An integrated approach to calculate life cycle costs of arms and military equipment

Abstract

INTRODUCTION

In a situation when government expenditures for defense are more restrictive, any investment in the acquisition of arms and military equipment (AME) is a question that does not allow errors in decisions. Accordingly, the economic analysis of the investment must be detailed and unavoidable.

In the past, the initial cost of procurement of AME was often the primary, and sometimes the only one criterion in decision-making. Neglecting the analysis of costs throughout the life of assets in prefeasibility studies is the main cause of unplanned investment in the later stages of the life cycle of investment, and also of a number of problems in the functioning and unfulfilling or partially fulfilling the goals of the system.

PROCESS OF EQUIPPING THE MoD AND THE SAF WITH AME

Legislation governing the process of equipping the Ministry of Defence (MoD) and the Serbian Armed Forces (SAF) with AME is based on the Regulation on equipping the Yugoslav Army with weapons and military equipment in peacetime, from 1996, and on several Standards of National Defense (SNO 0477/83, SNO 1096/85, SNO 8196/92, SNO 9000/97, etc.). Due to a number of social and organizational changes in the defense system, this regulation is not in full compliance with real-time requirements.

The analysis of legal regulations and activities in the process of equipping the MoD and the SAF with AME in practice indicates dominance of technical - technological aspects of the equipping analysis, while the economic aspect (primarily aspect of costs) is present, but not detailed enough. At best, there is only a static approach to the analysis and evaluation of investment projects, while a dynamic aspect and the aspect of the total cost over the life of assets are not taken into account.

ANALYSIS OF COSTS IN THE LIFETIME OF ASSETS

Given the non-profit character of military organizations and the possibility to express explicit costs, but not the benefits of investment in equipping with AME , costs are one of the most dominant parameters in decision-making. Modern trends in this area comprehensively perceive all costs during the life cycle of assets.

In general, in the analysis of costs in the life cycle of AME there are two sets of costs: visible and invisible (hidden) costs. The visible part of the costs is mainly present in decision-making and usually includes the cost of equipping units or purchase of assets. The invisible part of the costs is far more significant. Although it is larger than the visible part and covers more groups of costs, decision-makers often do not take it into account.

The hidden costs include: distribution costs, operating costs, maintenance costs, training costs, inventory costs, information systems costs, the cost of disposal and write-offs, etc.

The decision making problem about investment in the AME purchase and equipping is obviously of  multicriteria nature, whether an optimum combination of costs for one  technical system (AME) is in question, or whether it is a choice of a system of AME among many offered.

COST ANALYSIS OF A PARTICULAR  ASSET

For the illustration of an integrated approach to the analysis of the cost of assets in their life-cycle, a model from the US Naval Postgraduate School, was adjusted and applied on an example of a real asset. The model is applied to the case of two  squadrons of identical aircraft based at different airports.

With regard to the availability, confidentiality, and the variability of costs and reliability of the elements of AME, the calculations in the model are implemented on the basis of the estimated or orientation parameters. Essentially, the goal is to demonstrate the interdependence, mutual relations and influences of parameters and their ultimate impact on the overall cost of military assets.

Applying the model to a particular example points to the fact that, in the first years of asset life, the dominant cost is that of asset procurement (cost of acquisition, cost of assets themselves, the price of equipment for service and maintenance, the costs of initial training of a number of personnel and distribution costs). When assets are new and introduced gradually in phases within the warranty period, the costs of asset maintaining and upgrading are not significant at that period. During this period, the main costs are the costs of personnel and training. Maintenance costs increase over time, and at the half of the life cycle there are special investments in the development and modernization of equipment, as well as in testing the reliability of individual elements, etc.. Due to years of use, the operating costs of assets grow until the expiration of their life cycle, when there is a possibility of selling them and achieving certain profit.

When looking at how the dynamics of individual costs affect the overall cost of assets in their life cycle, it is evident that most of the percentage of costs are the costs of asset operating and maintaining - about 66%. The costs of testing and training follow with 16%, 12% is attributed to personnel costs, 6% to training costs, etc..

CONTRIBUTION TO THE OPTIMIZATION OF FUNDS ALLOCATED TO AME PROCUREMENT

In order to provide the necessary funds when they are needed and at optimal cost, it is necessary to carry out adequate strategic, managerial, operational and administrative activities.

Strategic actions in defense systems, in this sense, include: planning and development of procurement organization and infrastructure, determination of the best use of expertise and procurement resources, identification of the working standards to be achieved, and the establishment of control and reporting mechanisms.

Control activities are the identification of modes for the best satisfaction of perceived needs, planning and coordination in procurement, training and staff development as well as acquisition performance  measurement.

Operational activities are demanding specifications, examining options of research of the supply of goods or services, bid and supplier evaluation, negotiations, as well as contract and project administration.

Administrative activities include processing and dispatching orders, comparing delivery and receipt confirmations, invoice receipt and verification, record-keeping and others.

The identified existing and potential failures occurring in the procurement of military assets and affecting the optimization of use of financial resources, include: lack of adequate staff, imprecise legal regulations of procurement, lack of multi-year framework agreements related to the acquisition, insufficient and inadequate market research, incomplete adherence to the existing norms, late placing of funds at the disposal of the procurement service, untimely and inaccurate procurement planning, poor quality technical documentation, disrespect for deadlines, inadequate frequency of purchases, a number of "urgent and confidential procurements,", absence of a system limiting the time of procurement activities, absence of an adequate structure to deal with procurement control, etc.

In addition, an integrated information system or a database that would allow access to the data and the analysis of the dynamics of costs would ensure proper assessment of costs of investments in equipping the military with AME..

CONCLUSION

Determining AME  life cycle costs should be made at an early phase of asset development because it can repeatedly affect the total amount and cost reduction through project changing. In the cost analysis, it is desirable to use mathematical models and methods developed in the theory and practice to allow accurate calculations of the elements necessary for a cost estimate.

The biggest costs occur in the functional competence of logistics which shows that equipping the army must be based on logistic grounds for efficiency and cost saving throughout the life cycle of the asset. The initial cost of assets in relation to the costs that appear at the end of their life cycle is only a few percent and all other expenses are related to support costs.

All presented elements are necessary to be analyzed through the existing organization of the military and the logistic support system, because deviations or adjustments to specific operating conditions can bring significant cost saving as well.

Due to the multi-disciplinary and multi-criteria character of the process of equipping the military with AME, it is necessary to form project teams that will adequately manage the process.

When the equipping is of strategic importance for the country, it is necessary that the Government and relevant ministries  take an adequate role in the process.

An integrated approach to the budget and the reduction of AME life cycle costs should follow the general trends in the reform of public (state) sector such as: cost and efficiency optimization, team approach to solving complex problems, greater transparency, shorter response time, introduction of a labor-incentive system, reducing administration, public-private partnerships and multinational projects. The aim is to provide a better solution, product or service or a higher level of satisfaction of the public (state) interests with lower consumption of resources. In the defense sector, this means sustainable and smart defense and multinational approach in the implementation of costly projects.

In order to optimize the AME life cycle costs, it is necessary, at all levels of study and training of personnel, to study certain features of integrated logistic support, to apply proper concepts and approaches and to predict and monitor organizational and technological changes in the defense system.