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In many cases, equipment that seemed to be the
cheapest in terms of the initial capital cost,
turns out to be more expensive over an operational
lifetime.
There are charges like fuel or energy consumption,
maintenance and replacement of equipment or parts,
consumables and disposal, all of which add on
to the life-time cost of the equipment purchased.
But traditional models of costing do not consider
many of these charges when selecting a product.
Ultimately, the operations and support charges,
added to the acquisition cost, is a better measure
of the cost of a platform. Lifecycle costing (LCC)
is a tool that allows acquisition and procurement
managers to make more informed decisions by enabling
them to incorporate costs and benefits into their
procurement decisions.
This LCC is a comprehensive assessment of the
total financial commitment associated with the
platform, and is an international best practice
increasingly being used by governments to make
more informed procurement decisions.
White the upfront acquisition costs are relatively
easier to estimate and compare, getting an accurate
estimate on how much the user shall have to spend
in operating, maintaining and upgrading the equipment
till its final disposal involve complicated projections
and calculations. Determining the useful life
of a platform is generally difficult.If the duration
in which an equipment wears out is taken as a
measure of how long it will last, how do we make
estimates for a new, untried platform?
Accurate and dependable data essential for this
purpose is difficult to come by for new equipment
and technologies. However, a combination of data
from manufacturers, data from other operators
and extrapolation from experience from similar
equipment can help in making a reasonable assessment.
Since the government of India has a major defence
acquisition programme, it would be prudent to
develop databases and analytical models to ensure
cost effective longterm ownership. This would
also ensure economic asset management during the
life cycle of all equipment purchased.
A recent UK government report cautions on the
risk of obsolescence and says the buyer should
consider how to “oblige contractors to manage
risk of obsolescence throughout the life of a
project, which might include inbuilt flexibility
for aircraft and other equipment to accommodate
upgrades”.
To mitigate LCC evaluation challenges, the next
step would be to move towards a performancebased
logistics (PBL) approach. As an alternative to
the traditional system of owning both the equipment
the logistic chain, PBL brings in a new dimension
to asset management and operations. The significance
of PBL is that the original equipment maker or
supplier is compensated not on the promise of
performance, nor on its cost. Compensation is
based on actual performance.
To draw a simple analogy, the concept would be
similar to a comprehensive service contract for
an automobile, where the car is operated by the
owner, while its complete maintenance is taken
over by the manufacturer.
Modern day platforms require a large inventory
of sophisticated spares and commodities used to
perform maintenance and upgrades. PBL improves
the efficiency of the supply network by ensuring
the rapid delivery of the needed commodities and
reducing storage and inventory costs.
Performance-based logistics was introduced by
the US Department of Defense (DoD) in 2001 for
weapon system acquisition and logistics management.
It was made mandatory the same year: its initial
guidance was promulgated by the office of Secretary
of Defense. The potential annual savings to the
DoD just from reduced inventory holding and transportation
is estimated to range from $2.8 billion to $3.7
billion each year.
Estimated savings to the DoD in 18 programmes
range between $16 billion and $21 billion annually
if performance-based logistics was applied across
all applicable DoD weapons and equipment in the
support area.
To reduce its overall cost of ownership while
increasing serviceability of equipment, performance-based
logistics can be an important tool for India’s
ministry of defence, and should be made an established
practice.
In conjunction with the defence offset policy,
suppliers should be required to invest in setting
up facilities in India, thereby increasing both
service level assurance and help develop a trained
indigenous workforce.
The author is President
and CEO of RIL New Venture
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