MIest 16888 Today' s Topics Multidisciplinary System · An mdo value framework Design Optimization(MSDO) Lifecycle cost models Design for Value Value metrics valuation techniques Lecture 24 Value-based mdo 10May2004 Aircraft example Spacecraft Example Karen willcox Olivier de weck Acknowledgments: Jacob Markish and Ryan Peoples e Massachusetts Institute of Technology.Prof de Weck and Prof Willcox e Massachusetts Insttute of Technology.Prof de Weck and Prof Willco Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics Lest Optimal Design Design Example We need to design a particular portion of the wing Traditionally, design has focused on performance Traditional approach: balance the aero& structural requirements, e.g. for aircraft design We should consider cost: what about an option that is very cheap to optimal= minimum weight manufacture but performance is worse? Increasingly, cost becomes important manufacturing cost? → aerodynamics? structural dynamics? 85% of total lifecycle cost is locked in by the end of aircraft demand?← preliminary design aircraft price? environmental impact? But minimum weight≠ minimum cost≠ maximum value How do we trade performance and cost? What is an appropriate value metric? How much performance are we willing to give up for $100 saved? What is the impact of the low-cost design on price and demand of this aircraft? What is the impact of this design decision on the other aircraft I build? e Massachusetts Institute of Technology -Prof de Weck and Prof. Willcox Engineering Systems Division and Dept of Aeronautics and Astronautics What about market uncertainty?
1 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Design for Value Lecture 24 10 May 2004 Karen Willcox Olivier de Weck Acknowledgments: Jacob Markish and Ryan Peoples Multidisciplinary System Multidisciplinary System Design Optimization (MSDO) Design Optimization (MSDO) 2 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Today’s Topics Today’s Topics • An MDO value framework • Lifecycle cost models • Value metrics & valuation techniques • Value-based MDO • Aircraft example • Spacecraft Example 3 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Optimal Design Optimal Design • Traditionally, design has focused on performance e.g. for aircraft design optimal = minimum weight • Increasingly, cost becomes important • 85% of total lifecycle cost is locked in by the end of preliminary design. • But minimum weight z minimum cost z maximum value • What is an appropriate value metric? 4 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Design Example Design Example • We need to design a particular portion of the wing • Traditional approach: balance the aero & structural requirements, minimize weight • We should consider cost: what about an option that is very cheap to manufacture but performance is worse? aerodynamics? • How do we trade performance and cost? • How much performance are we willing to give up for $100 saved? • What is the impact of the low-cost design on price and demand of this aircraft? • What is the impact of this design decision on the other aircraft I build? • What about market uncertainty? structural dynamics? manufacturing cost? aircraft demand? aircraft price? tooling? environmental impact?
Mlesd Value Optimization Framework 50 Mlesd Challenges b Cost and revenue are difficult to model Modu often models are based on empirical data how to predict for new designs Uncertainty of market Perto ng program leng Module de Valuing flexibility Performance/financial groups even more uncoupled than Massachusetts Institute of Technology -Prof de Weck and Prof willcox e Massachusetts Insttute of Technology. Prof de Weck and Prof Willcox Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics MIest Cost Model Lifecycle Cost Need to model the lifecycle Modul cost of the system Life cycle e Design-Manufacture erforman Module "Value"metric Lifecycle cost Total cost of program over 85% of Total LCC is locked Revenu in by the end of preliminary Time (From Roskam, Figure 2. e Massachusetts Institute of Technology -Prof de Weck and Prof. Willcox B Massachusetts Insttute of Technology-Prof de Weck and Prof Willcox Engineering Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics
5 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Cost Module “Value” metric Performance Module Aerodynamics Structures Weights Mission Stability & Control Revenue Module Value Optimization Framework Value Optimization Framework Manufacturing Tooling Design Operation Market factors Fleet parameters Competition “Optimal” design 6 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Challenges Challenges • Cost and revenue are difficult to model – often models are based on empirical data – how to predict for new designs • Uncertainty of market • Long program length • Time value of money • Valuing flexibility • Performance/financial groups even more uncoupled than engineering disciplines 7 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Cost Model Cost Model Need to model the lifecycle cost of the system. Life cycle : Design - Manufacture - Operation - Disposal Lifecycle cost : Total cost of program over life cycle 85% of Total LCC is locked in by the end of preliminary design. Cost Module “Value” metric Performance Module Revenue Module 8 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Lifecycle Cost Lifecycle Cost 0 20 40 60 80 100 65% Conceptual design Preliminary design, system integration Detailed design Manufacturing and acquisition Operation and support Disposal Time Impact on LCC (%) 85% 95% (From Roskam, Figure 2.3)
Mlesd Non-Recurring Cost 16888 M|歌 d Development Cost Model男 Cost incurred one time only Cashflow profiles based on beta curve Engineering airframe design/analysi Typical development time -6 years configuration control Learning effects captured-span, cost Toolin. systems engineering Ing design of tools and fixtures fabrication of tools and fixtures development support ght testing from Markish) e Massachusetts Institute of Technology.Prof de Weck and Prof Willcox e Massachusetts Insttute of normalized time prof de Weck and Prof Willcox Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept. of Aeronautics and Astronautics Lest Recurring Cost Learning Curve Cost incurred per unit As more units are made, the recurring cost per Labor unit decreases fabrication assembly This is the learning curve effect Material to manufacture e.g. Fabrication is done more quickly, less raw material aterial is wasted purchased outside production Y=Y urchased equipment Production support Y number of hours to produce unit X n= log b/log 2 production tooling support b= learning curve factor (-80-100%) engineering support B Massachusetts Institute of Technology -Prof de Weck and Prof. Willcox e Massachusetts Institute of Technology- Prof de Weck and Prof Willcox Engineering Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics
9 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Non-Recurring Cost Recurring Cost Cost incurred one time only: Engineering - airframe design/analysis - configuration control - systems engineering Tooling - design of tools and fixtures - fabrication of tools and fixtures Other - development support - flight testing Engineering Tooling Other 10 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Development Cost Model Development Cost Model • Cashflow profiles based on beta curve: • Typical development time ~6 years • Learning effects captured – span, cost 1 1 ( ) (1 ) D E c t Kt t 0 0.01 0.02 0.04 0.05 0.06 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 normalized time Support Tool Fab Tool Design ME Engineering normalized cost (from Markish) 11 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Recurring Cost Recurring Cost Cost incurred per unit: Labor - fabrication - assembly - integration Material to manufacture - raw material - purchased outside production - purchased equipment Production support - QA - production tooling support - engineering support Labor Material Support 12 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Learning Curve Learning Curve As more units are made, the recurring cost per unit decreases. This is the learning curve effect. e.g. Fabrication is done more quickly, less material is wasted. n x Y Y x 0 Yx = number of hours to produce unit x n = log b/log 2 b = learning curve factor (~80-100%)
MIest Learning Curve 16888 Mlesd Airplane Related Operating Costs 50, CAPITAL COSTS: CASH AIRPLANE RELATED Financing OPERATING COSTS Crew b=09 0.55 reduced by CAROC Maintenance a factor of GPE Depreciation GPE Maintenance Control Communications Unit number Typical LC slopes: Fab 90%, Assembly 75%, Material 98% CAROC is only 60%ownership costs are significant e Massachusetts Institute of Technology - Prof de Weck and Prof Willcox e Massachusetts Insttute of Technology.Prof de Weck and Prof Willco ngineering Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics MIest Value metric What is value? Objective function could be different for each stakeholder Need to provide a e.g. manufacturer Vs airline vs. flying public quantitative metric that Program related parameters vs technical parameters incorporates cost, performance and cost, price, production quantity, timing revenue information Traditionally program-related design uncoupled from technical design erforman "Value" metric Module In optimization, need to Custoner es Customer value derived from about what metric we choose Shareholder value derived is directly related to customer Revenu satisfaction e Massachusetts Institute of Technology -Prof de Weck and Prof. Willcox 16 From Markish, Engineering Systems Division and Dept of Aeronautics and Astronautics Fig. 1, pg 20 e Massachusetts Institute of Technology- Prof de Weck and Prof Willcox Engineering Systems Division and Dept of Aeronautics and Astronautics
13 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Learning Curve Learning Curve 0.55 0 0.2 0.4 0.6 0.8 1 0 10 20 30 40 50 Unit number Cost of unit b=0.9 Typical LC slopes: Fab 90%, Assembly 75%, Material 98% Every time production doubles, cost is reduced by a factor of 0.9 14 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics CASH AIRPLANE RELATED OPERATING COSTS: Crew Fuel Maintenance Landing Ground Handling GPE Depreciation GPE Maintenance Control & Communications Airplane Related Operating Costs Airplane Related Operating Costs CAROC is only 60% - ownership costs are significant! CAROC 40% 60% Capital Costs CAPITAL COSTS: Financing Insurance Depreciation 15 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Value Metric Value Metric Need to provide a quantitative metric that incorporates cost, performance and revenue information. In optimization, need to be especially carefully about what metric we choose... Cost Module “Value” metric Performance Module Revenue Module 16 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics What is Value? What is Value? • Objective function could be different for each stakeholder e.g. manufacturer vs. airline vs. flying public • Program related parameters vs. technical parameters cost, price, production quantity, timing • Traditionally program-related design uncoupled from technical design Customer Value Shareholder Value Product Quality Schedule Cost Economic Value Added Demand Revenue EBIT System Design Price From Markish, Fig. 1, pg 20 Customer value derived from quality, timeliness, price. Shareholder value derived from cost and revenue, which is directly related to customer satisfaction
MIest Value metrics 16888 Valuation Techniques Traditional Metrics Augmented Metrics How much will I need to invest? performance cost How much will I get back? weight revenue When will I get my money back speed profit How much is this going to cost me? quietness How are you handling risk& uncertainty? emissions Investment Criteria commonality Net present value The definition of value will vary depending on your system Discounted payback and your role as a stakeholder, but we must define a Internal rate of return quantifiable metric · Return on investment e Massachusetts Institute of Technology - Prof de Weck and Prof Willcox e Massachusetts Insttute of Technology. Prof de Weck and Prof Willco ngineering Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics Mlesd Net Present Value(NPV) Discounted Cash Flow(DCF) E5.71 Measure of present value of various cash flows in different Forecast the cash flows, Co, C1,., C of the project over its economic life Cash flow in any given period discounted by the value of a Treat investments as negative cash flow dollar today at that point in the future Determine the appropriate opportunity cost of capital "Time is money (i.e. determine the a dollar tomorrow is worth less today since if properly Use opportunity cost of capital to discount the future invested, a dollar today would be worth more tomorrow cash flow of the project Rate at which future cash flows are discounted is Sum the discounted cash flows to get the net present determined by the discount rate"or " hurdle rate value(NPV) Discount rate is equal to the amount of interest the investor could earn in a single time period(usually a year) if s/he were to invest in a"safer investment e Massachusetts Institute of Technology -Prof de Weck and Prof. Willcox e Massachusetts Institute of Technology- Prof de Weck and Prof Willcox Engineering Systems Division and Dept of Aeronautics and Astronautics Engineering Systems Division and Dept of Aeronautics and Astronautics
17 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Value Metrics Value Metrics performance weight speed Traditional Metrics cost revenue profit quietness emissions commonality ... Augmented Metrics The definition of value will vary depending on your system and your role as a stakeholder, but we must define a quantifiable metric. 18 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Valuation Techniques Valuation Techniques Investor questions: • How much will I need to invest? • How much will I get back? • When will I get my money back? • How much is this going to cost me? • How are you handling risk & uncertainty? Investment Criteria • Net present value • Payback • Discounted payback • Internal rate of return • Return on investment 19 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Net Present Value (NPV) Net Present Value (NPV) • Measure of present value of various cash flows in different periods in the future • Cash flow in any given period discounted by the value of a dollar today at that point in the future – “Time is money” – A dollar tomorrow is worth less today since if properly invested, a dollar today would be worth more tomorrow • Rate at which future cash flows are discounted is determined by the “discount rate” or “hurdle rate” – Discount rate is equal to the amount of interest the investor could earn in a single time period (usually a year) if s/he were to invest in a “safer” investment 20 © Massachusetts Institute of Technology - Prof. de Weck and Prof. Willcox Engineering Systems Division and Dept. of Aeronautics and Astronautics Discounted Cash Flow (DCF) Discounted Cash Flow (DCF) • Forecast the cash flows, C0, C1, ..., CT of the project over its economic life – Treat investments as negative cash flow • Determine the appropriate opportunity cost of capital (i.e. determine the discount rate r) • Use opportunity cost of capital to discount the future cash flow of the project • Sum the discounted cash flows to get the net present value (NPV) NPV C0 C1 1 r C2 1 r 2 ! CT 1 r T