In the roofing example, there was no shortage of anecdotal evidence that the roofs were not lasting as long as people thought they should. Leaks and regular repairs occurred too often. Indeed, recently repaired roofs lasted just five years against a much longer expected life. In addition to the leaks themselves, collateral damage disrupted work and added to repair costs. For example, damaged electrical systems exposed both soldiers and civilians to risk of electrical shocks, ruined office equipment and interrupted other system functions. A less dramatic but quite costly connection was the link between roof insulation and energy costs: HVAC is a major contributor to total energy costs, and roof insulation affects HVAC efficiency.
Not surprisingly, when weighing the various lifecycle costs, the largest cost areas turned out to be direct replacement and repair costs.
Identify Cost Drivers: Why Does It Cost What It Does?
It is often tempting to stop with the major cost elements and attempt to reduce those expenses. But our ability to reduce costs is significantly increased by identifying why those costs occur, not just what they are. Armed with that understanding, managers can then spot opportunities to change their approach and take costs out of the supply chain. Key questions include:
- What factors influence volume?
- What factors impact the timing of costs?
- What decisions need to be made now or in the future that will impact future costs?
With roofing, replacement and repair costs were largely a function of how long the roofs were lasting and how frequently they needed repairs. What was driving those factors turned out to be the original roof design and the quality of the contractor that did the roof replacement. Interestingly, these are not line-item cost elements. Cost driver analysis also eliminated potential approaches such as preventive maintenance, which surprisingly did not have a significant impact on lifecycle cost.
Select the Best Strategic Option: How Do We Use What We Know?
Understanding the cost drivers allows us know which levers we can pull to lower lifecycle cost. Selecting the best strategic option involves weighing the costs against all the other factors related to an organization. In some cases, implementation challenges, cash flow restrictions or regulatory mandates may lead an organization to select an approach that may not have the lowest lifecycle cost. However, even in these cases, the total lifecycle cost approach helps an organization understand the tradeoffs and the implications of their decision, whatever it may be.
In the roofing case, cost drivers suggested two general management approaches: using low-quality roofs with higher repair costs and more frequent replacement, or high-quality roofs with minimal repair costs and less frequent replacement. Analysis estimated that the high-quality approach offered the lowest cost among all options. Additionally, the inclusion of a 20-year NDL warranty aligned contractor interests far more closely with those of the Army Reserve.
Figure 2 illustrates the relative cost per square foot over a 20-year lifetime of three low-quality scenarios against the 20-year NDL warranty approach. The tradeoffs are clear. The low-quality scenarios offer lower initial-year costs by about one-third. Yet repairs quickly escalate their total cost. In contrast, the higher initial cost of the 20-year NDL roof is offset by no additional costs after the first year.
Making It Happen: How Do We Get Compliance and Commitment from the Field?
Convincing people to change long-held habits is never easy. When decisions are made or new protocols established centrally, it takes effective communication and engagement to move people to comply and commit.
As cost elements and drivers are being identified, seek local expertise and input across facility locations. Not only will the program benefit from on-the-ground knowledge, but people are more likely to commit to initiatives to which they've contributed. Then keep those individuals involved by providing updates as the project moves forward.
When it's time to implement, scorecards and dashboards — the more specific and quantifiable, the better — will track progress. With a target such as "no leaking roofs within three years," there is no gray area. Either you have leaky roofs or not.
For many organizations, simply developing a comprehensive view of total lifecycle costs of facility assets will help managers identify new cost reduction opportunities. True lifecycle cost management, however, involves understanding those costs well enough to know how various asset management approaches impact them. Although this level of understanding may initially seem daunting, there are a number of simple steps organizations can take to get started: