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A DECISION-MAKING FRAMEWORK FOR TOTAL OWNERSHIP COST

MANAGEMENT OF COMPLEX SYSTEMS: A DELPHI STUDY

by

Russel J. King

A Dissertation Presented in Partial Fulfillment

of the Requirements for the Degree

Doctor of Business Administration

University of Phoenix

November 2007

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UMI Number: 3302636

3302636

2008

Copyright 2008 by

King, Russel J.

UMI Microform

Copyright

All rights reserved. This microform edition is protected against

unauthorized copying under Title 17, United States Code.

ProQuest Information and Learning Company300 North Zeeb Road

P.O. Box 1346

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All rights reserved.

by ProQuest Information and Learning Company.

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A DECISION-MAKING FRAMEWORK FOR TOTAL OWNERSHIP COSTMANAGEMENT OF COMPLEX SYSTEMS: A DELPHI STUDY

byRussel J. King

November2007

Approved:Marilyn K. Simon, PbD., Mentor

John DeNigris, Ph.D., Committee MemberTom G r i m D.B.A., Committee Member

Accepted and Signed:

Accepted and Signed:

Dean, Schoolof~dv a nc e d tudiesUniversityofPhoenix

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ABSTRACT

This qualitative study, using a modified Delphi method, was conducted to develop a

decision-making framework for the total ownership cost management of complex

systems in the aerospace industry. The primary focus of total ownership cost is to look

beyond the purchase price when evaluating complex system life cycle alternatives. A

thorough literature review and the opinions of a group of qualified experts resulted in a

compilation of total ownership cost best practices, cost drivers, key performance factors,

applicable assessment methods, practitioner credentials and potential barriers to effective

implementation. The expert panel provided responses to the study questions using a 5-

point Likert-type scale. Data were analyzed and provided to the panel members for

review and discussion with the intent to achieve group consensus. As a result of the

study, the experts agreed that a total ownership cost analysis should (a) be as simple as

possible using historical data; (b) establish cost targets, metrics, and penalties early in the

program; (c) monitor the targets throughout the product lifecycle and revise them as

applicable historical data becomes available; and (d) directly link total ownership cost

elements with other success factors during program development. The resultant study

framework provides the business leader with incentives and methods to develop and

implement strategies for controlling and reducing total ownership cost over the entire

product life cycle when balancing cost, schedule, and performance decisions.

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DEDICATION

For my wife, Cathy

and our children, Anthony and Kelly.

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ACKNOWLEDGMENTS

I wish to thank my distinguished committee, Dr. Marilyn Simon, Dr. John DeNigris, and

Dr. Tom Griffin for their contribution, analyses and assistance throughout this

dissertation. Special thanks to my chairperson and mentor, Dr. Marilyn Simon for her

patience, understanding, and support.

I would like to express my appreciation to Elbit Systems of America and EFW Inc. for

sponsoring me through much of the program.

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TABLE OF CONTENTS

LIST OF TABLES............................................................................................................... xLIST OF FIGURES ........................................................................................................... xiCHAPTER 1: INTRODUCTION........................................................................................1Background of the Problem................................................................................................. 2Problem Statement............................................................................................................... 8Purpose of the Study............................................................................................................ 9Significance of the Study..................................................................................................... 9

Significance of the Study to Leadership............................................................................10

Nature of the Study ............................................................................................................ 10Research Questions............................................................................................................ 13Theoretical Framework...................................................................................................... 13Definition of Terms............................................................................................................16Assumptions....................................................................................................................... 17Scope and Limitations........................................................................................................ 18Delimitations...................................................................................................................... 19Summary............................................................................................................................ 20CHAPTER 2: LITERATURE REVIEW...........................................................................22Title Searches, Articles, Research Documents, and Journals ............................................23Total Ownership Cost ........................................................................................................24Defining the Need for Total Ownership Cost....................................................................26Benefits of Total Ownership Cost Analysis.......................................................................28Barriers to Implementation of Total Ownership Cost........................................................29

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Total Ownership Cost Critical Cost Drivers......................................................................31The Product Life Cycle......................................................................................................33Product Life-Cycle Management.......................................................................................35Specifications and Requirements Development ................................................................36Customer Relationship Management.................................................................................37Acquisition and Procurement.............................................................................................38Supply Chain Management................................................................................................39Design and Development................................................................................................... 41

Systems Engineering.......................................................................................................... 42

Supportability..................................................................................................................... 43Manufacturing Quality and Reliability Practices...............................................................44

Product Quality Management ......................................................................................45Product Reliability Management .................................................................................48Reliability Assessment.................................................................................................49Product Maintainability Practices................................................................................49

Operational Availability.....................................................................................................51Military Aerospace Operational Availability...............................................................51Commercial Aerospace Operational Availability........................................................52Operational Availability Applications.........................................................................52

Activity-Based Costing......................................................................................................53Theory of Constraints ........................................................................................................ 53Earned Value Management................................................................................................54Warranties.......................................................................................................................... 55

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Customer Service ............................................................................................................... 56Product Disposal ................................................................................................................ 57The Delphi Method............................................................................................................ 57Summary............................................................................................................................ 61Conclusion ......................................................................................................................... 63CHAPTER 3: METHODOLOGY.....................................................................................65Research Design................................................................................................................. 66Appropriateness of Design.................................................................................................70

Research Questions............................................................................................................ 72

Selection of a Population of Experts..................................................................................72Informed Consent............................................................................................................... 73Sampling Frame................................................................................................................. 74Confidentiality ................................................................................................................... 75Geographic Location.......................................................................................................... 75Instrumentation .................................................................................................................. 76Data Collection .................................................................................................................. 77Data Analysis ..................................................................................................................... 79Validity and Reliability......................................................................................................81Summary............................................................................................................................ 82CHAPTER 4: PRESENTATION AND ANALYSIS OF DATA......................................84Data Collection for the Pilot Study....................................................................................87Pilot Study Results............................................................................................................. 88Pilot Study Group .............................................................................................................. 95

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Main Study Results............................................................................................................ 96Data Collection .................................................................................................................. 96Round 3 Results ................................................................................................................. 97

Research Question 1 .................................................................................................... 98Research Question 2 .................................................................................................. 106

Summary.......................................................................................................................... 109CHAPTER 5: SUMMARY AND RECOMMENDATIONS ..........................................111Overview of the Study.....................................................................................................111

Conclusions...................................................................................................................... 114

Research Question 1 .................................................................................................. 115Research Question 2 .................................................................................................. 125

Design and Development................................................................................................. 126Acquisition....................................................................................................................... 127Product Reliability ........................................................................................................... 127Repair............................................................................................................................... 128Assumptions, Scope, and Limitations and Delimitations of the Study............................129Recommendations............................................................................................................ 133

Operations Management ............................................................................................134Marketing................................................................................................................... 135Finance....................................................................................................................... 135Academia ................................................................................................................... 136

Framework and Application ............................................................................................136Future Studies .................................................................................................................. 141

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REFERENCES ................................................................................................................ 143APPENDIX A: LETTER OF INFORMED CONSENT .................................................161APPENDIX B: TOTAL OWNERSHIP COST ASSESSMENT KEY PERFORMANCE

FACTORS........................................................................................................................ 164APPENDIX C: MAIN STUDY ROUND 3 RESULTS ..................................................165APPENDIX D: MAIN STUDY ROUND 3 FRIEDMAN NONPARAMETRIC

STATISTICS TEST RESULTS ......................................................................................174APPENDIX E: TOTAL OWNERSHIP COST FRAMEWORK CHECKLIST EXAMPLE180

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LIST OF TABLES

Table 1 Criteria for the Identification of Complex System Total Ownership Cost Experts74Table 2Demographics of Experts in the Pilot Study .........................................................85Table 3Demographics of Experts in the Main Study ........................................................86Table 4Best Practices and Characterization ..................................................................138Table 5 Sample Total Ownership Cost Trade off Analysis ..............................................140

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LIST OF FIGURESFigure 1. Classical product life-cycle model.....................................................................34Figure 2. Complex system life-cycle model......................................................................35

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CHAPTER 1: INTRODUCTION

The goal of the rational consumer is to make the most practical purchase of

available products that will perform their function when needed and can be operated cost

effectively. This assumes that the buyers perception of the value and benefits received

from the product is driving the purchase. Gordon (2004) reported consumers purchasing

factors are not always based on rational analysis, but can be influenced by the perception

of a product, by beliefs and attitudes toward the product, and by the manufacturer or the

vendor. Consumers purchase decisions should extend beyond the initial purchase price

and influences of the brand name, product features, and functions. Very often, both the

enterprise and the customer limit their decisions to the purchase price (Kothari and

Lackner, 2005).

The total cost of ownership of a product is the sum of both direct and indirect cost

over the entire life cycle. It is a common metric used to evaluate capital investments in

many industries, and even for consumer purchases. The total cost of ownership is an

important consideration because purchase price alone does not provide a complete picture

of cost (Padnos, 2006).

The consumer often finds the product that is the cheaper choice to buy may cost

more to own during the lifetime of the product. Kaye, Sobota, Graham, and Gotwald

(2000) noted understanding the impact of total cost of ownership is critical. The authors

noted, The greatest challenge is the need to make decisions based on future impacts to

break the paradigm of continuously mortgaging the future when faced with the reality of

the critical exigencies of today (Kaye et al., p. 367).

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The application of total cost of ownership strategies is not limited to the

consumer. In the aerospace industry, the impact of the total ownership cost of a product

can be partitioned into four categories: the costs of research and development; the

procurement; the operation, maintenance, and support; and system disposal. The concept

of total cost of ownership (TCO) is the development of an understanding of the true cost

of doing business with a particular supplier for a particular good or service (Ellram,

1994). Total cost of ownership requires a rather complex approach to the purchasing

process. The buying firm must determine which costs it considers to be most significant

in the acquisition, possession, use and subsequent disposal of a good or service (Ellram,

1995). Aerospace industry manufacturers that use total cost of ownership strategies for

purchasing and supply chain management may gather data and make critical procurement

decisions beyond the initial purchase price. The decisions include trade-off analysis of

significant cost drivers (Ferrin & Plank, 2002).

Background of the Problem

A goal of many organizations is to provide the greatest profit for stakeholders for

the least capital investment. To develop or maintain competitive advantage in the

marketplace, many organizations strive to delight the customer by providing innovative

cost-effective solutions to meet their needs. One selection criterion for the consumer may

be to receive the maximum benefit from the purchased product for the least total

ownership cost. When the consumer does not know the total cost of ownership, the

procurement cost is the primary, and sometimes the only, selection criterion for making

the purchase. The complex system manufacturer that ensures the customer gets the most

use of a product for the least total ownership cost may not know how the customer will

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view the information in a purchasing decision. With no clear understanding regarding the

value of exceeding customer expectations of total ownership cost, there may be little or

no incentive for the manufacturer of complex systems to expend the resources or the time

necessary to manufacture a product that does little more than meet minimal customer

requirements.

Providing the consumer with innovative and effective total ownership cost

solutions to meet their needs requires a continuous assessment of company priorities and

subsequent trade-off decisions. In many cases throughout the life cycle of a product, the

price-competitive company strives to find the balance between delighting the customer

and maximizing profits, thereby ensuring continued growth through referrals and repeat

business while also maximizing profits. Adopting total ownership cost strategies as a

strategic marketing philosophy may provide the complex system manufacturer with the

data necessary to make cost-effective trade-off decisions. As of the time of this research

in 2006, there is no known framework for objectively guiding decision makers in the use

of total ownership cost strategies for competitive advantage.

The manufacturer of complex systems is a consumer of purchased products.

Suppliers are often used to provide components of the system that may be as small as

individual parts or as large as complete assemblies. A supply chain management

procurement valuation process that includes total ownership cost examines cost from a

long-term perspective, considering more than the initial purchase price. The company

that considers the total profit life cycle of a product plans for research and development,

production, marketing, aftermarket support, and disposal (U.S. Department of Defense

[DoD], 2003b). A total cost of ownership model may provide an organization with

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strategies for decision makingregarding supplier selection, evaluation, and performance

measurement.

Some of the primary benefits of adopting a TCO approach are that it provides a

focus and sets priorities regarding the areas in which supplier performance would be most

beneficial. It also provides a consistent supplier evaluation tool, thereby improving the

value of supplier performance comparisons among suppliers. Over time TCO helps

clarify and define supplier performance expectations and creates opportunities for cost

savings, as well as supporting continuous supplier improvement (Bhutta and Huq, 2000).

The U.S. Defense Acquisition System was developed to ensure the effective

management of resources necessary to support current and future security needs. The

DoD published Directive 5000.1 (DoD, 2003a), which reported, The primary objective

of Defense acquisition is to acquire quality products that satisfy user needs with

measurable improvements to mission capability and operational support, in a timely

manner, and at a fair and reasonable price (para. 4.2). The focus of the acquisition

process is to meet the end users need for technologically state-of-the-art systems that are

effective, affordable throughout their entire life cycle, and available when needed. The

DoD Directive 5000.1 indicates all system acquisition will follow the mandatory policies

and procedures for managing all acquisition programs as provided in DoD Instruction

5000.2 (DoD, 2003b). The assessment criteria in DoD Instruction 5000.2 direct

procurement decision makers to consider the entire system life cycle and ensure the

acquired system meets operational requirements and the key parameters of cost,

performance, and schedule.

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The DoD acquisition process begins when a clearly identified and defined end

users need or goal is validated and assessed. After the need is identified and assessed, a

request for information is developed and provided to prospective suppliers. The potential

suppliers may be selected as sole-source providers or the decision maker may determine

any potential supplier may openly provide a response showing an ability to meet the

need. The request for information will be used in the assessment of available technologies

and innovations that may fill the current or future needs of the end user and meet the key

assessment parameters. Following the request for information, the procurement decision

maker may send prospective suppliers a request for proposal. The request for proposal

will normally contain a statement of work, the required system performance

specifications, an outline of deliverable items, and the terms and conditions of an

agreement or contract. The prospective supplier will normally provide a response in the

form of a bid to provide the required system and meet the key performance and

assessment parameters.

The decision maker will assess the response from prospective suppliers based on

the weighting of key parameters that include meeting the required system specifications,

cost, schedule, and risk. The common practice for the procurement decision maker was to

award the contract to the lowest bidder until the implementation of DoD Instruction

5000.2(DoD, 2003b). In a DoD white paper, AMTSybex (2004) noted, The need to

achieve an equitable return on asset expenditure forces the choice of a solution that meets

the value for money requirement at the lowest through-life cost, as opposed to a

traditional leaning towards the cheapest purchase price (p. 5).

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Following procurement, the DoD program manager assumes responsibility for the

system throughout the remainder of the product life cycle. The expense of maintaining a

system in operation once it has been fielded may not be obvious. Barringer and Weber

(1996) reported the smallest amount of cash that will be spent on a system is during

acquisition and further suggested that 65% expended in sustaining, operation, and support

may be used as a heuristic of the total life-cycle cost of a system. The U.S. Air Force

established a total cost of ownership reduction initiative in 1997 to lower these operating

support and sustaining costs. The goal of the initiative is that the Air Force can expect

avoided costs and savings to exceed $3.4 billion by 2009 (Williams and Graveline, 2000).

Despite the instructions in DoD Instruction 5000.2 (DoD, 2003b),which clearly

outline the responsibility of the decision maker to optimize total system performance

and minimize total ownership costs (p. 32), Williams and Graveline (2000) provided

several factors that inhibit the implementation of the strategy. Their report to the U.S.

General Accounting Office indicated program managers have poor visibility and few

incentives to reduce the operating and support cost of fielded equipment and, therefore,

reliability, supportability, and affordability improvement initiatives are not priorities.

Although the military must be concerned with the initial purchase price of a

system, in the commercial aerospace sector the hidden cost is a much greater concern.

The fixed cost of operating an airline includes buildings, payments, and maintenance;

lease agreements; insurance; and loan interest. Airlines can lease aircraft and pay for

airport privileges as needed, rather than face the capital expenditure for infrastructure.

Hidden costs amount to much more because the costs include labor, fuel, maintenance,

administration, and passenger services. Cubbin (2004) noted, The capital investment in

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airways and airport infrastructure is borne by governments. As a consequence airlines

have lower fixed costs, but higher variable costs (The Nature of Costs, para. 2). The cost

of operating the airline is borne by the passenger or the freight. Airlines pay to operate

the aircraft regardless of the number of seats filled per flight. As a result, the common

practice in the aerospace industry is to report cost of operation by the available seat miles

(Cubbin).

The high cost of initial aircraft procurement is overshadowed by the hidden cost

of maintenance and operation. Butterworth-Hayes (2002) reported the annual cost of

maintenance repair and overhaul for the American airline industry was estimated at $37.8

billion in 2002. The American Airlines (2005) annual report provided a net corporate loss

with the operation cost of the combined fleet of 699 American and 302 American Eagle

aircraft of $0.105 per seat mile. The Continental Airlines (2005) annual report provided a

net corporate loss for the combined fleet of 356 aircraft and reported the operating cost of

an aircraft seat mile was $0.1015. For the same period, Southwest Airlines (2005)

reported an operating profit and reported the operating expenses for their fleet of 445

aircraft per seat mile was $0.0794.

Many variables may be assessed to determine the cost of operating an aircraft seat

mile. The variables that may be used in the assessment of the total ownership cost of a

complex system are different for each airline operator. The commercial aerospace

industry adopts many DoD strategies and initiatives in the life-cycle management of

complex systems. The development of a framework of total ownership cost strategies to

control and reduce life-cycle costs of a complex system may assist the commercial

aerospace decision maker with procurement and life-cycle management.

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Despite the apparent advantages of adopting total ownership cost philosophies,

few organizations employ a total cost model or framework. Surveys have shown how few

of the respondents actually use total ownership cost, although it is certainly not a new

concept (Veenstra, 2000). Beaudreau and Naegle(2005) reported the DoD regularly

make procurement decisions without regard for the total ownership cost, but understands

the strategies are so critical that DoD would pay nearly anything to have itfor a while

at least (p. 109). A framework is necessary that will provide the decision maker with a

tool for making continuous assessment of priorities and subsequent trade-off decisions to

optimize total ownership cost.

Problem Statement

Leaders in the military and commercial aerospace industry must plan for total life-

cycle management of complex systems. Despite the benefits that may be realized in the

industry from utilizing total ownership cost strategies, product cost or life-cycle cost

considerations are an afterthought for many organizations, including the military (Crow,

2004). Although there is a potential to save billions of dollars, total ownership cost

analysis are not applied very widely causing some experts (Bailey & Heidt, 2003;

Beaudreau & Naegle, 2005; Hall, 2005; Stundza, 2006) to determine there is a profound

need for military and commercial aerospace manufacturing and procurement decision

makers to implement total ownership cost strategies to control and reduce life-cycle costs

of a complex system.

A possible solution to correct the need for a leadership decision-making model is

to identify, characterize, and organize available total ownership cost management

strategies and key performance parameters that can be used in the aerospace industry. A

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study that investigates complex system life-cycle management by group position

consensus using a modified Delphi method could remedy the situation. The current study

included opinions of experts such as program and project managers and leaders in the

military and commercial aerospace industry. Participants in the study necessarily had

special knowledge or expertise in the area of complex system life-cycle development and

total ownership cost strategies.

Purpose of the Study

The purpose of the qualitative research study was to develop a framework of best

practices for controlling and reducing the total ownership cost of complex systems using

a modified Delphi design. The panel consisted of 23 decision makers who had special

knowledge and expertise in the area of complex system life-cycle development. Data

were obtained to synthesize a framework that identifies, characterizes, and organizes

methods for managing total ownership cost of complex systems throughout the entire

life-cycle process. The framework will be shared with decision makers in procurement

and manufacturing organizations in the south central region of the United States. The data

will be made available to other developers and manufacturers in both the military and the

commercial sector, including the National Defense Industrial Association (NDIA), who

could likely benefit from the information.

Significance of the Study

The research study provided decision makers with a framework that identifies,

characterizes, and organizes total ownership cost strategies across the life-cycle phases of

a complex system. The framework provided the decision maker with a course of action

for the development and implementation of total ownership cost methods. The methods

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could assist in the procurement and manufacture of complex systems by providing best

practices for controlling and reducing total ownership cost.

Significance of the Study to Leadership

Both military and commercial aerospace leaders may use the framework

throughout the life cycle of the complex system. The framework of best practices may

provide decision makers with trade-off alternatives during the research and initial concept

development. During the research stage, the viability and risk associated with using

current technologies or in the development of new innovations may be assessed. The

selection of potential suppliers may be based on past performance as measured in key

areas of concern and on total cost of ownership, rather than on the initial purchase price.

In the operation and support stages of the complex system life cycle, decision

makers may use the framework to select among available maintenance concepts, repair

philosophies, the necessity, number, and position of spare parts, tools and test or repair

equipment, training and publications, storage and facilities, and data gathering. The cost

of disposing of a complex system at the end of its useful life may include such

considerations as environmental impacts and the potential reclaiming of precious metals.

The framework may provide decision makers with total ownership cost strategies and

alternatives to consider for the reduction of cost and risk and an improved competitive

advantage.

Nature of the Study

The qualitative modified Delphi study involved the reliable and creative

exploration of ideas with the intent of gathering suitable information for decision making.

The Delphi method is based on a structured process for collecting and distilling

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knowledge from a group of experts by means of a series of surveys interspersed with

controlled opinion feedback (Gunaydin, 2006). The expert panel for the study consisted

of a diverse group of 23 experts in complex system life-cycle development. Dalkey and

Helmer (1963) developed the Delphi technique while performing investigative research

of group opinion for the U.S. Air Force project RAND. The primary objective of a Delphi

study is to make discussion between experts possible without permitting a certain social

interactive behavior, as happens during a normal group discussion, which hampers

opinion forming. Decision makers often rely on their own intuition or on expert opinion,

such as consultants, when full scientific knowledge is lacking. The Delphi method is

widely used to generate forecasts in technology, education, and other fields.

The Delphi technique may be compared to a multi-step brainstorming session.

The facilitator brings together a group of knowledgeable individuals on the subject of

interest to seek their opinion about the future. Delphi research begins with the use of a

questionnaire requesting a response from the panel of experts. Ludwig (1997) cited

Weaver (1971) as stating, Delphi operates on the principle that several heads are better

than one in making subjective conjectures about the future . . . and that experts will make

conjectures based upon rational judgment rather than merely guessing (Introduction,

para. 1).

The participation of a qualified panel of experts is essential to a modified Delphi

study. Delphi groups tend to outperform both standard interacting groups and statistical

groups (Rowe and Wright, 1999). Murphy et al. (1998) recommended, To define

common ground and maximize areas of agreement, groups should be homogeneous; to

identify and explore areas of uncertainty, a heterogeneous group is appropriate (p. 50).

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Pollard and Tomlin (1995) noted 20 to 50 individuals should be members of the panel of

experts in a modified Delphi study and members should be told how much time and

effort are expected of them prior to participating.

The Delphi technique is an iterative process in which individuals have the

opportunity to change their minds or add new questions and comments in the next round

of questions. The facilitator provides feedback to the members of the expert panel that

shows the statistical distribution of previous responses. The process provides group

members with the ability to see how their opinion relates to that of the group of experts

and then re-evaluate. Participants can align more closely to the group opinion by

changing their responses to the questionnaire or may choose to hold their ground based

on their individual judgment. Members of the panel of experts are free to change their

individual responses, so the result is a statistical summary of the consensus of the group.

As technology advances available methods for the development and manufacture

of complex systems, decision makers must plan for total life-cycle management. To

develop a framework that has broad applicability to complex system procurement and

manufacture, the framework must incorporate a robust collection of diverse methods that

accommodate a wide variety of complex systems. The framework developed in the

modified Delphi study may characterize and organize available and applicable methods

for guiding total ownership cost decision-making strategies across the entire life cycle of

a complex system.

The framework will facilitate a comparison of existing complex system

procurement, development and manufacturing practices to those utilizing total ownership

cost strategies. With this comparison, the decision maker may be better prepared to

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determine between cost, schedule, performance, and competitive advantage alternatives.

The framework will facilitate an effective approach for the application and

implementation of complex system management using total ownership cost strategies

throughout all life-cycle phases.

Research Questions

The qualitative study, using a modified Delphi method, was conducted to develop

a decision-making framework for the total ownership cost management of complex

systems. The study determined a core set of cost drivers and key performance factors and

provided barriers and incentives to implementation of total ownership cost philosophies

over the entire product life cycle. The framework will provide decision makers with an

understanding of the advantages and disadvantages of implementing total ownership cost

strategies. The following research questions guided the study:

1. What are the best practices for controlling and reducing the total ownership

cost of complex systems?

2. What are the key performance parameters in the development of a future

complex system total ownership cost framework?

Theoretical Framework

Total cost of ownership includes the direct or actual cost associated with the

purchase price, the cost of equipment, and the parts needed to keep it operating. In

addition to the direct cost, indirect or hidden costs may include the cost associated with

the operation, support, and disposal of the product. Total cost of ownership can be used to

discover the hidden costs, as well as the obvious costs, of conducting business with

different suppliers (Hurkens, 2006). Much research is dedicated to the effective

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management of the total ownership cost that results from acquisition and the supply chain

(Bailey & Heidt, 2003; Beaudreau & Naegle, 2005; Bhutta & Huq, 2000; Crow, 2004;

Ellram, 1993, 1994, 1995; Hurkens et al., 2006; Stundza, 2006). However, little research

existed regarding total ownership cost best practices, cost drivers, and key performance

parameters (Ferrin & Plank, 2002; Gartner, Inc., 2006; Milligan, 1999).

The functional components of a complex system must interact with each other to

perform the desired operation as a whole. In the aerospace industry systems engineering

plays a key role in the development of effective total ownership cost strategies

throughout the entire life cycle. Systems engineering is a discipline that is concerned with

the effect of all system components as they affect the product life cycle from system

design, operation, support and performance, cost, and schedule (International Council on

Systems Engineering [INCOSE], 2003).

The systems engineering focus is the transformation of customer requirements

and applicable technical factors across the entire product life cycle to optimize

functionality and interoperability of system components. The systems engineering

processes and systems engineers act as the technical glue that holds the various design

disciplines and subsystems functions together to provide an integrated system that

performs a specific job (Kludze, 2004, p. 40). Systems engineering processes are a guide

in the design, development, operation, support, and eventual disposal of complex

systems. The processes are used to effectively optimize the relationship among cost,

schedule, and performance based on the requirements and expectations of the

stakeholders (INCOSE, 2003; Kludze, 2004; NASA, 1995).

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When comparing the purchase price of systems that will perform a given process,

assessment of the direct cost is relatively uncomplicated. Obtaining an accurate estimate

of the indirect cost of the system throughout the entire life cycle is much more difficult to

quantify. Whether the customer is military or commercial, the indirect costs make up a

significant part of the total cost of ownership.

Total ownership cost takes into consideration all costs of an individual system,

including the research, development, procurement, operation, logistical support and

disposal associated with the system. It also includes the total supporting infrastructure

that plans, manages and executes that system over its full life (The U.S. Naval Air

Systems Command, 2003). The variables to be considered often include the cost of

training, setup, reliability, maintenance, and environmental considerations for disposal.

Over the life of a system the indirect costs can far outpace the initial purchase price or

direct cost. In a presentation for the U.S. Naval Sea Systems Command, Louden (2006)

presented data indicating the average cost of research and development is 2%,

acquisition is 34% and operating and support is 64% (p. 24) of the total ownership cost

of complex systems. The indirect costs of the product associated with operation and

support are dependent upon such variables as quality, reliability, and ease of

maintenance. The indirect costs make up the largest share of the total cost of ownership

over the life of the system. Based upon the results of the research, a core set of cost

drivers and key performance factors were determined.

Research studies indicated a potential in the aerospace industry to save billions of

dollars by adopting total ownership cost philosophies (Cubbin, 2004; Hurkens et al. 2006;

Williams & Graveline, 2000). Despite the benefits that may be available, few firms

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implement the strategies (Beaudreau & Naegle, 2005; Hurkens et al.; Veenstra, 2000).

The barriers to implementation are attributed to a lack of understanding and poor

communication of the value of the total ownership cost concept and, in many cases, data

and information needed to make effective decisions are not available (Ellram, 1993,

1994, 1995; Ferrin & Plank, 2002; Gartner, Inc., 2006; Milligan, 1999). The results of the

study will provide the decision maker with a decision-making framework, incentives, and

advantages to implementation of total ownership cost strategies.

Definition of Terms

The glossary of telecommunications terms found in the Federal Standard 1037C

(National Communications System, 2000) was used as a source of definitions for the

study. The federal standard provided the following definitions of terms:

Complex system: Kirshbaum (2002) provided a definition of the complex system:

Any system that involves a number of elements, arranged in structure(s) which can exist

on many scales. Complex systems theory also includes the study of the interactions of the

many parts of the system (Introduction to Complex Systems Theory: Basic Definition,

para. 1). Tesfatsion (2004) defined a complex system: A system that is composed of

interacting units (components, primitive elements, constituents, ), and exhibits

emergent properties, i.e., properties arising from the interactions of the units that are not

properties of the individual units themselves (p. 3).

Cost driver: Geiger (1999) defined a cost driver as Another measure that is used

to proportionally distribute the cost of activities to cost objects (p. 33), whereas

Whittaker (2005) claimed a cost object simply is an activity, output, or item whose cost

is to be measured (p. 7).

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System:1. Any organized assembly of resources and procedures united and

regulated by interaction or interdependence to accomplish a set of specific functions. 2. A

collection of personnel, equipment, and methods organized to accomplish a set of specific

functions (National Communications System, 2000, System).

System design: 1. A process of defining the hardware and software architecture,

components, modules, interfaces, and data for a system to satisfy specified requirements.

2. The preparation of an assembly of methods, procedures, or techniques united by

regulated interaction to form an organized whole (National Communications System,

2000, System design).

System life cycle: The course of developmental changes through which a system

passes from its conception to the termination of its use and subsequent salvage. For

example, a system life cycle might include the phases and activities associated with the

analysis, acquisition, design, development, test, integration, operation, maintenance, and

modification of the system. (National Communications System, 2000, System life cycle)

Assumptions

The study was based on the following assumptions. First, the study assumed there

was value added for the military and commercial leader in the development of a

framework of total ownership cost strategies and applications throughout the entire life

cycle of complex systems. Next, it was assumed no universal framework would be

applicable in all applications, but rather a set of best practices may aid decision makers in

trade-off analysis and in identifying complex system total ownership cost key

performance parameters. For the purposes of the study, a complex system has many

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individual parts that are coupled to form a system. The theorists and practitioners who

participate in the study will be considered experts by their peers.

Scope and Limitations

The scope of the study will be limited to the development of a decision-making

framework that may be used in the military and commercial aerospace industry. The

framework will include the entire life cycle of complex systems and will provide

strategies for the implementation of a total ownership cost approach, based on key

performance parameters. Although customer relationships and perceptions, as well as the

organizational emphasis on the cost of money and overhead, may be considered cost

drivers in the assessment of total ownership cost, they are regarded as outside the scope

of the study. The study will focus on future best practices that may be used in the

development of a total ownership cost framework for complex systems that are or may be

used in the military and commercial aerospace industry based upon the opinions of a

panel of experts.

Four limitations are outside the control of the researcher. The first limitation is the

best practice. For the purpose of the study, a best practice will be considered the most

desirable and most useful total ownership cost practice or strategy as defined by the panel

of experts. The second limitation is the complex system. For the purposes of the study, a

complex system is a system that performs a function or set of functions in interaction

with other systems in the overall performance of a process (Kirshbaum, 2002). As a

representative example, an aircraft engine controller is a complex system that must

receive information and data from a number of sources or systems to perform the task of

optimizing engine performance. The third limitation is in the aerospaceapplication. This

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study was confined to complex systems used in military and commercial aerospace

applications. The focus included commercial airlines and military aviation. Total

ownership cost strategies may be applied for decision making by the consumer. The

purchase of a vehicle may be based on factors that include depreciation, financing,

insurance, taxes and fees, fuel, maintenance and repairs (Reed, 2002, para. 2). The

fourth limitation isthe experts. The experts in the study included individuals who possess

the skills, knowledge, and experience in the development and procurement of complex

systems used in the commercial or military aerospace industry to be considered

influential leaders and decision makers by their peers. The experts included theorists and

practitioners and focused on bridging the gap in the development of a framework of

strategies and applications.

Delimitations

The study was confined to the inquiry of information through a modified Delphi

method by working with expert practitioners in the aerospace industry. The study focused

on the development of a framework to be used by decision makers for effective

implementation of total ownership cost strategies over the entire life cycle of complex

systems. The benefits and the barriers to implementation, the critical cost drivers, and key

performance parameters were considered in the development of the framework.

The experts were selected based upon their special knowledge, skills, expertise,

and experience in the development of strategies for total ownership cost of complex

systems in the aerospace industry. The sample group of experts was nominated,

identified, and selected from a larger population. The experts were asked to share their

ideas about the effective implementation of total ownership cost strategies and to focus

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on the strategies that will now, and in the future, support the development of a decision-

making framework. The study was confined to complex systems used in military and

commercial aerospace applications. The focus included commercial airlines and military

aviation.

Summary

Chapter 1 provided the need for total ownership cost strategies throughout the life

cycle of complex systems and the benefits of adopting a total ownership cost philosophy

were addressed. Complex system total ownership cost is the sum of direct and indirect

costs associated with the system throughout the life-cycle stages, including defining the

need and initial planning, development and production, servicing and maintenance,

support, and disposal of the product. The initial purchase price does not always provide

the full picture because the product that is the least expensive to purchase may cost more

to own. According to the DoD, the cost of operating, supporting, and maintaining a

complex system once it is in the hands of the customer is the greatest life-cycle expense.

Total ownership cost strategies arenot limited to the consumer purchase decision.

In addition to evaluating between potential suppliers and maintaining historical supplier

performance records, the complex system manufacturer may use total ownership cost

strategies to develop a strategic marketing advantage. Strategic decision making over the

complex system life cycle by both military and commercial aerospace decision makers

may include analysis of total ownership cost for supply-chain management. Commercial

aerospace decision makers may use total ownership cost strategies to reduce the operating

cost per seat mile. Cash flow advantages and savings that amount to billions of dollars are

cited as the result of using total ownership cost strategies reported by Williams and

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Graveline (2000) in an Air Force auditing team white paper to the U.S. Senate. Despite

the advantages, the literature indicated implementing total ownership cost philosophies is

not a widespread initiative.

Framework for effectively implementing total ownership cost philosophies over

the entire life cycle of military or commercial aerospace complex systems must be

developed. It is not anticipated that any one total ownership cost strategy will work

universally because the key performance parameters are different for each application.

The study provided a framework decision makers can use to identify, characterize, and

effectively implement a total cost of ownership philosophy that will aid the decision

maker in procurement and life-cycle management decisions.

Chapter 2 provides a review of the literature that highlights the key elements used

in assessing total ownership cost of military and commercial aerospace complex systems.

Chapter 3 details the modified Delphi method, first developed in the 1950s for the DoD

by the RAND Corporation as a research method for collecting the opinion of a panel of

qualified experts and thereby predict future needs. Chapter 4 provides the data, results,

and findings of the study. Chapter 5 provides conclusions, implications, and

recommendations of the study that further support the development of a framework of

total ownership cost strategies and key performance parameters.

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CHAPTER 2: LITERATURE REVIEW

The purpose of the qualitative study using a modified Delphi method was to

develop a decision-making framework for objectively guiding the total cost of ownership

of complex systems over the entire product life cycle. In the development of a complex

system in the commercial or military aerospace industry, decision makers may choose

from a number of available methods for meeting or exceeding the customers

requirements for products on time and within budget. The decision to procure or

manufacture products and complex systems is often based predominantly on the initial

purchase price. When the total cost of ownership is not known, the procurement cost is

often the primary, and sometimes the only, selection criterion for making the purchase.

The framework developed as a result of the study may provide military and

commercial aerospace industry decision makers with total cost of ownership strategies

and best practices. The framework may be used for determining a comprehensive cost-

benefit analysis, control, and supply chain management of complex system life-cycle

cost. A review of the available literature provided insight into total cost of ownership

strategies as they apply to complex system life-cycle management and included an

overview of the studies accomplished to date. Gaps exist in the literature and, as Ferrin

and Plank (2002) noted, The scholarly literature on total cost of ownership consists

mostly of case study and anecdotal data (p. 20). The literature was reviewed, assessing

the advantages, disadvantages, key performance parameters, and barriers to the

development and implementation of total ownership cost strategies. Additional current

sources were sought and utilized as the research continued.

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retrieved from the World Wide Web, the results provided in the study serve as the basis.

A review of past and present studies suggested total ownership cost is not a new concept,

yet despite the advantages, few complex system developers utilize the strategies.

Total Ownership Cost

Total ownership cost may be defined as the entire life-cycle cost incurred to

research, develop, procure, operate, maintain, and dispose of a system or subsystem.

Total cost of ownership, life-cycle cost, and total cost to own are related concepts (Ferrin

& Plank, 2002). The analysis of the total cost of product ownership provides the decision

maker with an alternative approach to product procurement that is based on initial

purchase price. Total ownership cost and life-cycle cost analysis have been in

development by the military since the late 1960s.

During the 1960s the DoD determined the initial cost of product procurement was

the primary consideration for system acquisition. The lack of planning and analysis of the

total cost of the system resulted in support costs that far exceed the initial acquisition cost

(Kaminski, 1995). With the rapid improvements in technology, the cost of the logistics

resources necessary to support the systems grew substantially. The growth of life-cycle

cost analysis was driven by the necessity to reduce the total ownership cost of a system

by effectively planning for every phase, or the cradle-to-grave acquisition, of a product

(Kaminski, 1995, p. 2).

The military has long studied the cost of systems throughout the life cycle. In

1975, the Canadian Department of National Defence initiated a number of system studies

and commissioned Bell Northern Research to develop a life-cycle cost model. The

Canadian Treasury Board directed, Life cycle costs were to be the determining factor in

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all government procurement (Material Management Training Center, 1993, p. 2). During

the same time period, the United States DoD developed a number of references or

military handbooks as guides in the implementation of life-cycle cost, including MIL-

HDBK-259 for life-cycle cost details and MIL-HDBK-276-1 and MIL-HDBK-276-2 as

form guides and instructions for importing data into specific computer software

programs, mandating total life-cycle cost systems management in theDoD Acquisition

Guide, DoD 5000 subsection 4.5, Effective Management.

Many automobile owners realize the initial cost of acquiring a vehicle may soon

be overshadowed by the cost of financing, taxes, fuel, insurance, maintenance and

repairs, and fees. MacMillan and Vella (2007) provide research of the potential total

ownership cost savings available from hybrid vehicles. A consumer can determine the

total ownership cost of a vehicle by going on the internet to various websites. Edmunds

Inc. (2006) has developed a research tool that provides, by ZIP code, the estimated 5-year

costs of automotive expenses for vehicles. Assuming a person owns a vehicle for 5 years

and drives 20,000 miles per year, and using data available on the Edmunds Web site for

nine of the most popular models, the average cost to operate and support a vehicle is 45%

of the purchase price. As with most products, the older an automobile is the more

maintenance it requires.

Hysom (1979) reported life-cycle cost is an effective tool when used to evaluate

the total ownership cost of real estate, helping real estate investors to analyze the hidden

expenses in a building (p. 332). Real estate investors are encouraged to use life-cycle

cost modeling to deal with the uncertainties of such unknown variables and hidden

expenses as the ever-increasing cost of energy. Hysom noted although life-cycle cost

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analysis must be used prudently (p. 332), it is an important factor in considering the

economic life of a real estate investment.

Defining the Need for Total Ownership Cost

A total ownership cost analysis changes the perspective for business from looking

at the short-term cost advantages to an emphasis on the lowest long-term cost of

ownership. Examining the total ownership cost associated with doing business is a

process that, once implemented, takes into account not only the design and development

of a product but also the procurement of purchased goods and services and all phases of

aftermarket support. During the design and development phase of the product life cycle,

engineering may perform trade-off analysis to reduce the long-term failure rate of the

product and improve the manufacturability, testability, and ease of maintenance; the

purchasing department may choose a better grade of equipment rather than a more

favorable cost price. In the production phase of the product life cycle, the operations

department may choose the long-term view of low-cost production over the short-term

needs to meet flow-through commitments; process and quality engineering may choose to

use Six Sigma, lean, or continuous improvement process methods to reduce cost and

improve product quality. During the operation and customer support life-cycle phase

there may be benefit from implementing preventive and corrective maintenance plans

that consider total ownership cost rather than short-term management gains. The logistics

support pipeline of spare parts, facilities, product packaging, handling, storage, and

transportation considerations may also be taken into account to reduce the overall total

ownership cost.

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Ferrin and Plank (2002) performed exploratory study research in the availability

of life-cycle cost and total ownership cost analysis models. Many leading companies used

the models with a focus on value purchase opportunities but firms are unsure of their

ability to effectively identify the critical cost drivers for estimating total cost of

ownership (Ferrin & Plank, p. 24). Ferrin and Plank noted, The study suggests a

generic model of total cost of ownership is not appropriate. However, the findings

suggest a TCO model based on a core set of cost drivers, along with an auxiliary set of

cost drivers, is appropriate (p. 18).

No single solution will meet the needs for all total ownership cost models. Ferrin

and Plank (2002) contended purchasing managers could use a core set of cost drivers and

additional tailored drivers for computation in a particular purchase situation. Ferrin and

Plank also noted, It is also suggested that a value-based, multi-firm, or supply chain

TCO computation model is needed (p. 18).

Total ownership cost strategies form the basis for economic analysis to

systematically investigate the problem of choice and facilitate trade-off decision making.

Hurkens et al. (2006) claimed, TCO can be used to think about cost at the strategic level;

as such, a TCO model could be the starting point to redesign and make the supply chain

more effective (p. 27). Total ownership cost strategies provide the decision maker with

alternative means of satisfying an objective and a systematic method for investigating the

costs and benefits of each of the alternatives.

Ellram and Siferd (1998) examined total ownership cost as a key concept in

strategic management decision making in a case study of 11 organizations. The case

study provided a robust viewof both internal and external organization cost management

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to enhance competitive advantage. The case study determined manufacturers rely heavily

on suppliers. Purchase items make up an average of 63.5 percent of total costs for

manufacturing firms and 25 percent for non manufacturers (Ellram & Siferd, p. 55).

Ellram and Siferds (1998) total ownership cost comparison of goods purchased

from three different suppliers and the resultant analysis demonstrated the initial price of

the product is not a good indicator of the total price and total ownership cost of product

ownership. In this case, products available at the cheapest purchase price from a supplier

resulted in the highest total ownership cost, whereas an alternate supplier had the highest

initial purchase price but the lowest overall ownership cost. As a result of the case study,

Ellram and Siferd concluded the corporate purchasing, sourcing, or procurement

department should consider the cost of systems over the entire life cycle as well as the

initial purchase price.

Benefits of Total Ownership Cost Analysis

The primary focus of total ownership cost is to look beyond the purchase price. In

a research case study of nine firms, Ellram (1994) examined total ownership cost as used

in the procurement process, including the initial idea or concept, design, development,

suppliers, manufacturing, and the warranty claims associated with the final product once

it is in use by the customer. The benefits resulting from the effective implementation of

total ownership cost strategies in the procurement process are described as improved

supplier performance measurement, improved purchasing decision making, improved

internal and external communications, better insight and understanding into purchased

goods/services and supplier performance, and support of the firm's continuous

improvement efforts (p. 178).

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In a meta-case study, Ellram (1994) found many different reasons and methods

for using total ownership cost analysis. In some cases, the primary focus for total

ownership cost analysis was the savings gained from continuous improvement efforts and

reduction of the cost of poor quality. In other cases, companies used total ownership cost

to support decisions regarding supplier and equipment selection. Decision makers should

consider after market warranties, product reliability, customer support and the provision

of spare parts necessary to make required repairs as the associated cost may be in the

millions over the life of the product (Ellram, 1994). The common thread in all the cases

studied by Ellram (1994) is all the companies agreed the benefits of TCO far

outweighed the disadvantages and costs associated with TCO implementation (p. 3).

Ahgren and Wierda (2007) found that the implementation of total ownership cost

strategies provides the decision maker with effective methods for evaluating cost and

comparing alternatives that reduce total net cost. Kilcourse (2007) posits that Total cost

of ownership is the one right way to make any technology decision. Understanding the

true cost to own any technology is especially important for retailers when making

decisions regarding in-store technologies (p. 54). OHara (2007) reports that key

technology decisions are being made that employ total ownership cost and return on

investment analysis.

Barriers to Implementation of Total Ownership Cost

Despite the benefits that may be available from implementing TCO strategies, few

firms use the analysis as a critical decision-making factor. Gartner, Inc. (2006) attributed

the failure of organizations to communicate the effectiveness of TCO as a major barrier

to implementation of the strategies. For a TCO evaluation to be most effective, the

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The resolution is to provide the purchasing agent with an understanding of the value of

TCO, the key performance and cost factors and the tools necessary to make effective

decisions.

In early research, Hart (1978) encountered resistance to the adoption of a

government-wide mandate to purchase products following a thorough life-cycle cost

analysis. Hart reported, The problem, however, is a lack of expertise and an

understanding of the benefits that can be achieved (p. 16). Hart encouraged the use of

life-cycle cost analysis and incentives for private industry to produce more reliable

systems and to provide more extensive equipment warranties.

Total Ownership Cost Critical Cost Drivers

Limited research existed regarding the variables that provide the critical cost

drivers or the relationship to the application of total ownership cost strategies. A review

of the available literature provided insight into many variables and key performance

parameters that affect the total ownership cost of complex systems over their entire life

cycle. The limited scholarly literature on total ownership cost and life-cycle cost

consisted mostly of case studies, with very little empirical research of the cost drivers

used in modeling.

A total ownership cost analysis requires judgment on the part of the decision

maker. The leader who is developing a total ownership cost model may consider a core

set of cost drivers and appropriate cost elements that are dependent on the application and

discard the elements that are not of substantial influence (Ferrin & Plank, 2002). A total

ownership cost analysis may include both nonrecurring costs and recurring costs.

Nonrecurring costs include the initial phases of the product life cycle, from defining the

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need through development and production. The nonrecurring cost of the complex system

to the customer is the initial purchase price. The recurring costs are invisible in the initial

purchase transaction. The recurring cost of product ownership includes elements found in

the remainder of the product life cycle: the total cost to operate and maintain the system,

the cost associated with system unavailability and the safe and environmentally friendly

disposal of the product after use. The recurring cost to the manufacturer may include the

cost of warranty, repair and maintenance, and any required aftermarket customer support.

While researching the methods used by purchasing managers, Ellram (1993)

found the majority of the firms studied had a good grasp of how much time, effort, and

expense is involved in adding suppliers to their systems and in placing orders (p. 6) and

the managers know the value to their firm of on-time delivery, how much it costs to

follow up on problems, match receiving with invoices, and even cut checks (p. 6). The

same group of procurement managers failed to consider the significant cost associated

with the product once it is in use.

The significant cost of complex system ownership once it is in use was provided

as considerably higher than the initial purchase price. Sun Tzu, a military general from

the 6th century B.C., noted, As to government expenditures, those due to broken-down

chariots, worn-out horses, armor and helmets, arrows and crossbows, lances, hand and

body shields, draft animals and supply wagons will amount to sixty percent of the total

(as cited in McNeilly, 1996, p. 179). The cost of maintaining a product, as in the time of

Sun Tzu, often amounts to the greatest part of the product life cycle, 60 to 70% of the

total ownership cost (Barringer & Weber, 1996; Kaminski, 1995; Louden, 2006).

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In a U.S. Government Accounting Office report to Congress, Williams and

Graveline (2000) clearly defined the high cost associated with the operation and support

of complex military aerospace systems. The report provides the account of historical data

indicating that operating and support is about 70 percent of a systems total life-cycle

cost (Williams & Graveline, Introduction, para. 1). The cost of maintaining aging

systems includes all of the spare parts, maintenance personnel, tools, training, facilities

and logistics necessary to perform corrective and preventive maintenance to ensure

operational availability. As systems age and more maintenance is required to keep them

operational the cost of operating and maintaining is ever increasing. The life of some

systems is extended beyond the initial design specifications. Replacement systems are

required as aging systems wear out yet the increasing cost of support is depleting the

funding available to replace those systems. This dilemma is described as a potential

death spiral (Williams & Graveline, Introduction, para. 1).

The Product Life Cycle

Total ownership cost represents the true cost of product ownership, looking

beyond the initial purchase price to include the entire product life cycle. A total

ownership cost analysis may take into consideration all phases of the complex system life

cycle, including identifying the need, research and development, production, initial

operation during a warranty period, cost of using the item and the associated expense of

products returned by the customer due to defects and failures, and the cost associated

with product disposal. The actual acquisition of the product may only amount to

approximately 35% of the total ownership cost, whereas operation may account for

approximately 65% of the total cost of ownership.

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The classical product life cycle is used as a method for assessing the phases a

product passes through. The phases may be used to identify the many different

challenges, opportunities, and problems faced by the product developer, marketer, or

seller. Profits from the sale of products rise and fall throughout the life-cycle progression

and different marketing, manufacturing, procurement, and resource planning techniques

may be required. Many classical product life-cycle models are portrayed in a bell curve,

typically divided into four stages: introduction, growth, maturity and decline (Kotler,

2000, p. 304). Many forms, shapes, and stages of the product life cycle are available and

Kotler determined researchers have identified from 6 to 17 different product lifecycle

patterns (p. 304). For the purposes of the study, the classical product life cycle is

provided in Figure 1.

Develop MaturityGrowthIntroduce Decline

Make the product Sell the product

Develop MaturityGrowthIntroduce Decline

Make the product Sell the product

Develop MaturityGrowthIntroduce DeclineDevelop MaturityGrowthIntroduce Decline

Make the product Sell the product

Figure 1. Classical product life-cycle model.

The DoD acquisition management framework (DoD, 2003b) provides five life-

cycle phases, including identification of the need, research and development, production,

operation and support, and disposal. The Society of Automotive Engineers developed a

life-cycle cost model focused on the manufacturing environment. The Society of

Automotive Engineers (1995) model includes acquisition cost, operating costs, scheduled

maintenance, unscheduled maintenance, conversion, and decommission or disposal.

Research provided many product life-cycle models. The complex system life cycle model

that is representative of this study is provided in Figure 2.

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Research &

DevelopmentSupportOperationProduction Disposal

Acquisition Use

Research &

DevelopmentSupportOperationProduction Disposal

Acquisition Use

Research &

DevelopmentSupportOperationProduction Disposal

Research &

DevelopmentSupportOperationProduction Disposal

Acquisition Use

Figure 2. Complex system life-cycle model.

Product Life-Cycle Management

Product life-cycle management is a process for effectively managing a complex

system or product and related services throughout the entire life cycle. Johnson (2005)

reported, PLM [product life-cycle management] enables collaboration across disciplines,

aiming to achieve technological interoperability and optimize processes (p. 14). Product

life-cycle management is one method an organization may use to understand internal

information needs and process flows and thereby determine where the available

technologies can provide best value.

Fraser (2005) posited product life-cycle management may be used as a strategy to

provide a coherent view of a product from womb-to-tomb. This means having an

accurate view of each product at each revision level, from concept to design to

manufactured product, and on through service, maintenance, and retirement(p. 36).

Product life-cycle management (PLM) is often described asa technology. Hakola and

Horning (2004) contended that PLM is more appropriately described as a strategy for

making companies more innovative and productive. Hakola and Horning (2004) posit

that By applying a number of technologies PLM enables manufacturing companies to

capture, use, and build upon the intellectual property created by design and

manufacturing engineers, and to do so all the way from the concept of a product to the

very end of its life (p. 26).

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In the aerospace industry, product life-cycle management is an effective strategy

for ensuring total ownership cost philosophies are integrated in the decision-making

process. Mostefai, Bouras, and Batouche (2005) claimed, PLM is the business activity

of managing an organizations products all the way across their lifecycle in the most

effective way (p. 206). Product life-cycle management strategies may be used to

educate relevant stakeholders about the value of a systems and life cycle perspective for

decisions and decision-making processes, such as policy making, corporate strategy

development, product design, production changes, purchasing and marketing (Saur et

al., 2003, p. 2).

The advancement of computer technology makes it possible to store in one place

all complex system data that are or will be available throughout the product life cycle.

Swink (2006) concluded, So far a comprehensive PLM system has not been developed.

No single vendor has offered a complete solution for fulfilling all the functions of PLM

(p. 37). The continued development of product life-cycle management may provide the

complex system decision maker with an effective tool for reducing the total ownership

cost of a product over the entire life cycle.

Specifications and Requirements Development

Complex system product development begins with the identification of a need.

For many companies, identifying what they should create in the first place is the hardest

question in developing new products and services (Korman, 2002, Avoiding Roadblocks

to Innovation, para. 1). A clear and complete product definition is an essential aspect of

any development project. Although it may appear obvious that until the product has been

clearly defined the development should not begin, Crow (2004) noted that, despite the

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importance, there are a number of common shortcomings to the process of product

definition in many companies (Introduction, para. 1). Without clear specifications and

requirements, the decision maker may be hard pressed to meet the customers needs and

manage the total ownership cost.

Customer Relationship Management

Research and discussion are available on customer expectations and the marketing

strategy to delight the customer. Delighting the customer and exceeding performance

requirements is a marketing strategy used to encourage repeat business. Customers buy

benefits, not features. Features are of value only if the customers can perceive them

directly and if they really want them (Himmelfarb, 1999). Rust and Oliver (2000) defined

delighting the customer as exceeding expectations by adding some utility to the product

that is surprisingly pleasant (p. 87). The implication is delighting the customer

heightens the expectation for repeat business, raises the customers expectations, and

pulls customers away from the competition.

Goel (1998) provided research in the challenges product development professions

face when making quality, reliability, and durability engineering decisions. A study of

customer behavior determined that product quality is based upon perception. Companies

that provide high-quality products and services are at a competitive advantage in the

marketplace. Those products that are perceived to have better quality than that of the

competition may demand a premium price.

The development of total ownership cost strategies provides an awareness of the

need for effective cost management of products throughout the entire lifecycle. Rust and

Oliver (2000) postulated, Critics have suggested that delighting the customerraises the

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barof customer expectations, making it more difficult to satisfy the customer in the next

purchase cycle and hurting the firm in the long run (p. 86). Rust noted, Delight

programs are likely to be profitable if customer satisfaction can be maintained at the

higher expectation levels caused by assimilated levels of delight (p. 86). Ensuring

optimal total ownership cost may delight the customer and provide a competitive

advantage.

Kothari and Lackner (2005) posited to achieve long-term growth, the organization

should understand customers dont buy products or services. They buy valuethe total

package of product performance, access, experience, and cost (Introduction, para. 1). An

aerospace manufacturing firm may choose to delight the customer by providing the

lowest possible total ownership cost, thereby increasing the value the customer perceives

in the product. Consumers often develop a preference and loyalty for a brand or product

category based on the perception of value. Providing a quality product and exceptional

service will aid in the retention of customers (Rollo, 2006). Satisfying the needs of the

customer must first begin with a clear identification of the requirements. Implementing

strategies to provide customers with the lowest possible total ownership cost may be an

effective method for maintaining the relationship.

Acquisition and Procurement

Early in the product life cycle, the total ownership costs of the complex system

are greatly affected by the components used to manufacture the end product. The

procurement function of ensuring the raw materials, components, and supplies necessary

for the manufacturing process are available when and where they are needed requires the

analysis of price, quality, and supplier delivery performance. Srinivas (2002) studied

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multi-criteria life-cycle cost models used in the procurement process and determined the

models provided managers with valuable information about the marginal costs of

supplier outputs (p. 4) that can be us