time value of money during the comparison of future savings stream against the cost of the initial investment.

From a more practical front, Blanchard (2007) highlights some of the application areas for LCCA. One of these, according to the author, is the design, development, as well as production of new systems. In the opinion of the author, new system requirements come up every time new needs are identified. For clarity purposes, a system in this case could refer to manufacturing and production systems, communication systems, transportation system, etc. (Blanchard, 2007). The objective in this case remains the establishment "from a top-down perspective, a quantitative 'design-to-life-cycle-cost' requirement, and then design, build, and operate to meet this requirement"( Blanchard, 2007).