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2013

The role of life cycle cost in engineering asset

management
Khaled El-Akruti
University of Wollongong, [email protected]

Richard Dwight
University of Wollongong, [email protected]

Tieling Zhang
University of Wollongong, [email protected]

Mujbil Al-Marsumi
Higher Institute of Industry

Publication Details
El-Akruti, K. O., Dwight, R., Zhang, T. & Al-Marsumi, M. (2013). The role of life cycle cost in engineering asset management. 8th
World Congress on Engineering Asset Management and Safety (pp. 1-16).

Research Online is the open access institutional repository for the University of Wollongong. For further information contact the UOW Library:
[email protected]
The role of life cycle cost in engineering asset management
Abstract
This paper presents a case study demonstrating life cycle cost (LCC) analysis as a major and critical activity of
engineering asset management decisions and control. The objective is to develop a maintenance policy to
control the economics of replacement and repair practice of refractory lining of an electric arc furnace (EAF).
The replacement & repair policies involve the optimum life policy, the repair versus replacement policies, the
repair limit method and the comparison of lining material types from different suppliers. The developed
models provide a method for defining the most important factors involved in decision making with respect to
operational and managerial levels. The approach also involves deciding the remaining age value as the repair
limit criteria while avoid lining failure due to unavoidable deterioration caused by variation in operation
conditions. The decision criteria are established as: a) what type of lining material is better to use? b) When to
replace lining in a cyclic manner? c) At what sequence is hot repair required and d) whether to replace or use
cold repair between replacements. Finally, the model output values for the decision criteria are presented in
tables and graphs to guide decision making in operation and maintenance.

Keywords
life, role, asset, management, engineering, cost, cycle

Disciplines
Engineering | Science and Technology Studies

Publication Details
El-Akruti, K. O., Dwight, R., Zhang, T. & Al-Marsumi, M. (2013). The role of life cycle cost in engineering
asset management. 8th World Congress on Engineering Asset Management and Safety (pp. 1-16).

This conference paper is available at Research Online: http://ro.uow.edu.au/eispapers/2491

The Role of Life Cycle Cost in Engineering Asset
Management
Khaled El-Akruti1 Richard Dwight2 TielingZhang3 Mujbil Al-Marsumi4

Abstract This paper presents a case study demonstrating life cycle cost (LCC)
analysis as a major and critical activity of engineering asset management decisions
and control. The objective is to develop a maintenance policy to control the
economics of replacement and repair practice of refractory lining of an electric arc
furnace (EAF). The replacement & repair policies involve the optimum life policy,
the repair versus replacement policies, the repair limit method and the comparison
of lining material types from different suppliers.
The developed models provide a method for defining the most important
factors involved in decision making with respect to operational and managerial
levels. The approach also involves deciding the remaining age value as the repair
limit criteria while avoid lining failure due to unavoidable deterioration caused by
variation in operation conditions.
The decision criteria are established as: a) what type of lining material is better
to use? b) When to replace lining in a cyclic manner? c) At what sequence is hot
repair required and d) whether to replace or use cold repair between replacements.
Finally, the model output values for the decision criteria are presented in tables
and graphs to guide decision making in operation and maintenance.

Keywords: Life Cycle Cost Engineering Asset Management Decision-making

Criteria Optimal Maintenance Decision-making Model

1
K. El-Akruti ()
Faculty of Engineering and Information Science, University of Wollongong, Australia
[email protected]
2
R. Dwight
Faculty of Engineering and Information Science, University of Wollongong, Australia
[email protected]

3
T. Zhang ()
Faculty of Engineering and Information Science, University of Wollongong, Australia
[email protected]
4
M. Al-Marsumi
Industrial Engineering, Higher Institute of Industry, Libya
Email: [email protected]

1
1 Introduction
The concept of asset management utilizes the LCC analysis in managing the
life of assets. There is a common understanding that Engineering Asset
Management; AM involves life cycle management which is based on LCC as a
dominant criteria for decision making within the AM system (Asset Management
Council 2009). The AM system is defined as: The system that plans and controls
the asset-related activities and their relationships to ensure the asset performance
that meets the intended competitive strategy of the organization (El-Akruti 2012).
This definition provides an integrated view of the AM system within the whole
organizations management system. As a control system AM involves a set of
planning and control activities at different organizational levels.
It is proposed that the role of LCC analysis in AM system is focused on
defining decision criteria for the lifecycle management of physical assets as a
holistic approach to control the life cycle activities of assets in order to achieve the
organizations objectives.
The activities of concern in asset management in relation to LCC analysis
during each stage of the asset life are shown in Figure 1. For example, at the
preliminary system design stage, the AM system activities that require LCC
analysis may include system definition, system analysis, and evaluation of
alternatives or trade-offs. The challenge in managing the entire asset life
effectively lies in integrating the fragmented activities through the various stages
(Charles & Alan 2005). This leads to integrating the need-identification,
alternative analysis, and project selection to the business management focus
(ISO/IEC 15288 2008).
100

Detail design and development

Percentage of life-cycle cost committed

System analysis, evaluation of

alternatives (trade-offs), system
definitions, etc.

Market analysis, feasibility

study, operational
requirements, maintenance

0
System Prelimina Detail Production, System/prod-
planning ry system design construction uct use, and
function and design and and disposal

Figure 1: Life cycle processes and cost committed (Blanchard & Fabryky 2011)
Value creation is a concept that is related to organizational activities and LCC
(Porter 1985). Relationship between value activities and AM system is not clear
but performance attributes reflect the LCC-value relationships between activities.

2
El-Akruti (2012) argues that the AM system controls LCC of assets. He states,
that it also incorporates coordination activities to maintain relationships between
these life cycle activities such as those related to:
a. Procurement, finance and accounting which are important for
establishing the LCC requirements to enable investment, funding and
budgeting, cost analysis and decision making.
b. The information technology to establish the required information flow to
facilitate a data base for LCC. For example, a published case study
(Holland et al 2005) reports that BP connects its business processes
with over 1500 suppliers to co-ordinate the maintenance, operation and
repair of specialized exploration and production equipment.
c. External suppliers to establish their impact on assets LCC and maintain
value added relationships with suppliers and to make outsource verses
in-house decision and maintain both-side-benefit relationship.
d. Technical support and development to establish the required
development in assets or asset-related processes and the suitable
technology or any new developments in technology for use in enhancing
performance.
e. Human resources, inventory, quality and safety systems for better
performance, less risks and safe environment.
The AM activities involve the use of LCC analysis in lifecycle management of
assets in existing organization (Charles & Alan 2005; Amelsberg 2002). Any
decision concerning the portfolio of assets is built on the accumulated information
of managing the utilisation stage. A major portion of such information would be
related to cost of activities at different stages of asset life (Blanchard & Fabryky
2011). At any time it may be determined for example that the current design of
one or more assets is not capable of achieving the required performance given the
current or projected future environment (Dwight & El-Akruti 2009). Concurrently,
organizations must identify the business needs, and make decisions to launch any
change or project to enhance assets, their design, operation, maintenance or
logistic support (Charles & Alan 2005; Du Preez & Louw 2008; Narayanamurthy
& Arora 2008). AM projects may involve decision regarding, upgrading,
expansion, support system, redesign, replacement or retirements of assets. These
decisions require the LCC analysis to choose the right assets, use or maintain them
appropriately, and balancing short-term performance against long-term
sustainability.
The literature on this topic is extensive. Examples on the use of LCC in asset
management decisions are numerous but each example may be unique due to the
nature of different assets in different industries. Table 1 is a summary of some of
the reviewed literature on the use of LCC in engineering asset management
decisions. These decisions highlight the need for LCC analysis as a holistic
approach to AM system activities in relation to achieving an organizations
objectives. For example, Pinjala, et al. (2006) discuss relationship between
business and some of the asset-related activities such as maintenance.

3
 Table 1 Use of LCC in engineering asset management decisions

Use of LCC in Sample References

AM Decisions
To develop value-orientated decision Scarf et al. (2006); Taylor, (2012); Thkm,
support systems for maintenance and et al. (2011); Shahata, and Zayed, (2008);
replacement or rehabilitation: this may Schuman and Brent (2005); Khan (2001);
include optimization or performance Mahapatra. (2008); Garcia et al. (2008); Hartman
improvement, setting policies or (2004); Eginhard (1977); Jardaine (1970), White
developing strategies (1985) & Herbert and Gordon (1979); Wijnia et
al. (2007)
To evaluate feasibility and/or Goralczyk & Kulczycka (2003); Wubbenhorst
requirements of existing & new asset or (1986); Buys et al. (2011); Vorarat & Al-Hajj
asset-related projects (2004)
To develop value-orientated decision Girsch et. Al. (2005); Barringer (1998); Janz
support systems to improve asset and Westkamper (2008); Liu (2012); Farran &
design/selection, installation, use & Zayed (2009); Jun and Kim (2007)
maintenance and retirement or trade-off
between alternatives to an asset
To assess or assert trade-offs for Nyuk (2002); Sullivan & Young (1995); Norris
environmental impact and sustainability (2001); Mahapatra (2008); Castella et al. (2009)
To provide a decision tool (e.g. cost- Kim et al. (2009); Patra & Kumar (2009); Ge
benefit analysis) for estimating project & Wei (2011); Yu-Rong et al. (2009); Woodward
requirements or investment, identify (1997); Jeromin et al. (2009); Esveld (2001);
cost drivers and highlight need for Thoft-Christensen (2012); Uppal (2009)
change or for selecting assets

A strategic approach to maintenance as an asset-related activity has been

recognized especially in capital-intensive industries (Pinjala, et al. 2006; Tsang
2002; Muchiri & Pintelon 2007).
As presented by Blanchards model (Blanchard & Fabryky 2011), integration
of LCC models into asset management decision process involves 12 steps:
1. Define system requirements and TPMs.
2. Specify the system life-cycle and identify activities by phase.
3. Develop a cost breakdown structure.
4. Identify input data requirements.
5. Establish costs for each category in the CBS.
6. Select a cost model for analysis and evaluation.
7. Develop a cost profile and summary.
8. Identify high-cost contributors and cause-effect relationships.
9. Conduct a sensitivity analysis.
10. Identify priorities for problem resolution.
11. Identify additional alternatives.
12. Evaluate feasible alternatives and select a preferred approach.
Decisions may involve issues such as:
Establishing the remaining costs (given you are in the use phase), which
raises the issue about replacement cost as a function of behaviour of the
current system.

4
 Repair/replace decision logic which may give rise to economic or
optimum repair frequency and replacement period.
Prediction and estimation decisions which require CBS breadth and depth
for visibility.
Projection decisions which involve investment, system operation and
support costs. These are based on the projected activities throughout the
operational use and support phase and are usually the most difficult to
estimate.
Trade-off decisions which may involve capital vs. running costs, labour
& materials vs. reduced services and reduced safety.
Alternative options decisions which comparing LCC of alternative asset
e.g. pieces of equipment or maintenance strategies or methods and
balancing the cost of a new item against the cost of maintaining
efficiency on the old one and/or that due to the loss of efficiency.

2 LCC Criteria for AM Control Models and Performance

It is necessary at this stage to stress that the purpose of a LCC model is so that
it can formally be manipulated to determine relationships between AM control
decisions and levels of performance. LCC models are essential for AM control to
aim at improving performance, either in terms of improved benefits for the same
cost, or reduce cost for the same benefit, or in terms of cost / benefit mixtures. For
example for obtaining optimum LCC, control of replacement and/or repair
frequencies is needed. AM control is meaningless unless there is a criterion to tell
when control is good or bad. Such criteria do not exist, and involve a search for it
in the context of the demand for the asset and in the effectiveness of the functions
in meeting this demand. It is therefore a two way interaction e.g. replacement
and/or repair functions as shown in Figure 2, and the demand pattern has to be
decided in the light of economic or optimum LCC.
As shown in Figure 3, there are two aspects to this; firstly determination of how
to measure performance and secondly identification of the decision criteria
(control variables) to be manipulated by the replacement function in order to set a
decision or policy. Measures of performance depend on the availability and
performance of the asset required by production over some time span. If they are
laid down clearly and can be met, then performance can be judged in terms of cost
of providing this service.

Demand for Replacement Equipment

Equipment and/or Repair Situation
Figure 2: Demand vs. replacement and repair
Availability
Replacement Minimum Cost
Production
and/or Repair
Performance
Figure 3: Demand vs. replacement and repair

5
 Even if availability and performance are specified, one can question the true
financial production effects of each service level. Thus what are the financial
effects of lost production time and of poor quality? What are the financial effects
of delaying production, resulting from not having equipment available? This gives
rise to the need of combining both functions; minimizing LCC to achieve various
service levels and the economic benefits of various service levels. Finally it needs
to be remembered that the way in which an asset is used in production programs,
will inevitably influence the condition of the equipment. Meeting demand is
usually a priority but some time the choice between delaying production and using
asset with risky condition has to be made depending on deterioration rate which
may be rapidly accelerated and lead to catastrophe.
Regarding LCC decision criteria for AM policies, the decisions which can be
taken are numerous, and they occupy different hierarchical levels, e.g.
replacement of equipment, repair or overhaul of equipment, replacement of
components or inspection of component. The effect of such decisions cannot be
separated. Thus it is the combined effect of operation and maintenance that has to
be assessed when dealing with AM policies in utilization stage. For example an
optimum overhaul frequency of replacement of some components depends on the
frequency of other associated components replacement (component may or may
not be replaced at times of major overhauls and at time of breakdown). LCC is
needed for replacement decision which does not have to be in the strict sense of
the word, but perhaps maintenance decisions such as repair and overhaul may be
taken synonymous with replacement provided that it is reasonable to assume that
maintenance actions return equipment to as new condition. Therefore it is not a
'one-off' decision, but a serious of decisions. Thus there is a complexity of
decision structure that involves LCC.

3 LCC Criteria for AM Control Models and Performance

3.1 Case Study Definition

This case study examines furnaces as the significant assets in steel making
industry. In this steel making case study organization, EAFs are the most critical
assets for the process availability. The main activities of the EAFs that impact
process availability are lining replacement and repair. Therefore, the development
of the economical criteria for the control of lining replacement and repair of EAFs
provides a good opportunity to increase product unit profit (profit margin).
The policy of lining refractory replacement and/or repair varies greatly from
one steel plant to another depending on differences in environmental and
operational condition. Hence every plant has to develop its own convenient
replacement and/or repair policy.
Furthermore the maintenance strategy of working lining replacement and/or
repair controls to a large extent the availability and productivity of the process,
resulting in a great effect on the unit cost of liquid steel produced.

6
 The life of the working lining is dependent on the repair practice. Lining repair
involves two types; hot repair and cold repair. Hot repair is done by fettling and
gunning while EAF is hot. The amount of material used and the time required to
do hot repair are the main factors in considering hot repair cost. Cold repair is
done by cooling EAF down to fix the damaged spots. It is usually resorted to when
deterioration or damage cannot be handled by hot repair. It is time consuming
because it requires cooling the EAF down resulting in a great loss of EAF's
availability. The time required for cooling EAF and the time required for repairing
are the main factors in considering cold repair cost. Working lining replacement is
done periodically as required and has direct effect on EAF availability.
Hence it can be concluded that, working lining replacement is directly related
to the overall cost of replacement and repair, and lost production cost due to
unavailability. Consequently an assessment of working lining replacement costs in
terms of lining material and replacement stoppage is required to base decision on
the LCC.
Hot repair is done as required and involves consumption of material and
relatively short time. Cold repair is done when hot repair is not sufficient and the
time is too early for replacement, or most of the lining is still in a good condition.
Cold repair is considered as a partial replacement where the EAF has to be cooled
down. It involves the use of used bricks and its duration may be as long as that of
the replacement or even more.
Hence it can be concluded that, hot and cold repair are as relevant aspects as
working lining replacement because they are directly related to LCC involving
replacement and repair, and lost production cost due to unavailability.
Consequently an assessment of repair costs in terms of hot and cold repair
material and hot and cold repair stoppages is required to base decision on the
LCC.

3.2 AM Decision Models and LCC Criteria of the Case Study

In this case study, the AM control focuses on providing a maintenance policy
that guaranties and outlines the economical decision bases for replacement, repair
practice and refractory procurement policy.
For AM control, the main concerns are the working lining life, the required
repair amount, frequency and the required repair type. Since the consumption rate
of hot repair material and time making hot repair increases with longer life of
EAF's lining, there must be a point where it is not worthwhile to use hot repair and
replacement is more economical. Furthermore, is it worthwhile to use cold repair
at all? Also, what lining supplier's set of refractory materials is more economical?
It is the aim of this paper to demonstrate and establish the modelling procedure
using the LCC to set an AM policy that economically control the replacement and
repair practice of refractory working lining in EAFs. The policy of determining
the maintenance economical decision bases, involves modelling for the
replacement and the repair criteria of lining such that the LCC of lining is reduced

7
for each unit produced. The question then becomes how to optimize LCC while
maintaining the same high level of availability, quality and productivity.
As a result, this case study involves answering these questions:
1. What lining type (supplier) is better?
2. When to replace lining in a cyclic manner?
3. At what sequence is hot repair required relative to lining life?
4. Whether to use cold repair in between replacements and
determine the repair limit for use?

3.3 Cost Structure Breakdown and Evaluation for Modelling

As the decision criteria are based on cost data, the various types of costs that
might be involved in lining repair and replacement must be outlined. These costs
are structurally related as shown in Figure 4. As will be noticed only some costs
will be used for the development of the model, where others would not be used
either because they have no effect on the replacement and repair practice or they
do not change with respect to time or replacement and repair events.
The main cost variables evaluation includes:
1. Working lining cost: which is composed of material cost and stoppage loss
and it may be defined as; (Cw = Cwm + Cws). Where Cwm represents the
material cost and Cws represent the stoppage loss.

Total Cost (LCC)

Figure 4: Models cost structure breakdown

2. Working Lining Replacement Stoppage Cost (Cws): which is a loss of time

that could have been utilized for production resulting in two effects one is
the loss of operation while incurring ongoing payment of fixed cost. The
second is the loss of products that could have been sold and therefore a
possible result of lost benefit. These effects are dependent on many
economical policies imposed by strategies of the overall economy. For
instance at one extreme, the policy may be purely economical benefit where
product value is equal to sales price. On the other extreme the policy may be
anything but not economical benefit where product value is equal to product

8
 unit cost. For nature of demand in markets associated with this case study it
is assumed that stoppage cost is only due to the contribution of "no
operation cost" which is incurred ongoing payment of fixed cost.
3. Cold repair cost which is composed of material cost and stoppage loss and
is defined as; Cc = Ccm + Ccs. Where Ccm represent the material cost and
Ccs represent the stoppage losses. Ccm is the cost made up of the various
material used which may be brick or mixes or binding material. Cold repair
stoppage cost may be define as:
Stoppage cost = stoppage duration * productivity * availability * fixed
unit cost ( Cws = Dcs * Pr * A * NOCu )
Where, Dcs, Pr and A values are to be evaluated statistically from operation
records as an input to the model and the NOCu is based on accounting
records (Omar et al 1996).
4. Hot repair cost which is composed of material and stoppage cost (Ch = Chm
+Chs). Where hot repair is defined in terms of gunning and fettling (Chm =
Cf +Cg) and the hot repair stoppage cost is define similar to cold repair
stoppage cost as: Stoppage cost = stoppage duration * productivity * fixed
unit cost (Chs = S * Pr * NOCu).

3.4 Model Development, Result and Application

3.4.1 Model Development

The model is developed based on LCC structure to achieve the research

objectives. It is intended to contribute a significant saving in refractory
consumption by proper application of the developed model to set the policy for the
economical criteria. It is also intended that such application of the model is made
such that it does not impose any changes in the actual practice and provides the
required information for decision makers to base their decisions on the economical
aspects of LCC optimization while increasing productivity and maintaining the
required quality. As such those objectives shall be achieved through obtaining an
optimum replacement model and a repair limit model.
These models are developed as a decision support system to enhance optimum
life decision, suppliers refractory lining selection decision based on the most
economical suppliers lining (refractory set), decision regarding amount and
sequence of using hot repair and cold repair limit. The models are developed to
define the appropriate action in terms of hot repair, cold repair or replacement.
The two types of repair stand as preventive means to failure and as a substitute for
replacement until they become uneconomical. Hot repair is to be carried out as a
preventive treatment against failure until optimum life is reached based on
minimum LCC per heat. If hot repair fails as a preventive treatment, then cold
repair is applied only if it is more economical than replacement. This comparison
is done on the basis of the remaining age value of the lining as a repair limit. Cold
repair is carried out as long as its estimate at any specified age does not exceed the
repair limit.

9
3.4.2 Model Results
A graphical presentation of the results for one suppliers material type is
presented in Figure 5 and 6. They show the analysis that determined the criteria
for optimising replacement and frequency of hot repair for one lining supplier.
These solutions represent the evaluation and analysis that provided a view on the
economics of repair and replacement for decision making based on the LCC per
heat, repair costs per heat and the gunning consumption per period. The output
values for application decision variables are summarized in Table 2 for each
suppliers material type.

Figure 5: Determining the optimal replacement

Figure 6: Gunning consumption for hot repair sequence

10
 Table 2: Output values of the model for decision criteria and optimum status
Parameter Unit Material Suppliers
Supplier-X Supplier-Y Supplier-Z
Replacement Cost $ 175,490 161,614 152,613
Cold Repair Cost $ 91,446 91,446 91,446
Maximum Gunning Ton 5.20 6.0 5.50
Hot Repair Period Length Heats 10 10 10
Max. Hot Repair Cost per $ 13,682 14,007 15,907
Period
Optimal EAF Working Lining Heats 278 319 229
Life
Cold Repair Limit Heats 120-to-130 110-to-120 80-to-90
Cold Repair Actual --- Not Feasible Feasible Feasible
Application
Total Cost per Heat (Cta) $ 1,426 1,544 1,652
Total Cost per Ton of Liquid $ 15.6 16.8 16.8
Steel
Priority for Use --- First Second Third
Total Annual Cost based on $ 5,436,058 5,887,760 6,298,710
use of each suppliers material
alone

3.4.3 Benefit and Recommendation for Application of the Model Results

The application of the results is carried out in terms of the values determined by
the model analysis for the decision criteria. Using these values of decision criteria
with relation to the total management system of the company, requires fitting
these criteria within the existing procedure for the decision making process at the
different existing decision levels. The integration of these models is presented in
Figure 7, where all decision criteria and relevant points needed for decision
making were indicated. Therefore the model is made so that, the application
procedure can fit easily within the operation practice and allows for taking
advantage of any production stoppage or any furnace in a non utilization case
when more than one furnace exist for production.
The application of the model for the optimum policy would result in cost
reduction for the company:
From 10% to 15% annual saving in the annual refractory cost ($1,900,000) is
expected when managerial decision for material type selection is based on the
model output criterion.
From 2% to 6% annual saving in refractory cost is expected when operational
decisions are based on the model output criteria.
Therefore it is an attractive proposal for top management to adopt. Furthermore
the application is very simple since it only requires the use of the model findings
for the economics of the decision making process with a very simple procedure
that would not impose any change in the actual operation or managerial practice.
The recommendation for application includes:
Operational recommendation
1. Always replace lining at optimum life or as close to it as possible.

11
 2. Observe gunning amount for every sequence of 10 heats Cold repair
should not be applied if its cost exceeds the limit. Start hot repair
approximately after the 20th heat For lining life less than 100 heats hot
repair should be applied with a frequency ranging from every 5th to
every 4th.
3. For lining life beyond 100 heats hot repair frequency should not be less
than every 3rd heat.
Managerial recommendation
1. When purchasing lining material, the decision of supplier selection
should be based on the criterion of minimum LCC per unit production.
2. The model should be updated in case of any future development,
changing conditions or including new suppliers.

Figure 7: Operational procedure & decision criteria

4 Conclusion
LCC is a tool to develop value-orientated decision support systems in various
AM-related industries. LCC has a critical and essential role to play in asset
management decision making processes.
The main results of the case study present an illustrated simple example of how
LCC plays an essential role in asset management decision making; in particular
replacement optimization and maintenance policy and its impact on the
procurement policy. Those decision criteria in the case study are shown to be
supported by the LCC-based model developed at the operational and strategic
levels within the direct and support functions of the company.
Therefore, the developed LCC-based model provides a decision support system
within this case study company and implies that LCC has a great potential for
decision making support for asset management.

12
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