Editor’s Note
The relevance of Life Cycle Costing (LCC) in defence procurement becomes all the more critical, with military equipment often being in-service for as long as four decades. There is a need to go beyond the two-bid system of technical and commercial bids and have a third bid covering the best vendor from a life cycle sustenance support perspective.
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Armed Forces have exploited equipment for over forty years, unlike any other organisation. Technology life cycles have condensed, and disruption is the norm. In this long equipment exploitation period, the technology would upgrade over 20 times, and upgrades in hardware and software would be a major cost centre in addition to MRO interventions. Procurement of equipment, therefore, based on the given two bid methods of quality cum cost based L1 /L2 etc., could result in astronomically high Life Cycle Sustainment Costs. It has been the past practice the world over.
Life Cycle Costing (LCC) is an economic analysis tool to determine the most cost-effective option to procure, exploit, sustain and dispose off products. Simply put, it is the cost of the entire iceberg (Figure 1 refers). Conventional procurement focuses on the initial cost of procurement, the Capital Expenditure (CAPEX) of equipment, which comprises the equipment, a manufacturer-recommended List of spares (MRLS), specialised tools, specialised test equipment, training, and warranty.
LCC is the total cost of ownership or expenditure comprising Capex and Opex, including lifetime operating cost, lifetime maintenance cost, cost of upgrades and major interventions, including overhaul, disposal and residual cost. A number of statistical studies and mathematical models exist for life cycle costing. However, given the complexity of the equipment exploitation in varying terrains, climatic conditions, varying durations of exploitation from a high surge in the field to dormant in the garage and many other tangible and intangible factors, it has remained in the realms of a study with limited application in the real world. Technology and data analytics today can help graduate to a Life Cycle Costing Procurement Methodology.
Figure 1 Life Cycle Costs of Procurement
This article intends to generate a thought process and ideation in favour of LCC as a potential procurement best practice.
Taming the Elephant in the Room: LCC
AUCRT: Accelerated User Cum Reliability Trials have been acknowledged as a well-established practice for generating Maintenance, Repair and Overhaul data which gives an insight into risk modelling, fault modes and frequencies, recurring defects, facilitates product improvement and can give insight into assembly/system life cycles and product life cycles. This data can be analysed for computing life cycle costs. A lot of data may already exist for equipment, mainly imported equipment, under exploitation by other Armed Forces. These data analytics tools can help derive Life Cycle Costing.
Digital Twins: Technology and data are two sides of the same coin wherein data is the new oil and technology is the new oil refinery. Any equipment today can be modelled and simulated as a digital twin. Digital twins provide constant optimisation in product design, development and manufacturing. The digital twin ecosystem is data-driven, rendering value add virtual and physical products by complex modelling and simulation and real-time data analytics with what-if scenarios to make the product life cycle more predictable and agile. Digital twins can be repositories of multiple data models related to assets or products, humanising assets for condition-based monitoring, manufacturing product improvement, supply chain and life cycle sustenance and services support. It is where OEMs must be motivated to upgrade themselves to embrace digital twins to impart digital velocity to LCC.
Condition Monitoring Systems: The use of sensors, IoT and ICT technologies in systems and sub-systems of assets help in humanising assets. Humanising asset implies assets assisted by the sensor-based ecosystem talk and conveys data to announce their health condition. These condition monitoring systems will bring asset health /condition visibility, which is essential in enhancing mission reliability, reducing maintenance costs and evaluating LCC.
Gain-Pain Points in the Present System: The present system in vogue is a two-bid system wherein the first technical bid is opened, and all qualifying OEM equipment is subjected to the field-based user and maintainability evaluation trials. Those which pass the muster are taken forward to the second commercial bid to arrive at the L1 vendor, who is invited to meet the equipment needs of the Armed Forces. Simple as it may sound, it has complexities, especially if the equipment is ex-import. With the negative list of imported equipment in vogue, joint ventures have been concluded between Indian and foreign vendors to meet the capability needs of the Armed Forces.
The major pain points are the high cost of MRLS which may be 10-20% of contract value (in real terms for a complex missile radar system may be Rs300 Crores per system), most of which goes into slow/dead inventory since no exploitation data is available or studied. The cost of training, technical manuals, SMTs and STEs are of the initial capital procurement.
Exploiting equipment during a standard two-year warranty period may not be enough to understand the sustenance support challenges. Major intervention policies are defined in terms of vintage and exploitation, which adds to the maintenance costs and down times of overhaul, and those due to upgrades etc.; hence, life cycle costs go high.
Embrace LCC Through a Three-Bid System: There is a dire need to incorporate experts in data science and hard-core trained negotiators into the LCC procurement committees. Ideally, these should be SMEs trained on the aforesaid from MRO agencies or veterans (with Non-Disclosure Agreement Legal Bonds) who have immense domain knowledge and may be hired as a Chair, Member, Advisor, or Consultant to steer the LCC Procurement.
- The first technical bid is sacrosanct with exhaustive user and maintainability trials or preferably AUCRT to derive actionable data.
- The second bid by the vendor may be Life Cycle Sustenance (LCS) Data with Key Performance Indicators (KPIs) listed. The vendor may provide this data based on actual exploitation in another country, in case available and allowed, or experience based on design documentation and digital twin-based modelling and simulation. Those vendors who qualify for the first bid would be subjected to the Second LCS bid, wherein the Trials Teams will augment the Committee for data-science-based analytics. The Trial teams carry the conviction of the exploitation reality, which can be checked with respect to vendor data.
- A time-bound technology obsolescence forecast and upgradation of both hardware and software must form part of this analysis. Thus, the LCS will capture all events/interventions based on what-if scenario data as a work time maintenance plan, as envisaged by the OEM. In the foreseeable future, Digital twins and condition-based monitoring systems will be embedded in the equipment and help improve LCC’s systemic reliability and evaluation.
- The third commercial bid will have all elements of LCS built in to decide in favour of the best LCC equipment and the most optimum LCC vendor. This may be a good starting point to build quality, Life Cycle Sustenance and Cost based Procurement. In high-cost, low, volume procurements, the cost of equipment and post-warranty AMC may be a good matrix for evaluating LCC.
- The three bids will decide the best vendor from a life cycle sustenance support perspective, which is the current system’s major missing link and pain point.
Performance Based Logistics (PBL) & Unravelling MRLS: MRLS is the biggest bugbear of PBL. Most of the Depots holding stocks of spares carry a lot of slow-moving and dead inventory, which over time becomes a huge cost centre. Moving, maintaining, storing and holding costs only add exponentially and compound costs with time. It would make perfect sense to contain the MRLS and dead inventory. A suggested model for the same may be analysed based on some important parameters:
- The warranty period may be extended to five years, and a minimum inventory based on life cycle sustenance data, such as war packs, maybe only held with the requisite repair echelons akin to the minimum stock level in the case of FOL.
- Based on the equipment exploitation, including AUCRT / exploitation in exercises /actual ops, adequate data for spares holding beyond the war pack would be identified and indented as per LCS or a modified plan.
- The balance spares, or erstwhile MRLS, be provided by OEM based on a legal binding akin to continued guaranteed reserve in FOL to sharpen the inventory and add agility to equipment readiness based on an assured PBL. It would entail that all foreign OEMS would need to conclude MoUs/ Strategic partnerships for life cycle sustenance support, which would be mandated in RFPs and, therefore, contracts. It will give momentum to Aatmanirbhar Bharat and Make in India and reinvigorate the MSME Sector.
- This shall immensely enhance PBL.
Recommendations for Enhanced Procurement Effectiveness. Life Cycle Costing is an idea of the time which has arrived. Salient value-added proposition to embrace LCC are given below:
- QLC – the Three Bid System Quality (Q), Life Cycle Sustenance (L), and Cost (C) will be a paradigm shift with better payoffs for capturing LCC.
- Digital twins and condition monitoring systems will lend better visibility to product development and life cycle sustenance support.
- All maintenance interventions will have better visibility and be optimised through just-in-time predictive and prescriptive condition-based reliability-centric maintenance with KPIs against just-in-case cost prohibitive periodic preventive maintenance.
- All upgrades in hardware and software would have been pre-documented with triggers for implementation.
- Extended five years warranty and assured PBL will immensely aid Specific Measurable Agile Realistic just in Time (SMART) life cycle sustenance support through modified MRLS of war pack and continued guaranteed reserve with OEMs.
- Incorporating data scientists and hard-core negotiators into LCC Committees for better impact.
- A Management Study Board is proposed through an academia-industry interface to prepare a blueprint for change to the LCC procurement model.
Conclusion
Capital procurements (Capex) in the Armed Forces are the biggest enablers of capability development. Given the technology landscape, even cars and consumer products will become redundant in 10 years. However, given the complexities of the Armed Forces, changing an equipment profile entails an extraordinarily long useful life of 40 years, after which obsolescence may take up to a decade to dispose of equipment. It entails a considerable revenue expenditure (opex) of life cycle sustenance support. There is a dire need to capture the totes comprising capex -opex at the initial stage through life cycle costing. The academia and industry are rife given the huge push to Aatmanirbhar Bharat, Make in India and Start-Up India to develop a cost-effective, time-efficient QLC model for LCC. Let us do it!
Lt Gen Dr Anil Kapoor AVSM, VSM (Retd)
