CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 1 The Life Cycle Management Navigator Life Cycle Costing Training Session

Life Cycle Management Navigator: 12_PR_LCC 1 CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME

The Life Cycle Management NavigatorLife Cycle Costing

Training Session 12


Life Cycle CostingThe LCC Message!

What?

. . . through . . .

• identification,

• evaluation and

• more accurate allocation of life cycle

costs.

• identification,

• evaluation and

• more accurate allocation of life cycle

costs.

Life Cycle Costing (LCC) helps you to . . .

1. reduce costs and

2. improve life cycle performance

1. reduce costs and

2. improve life cycle performance


Life Cycle Costing What are Life Cycle Costs?

What?

Life cycle costs can be . . .

• potentially hidden costs;

e.g. costs for purchasing, processing and disposing non-

product output (NPO), costs for inefficient resource-use,

insurance, monitoring, training.

• contingent costs;

e.g. costs for penalties, natural resource or personal injury

damages, future compliance costs.

• image and relationship costs.

e.g. costs for advertising, lower earnings due to

environmental image.

• potentially hidden costs;

e.g. costs for purchasing, processing and disposing non-

product output (NPO), costs for inefficient resource-use,

insurance, monitoring, training.

• contingent costs;

e.g. costs for penalties, natural resource or personal injury

damages, future compliance costs.

• image and relationship costs.

e.g. costs for advertising, lower earnings due to

environmental image.


Life Cycle Costing Functions of LCC

What?

LCC intends to:

• promote more accurate costing and pricing;

• help identify potentials for cost reduction;

• provide information on life cycle costs;

• support (life cycle) controlling / decision-making.


Life Cycle Costing LCC - A Management Accounting Tool

Where?

LCC is primarily used

• by management

• for internal purposes

• to support decision-

making in various

business areas . . .

Business decisions

benefitting from LCC:• product design• process design• facility siting• procurement• processing• waste management• risk management• capital investments• costing and pricing

Source: US EPA


Life Cycle Costing Information Gap

Why?

Disposal costs are just the tip of the iceberg

costsfor disposal

other life cycle costs


Life Cycle Costing Information Gap and Resulting Problems

Why?

• Traditional accounting systems are incomplete in scope because they overlook important environmental costs (and potential cost savings and revenues), which can be a significant component of a company’s overall cost structure.

• The failure to include environmental costs adequately in financial analyses has the effect of sending the wrong financial signals to managers.

• When environmental costs are not adequately allocated, cross-subsidisation occurs between products.


Life Cycle CostingCost Reduction & Profitability Enhancement

Why?

You pay at least 3 times for your non-product output (NPO)

costs of NPOTotal costs

of NPOcosts of NPOcosts of NPO+ + =

1.Procurement

2.Processing

Input Output

desiredproducts

unwantedNPO

Throughput

(Marketing)

10-30% of total production

costs

3. Disposal

Source: Fischer et al.


Life Cycle Costing Some Figures

Why?

• Kienbaum Consultants International estimates that LCC discovers cost reduction potentials of 1-2% of total costs.

• GtZ estimates that total NPO costs account for 10-30% of total production costs and that LCC enables to reduce total production costs 1-5% within one year.

• Bosch-Siemens-Hausgeräte GmbH: In 3 years total waste reduction of 20%, reduction of waste for disposal of 45%.

A reduction of total costs by 1-5% equals increased profits of 20-100%!

A reduction of total costs by 1-5% equals increased profits of 20-100%!


Life Cycle Costing Increased Profitability

Why?

Profit

Productionand other

costs

NPO costs

Production and other

costs

NPO costs

Profit

Additional profits of 20-100%

Source: Wuppertal Institute

Additional profits of 20-100%


Life Cycle Costing Benefits of LCC

Why?

• cost reduction and avoidance;

• profitability enhancement;

• increased product quality;

• staff motivation;

• better decision-making including life cycle aspects;

• satisfying information demands;

• improvement of life cycle performance.

• cost reduction and avoidance;

• profitability enhancement;

• increased product quality;

• staff motivation;

• better decision-making including life cycle aspects;

• satisfying information demands;

• improvement of life cycle performance.

COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE


2. Use improvementpotentials

Life Cycle Costing Steps to take

How?

Non-product output (NPO) as a starting point . . .

1. Make your NPOtransparent

3. Check results and review


Life Cycle Costing Step 1

How?

• Do you know the amount of NPO your company “produces”?

• Do you know the sources of NPO? Where does NPO arise?

• Do you know the costs belonging to NPO?

Identify (most relevant) NPO flows and associated costs

Identify (most relevant) NPO flows and associated costs

1. Make your NPOtransparent

Key questions:



How?

Key questions:

2. Use improvementpotentials

• Identification of most beneficial NPO flows.

• Detailed description of those NPO flows in physical and

monetary units.

• Development and implementation of improvement measures.

“Pick the lowhanging fruits first!”



How?

3. Check results and review

• Monitoring performance.

• Evaluation of performance.

• Development and implementation of further improvement measures.

Key elements:

Ensure continuous improvementEnsure continuous improvement


Life Cycle Costing Further Opportunities

How?

• track other life cycle costs;

e.g. inefficient resource-use

• improve product design, investment decisions etc.

Non-product output (NPO)

Non-product output (NPO)

Further opportunities

Further opportunities

NPO is a good starting point for implementing LCC especially in SMEs, but LCC offers more . . .



How?

In the building sector:

• Provide a common platform for addressing sustainability issues

• Establish baselines based on the life cycle approach

• Develop tools and stategies for achieving adoption of sustainable building practices

• Implementation through pilot projectsSource: www.unepsbci.org

Objective: Promoting a worldwide adoption of sustainable buildings and construction practices

Objective: Promoting a worldwide adoption of sustainable buildings and construction practices



Example

Source: www.wbdg.org

Investment costs + Capital replacement costs- Residual value+ Disposal costs+ Energy and Water costs+ Non-fuel operating, maintenance and repair costs+ other costs i Life cycle costs

All costs are discounted

Investment costs + Capital replacement costs- Residual value+ Disposal costs+ Energy and Water costs+ Non-fuel operating, maintenance and repair costs+ other costs i Life cycle costs

All costs are discounted


Life Cycle Costing Tips for Action!

Tips

• It is not necessary to undertake a detailed material and energy flow analysis at the very beginning.

• To become familiar with LCC you may first choose one type of NPO and figure out how LCC works.

• Start with the most beneficial NPO flow(s).

• Build up a team of several business units accompanying the entire LCC process.

Documents

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 1 The Life Cycle Management Navigator Life Cycle Costing Training Session