OR 651 – Military Operations Research: Cost Analysis
Spring, 2003
Abstract: Cost Analysis is a sub-discipline of
Operations Research. While drawing on other disciplines (e.g., Managerial Accounting,
Econometrics, Systems Analysis, etc.), Cost Analysis uses the basic tools of
Operations Research to solve a specific class of public sector problems. Cost
Analysis is an inquiry to assist decision-makers in choosing preferred future
courses of action by evaluating selected alternatives on the basis of their
costs, benefits, and risks. Cost Analysis is distinctly different from Cost
Estimating in that projecting future courses of action usually requires
mathematical modeling, hence the link to Operations Research and Economic
Analysis. This course introduces the basic concepts of Cost Analysis.
This
class will follow a lecture format, but there will be a different lecturer each
week. An important topic in Cost
Analysis is scheduled for each lecture. We draw on the experiences of experts
from the Cost Analysis research and practitioner community; hence, this course
provides a unique introduction to the topic. This course is particularly useful
for students of Operations Research, Public Policy, Information and Software
Systems Engineering, and Systems Engineering.
Course Coordinators: Stephen J. Balut, Director
Cost
Analysis and Research Division
Institute
for Defense Analyses
sbalut@ida.org
Andrew
Loerch, Associate Professor
aloerch@gmu.edu
Time: Thursday
Location: Institute for Defense Analyses
Room
1307
Prerequisites: STAT 354 (or equivalent) - Applied
Statistics
OR
540 (or equivalent) - Management Science
Textbooks: Course Pack for OR 651 available at the GMU Bookstore
Topical Outline and Lecturers:
January 23 Cost
Analysis Overview
Andrew
Loerch,
Presents a concise definition of cost
analysis, its history and evolution to the present time. Cost analysis is differentiated from related
disciplines, including operations research, systems analysis,
cost-effectiveness analysis, and policy analysis. Each ensuing lecture topic will be described
along with the contribution of the topic to cost analysis. Those taking the course for graduate credit
will be advised of testing, grading and required class projects. A review of statistics will be presented.
January 30 Cost Effectiveness Analysis
D.
Levine, Institute for Defense Analyses
First postulated by RAND Corporation
analysts in the 1950s, cost effectiveness analysis has been accepted as the
principle analytical methodology for making resource allocation decisions in
the government. In the Department of
Defense (DoD), it is applied to choices among weapons systems, support
concepts, training methods, and many other military outputs. This lecture will highlight the
methodology: a clear statement of the
objective(s), a broadly based search for alternatives for meeting the
objective, and the quantitative analysis of the costs and effectiveness of each
alternative. Preference is indicated for
the alternative with minimum cost for achieving a desired level of
effectiveness (or maximizing effectiveness among equal cost alternatives).
February 6 Economics in Cost Analysis Homework
Problems due
S.
Horowitz, Institute for Defense Analyses
Presents the economic underpinnings of
cost analysis. In particular, the cost
function will be derived from the underlying production function relating input
and output quantities. In addition, the
rationale for discounting future costs and benefits will be given. Finally, various criteria will be compared
for choosing among alternative investment projects: cost-benefit ratio, internal rate of return,
and discounted present value.
February 13 Estimating Relationships - I: Factors and Simple Models HW, HW data,
due
P.
Lurie, Institute for Defense Analyses
Introduces simple factor models and
linear regression analysis as tools for establishing cost estimating
relationships (CERs). Topics to be
covered include measures of model fit, graphical goodness-of-fit diagnostics,
significant tests, confidence intervals, and cost prediction. The lecture will use a real-world example of
an aircraft airframe cost model to help illustrate the methodologies covered.
February 20 Cost Data
J.
Cloos, Institute for Defense Analyses
Emphasizes the requirement and importance
of accurate, consistent and relevant data for use in cost estimating and
analysis. The discussion will focus on various
dimensions of cost data and how such data should be presented for analytical
purposes. The overall cost data process
will be described, to include identifying data requirements, assessing
potential sources, and selecting methods for collecting and adjusting
data. Specific areas to be covered
include definitions of costs and cost structures (e.g., Work Breakdown
Structures), major sources of cost data, both contractor (e.g., Cost
Performance Reports) and government (e.g., Future Years Defense Program),
consistent measurement in dollar terms (e.g., normalization), and the
implications of time value of money on costs and investments (e.g., net present
value).
February 27 Estimating Relationships - II: Complex Models HW
P.
Lurie, Institute for Defense Analyses
This lecture is a continuation of the
lecture on “Simple Models.” The lecture
will introduce more realistic non-linear models that are often used to model
cost relationships in practice. The same
aircraft airframe example used in the earlier lecture will be used again to
guide the students through model estimation, diagnostics, testing, and
prediction. Also to be covered are
methods of cost risk analysis, which allow the analyst to supplement point
estimates of cost with more informative distribution
on cost.
March 6 Cost Progress Curves
A.
Loerch,
The public generally understands the notion
of the learning curve. This lecture
presents the theory and history of the development of the related cost progress
curve in common use by cost analysts.
The fitting of curve parameters is illustrated using empirical
data. Application of the curve is
illustrated using an example. Extensions
of the cost progress curve are described.
March 13 Spring Break
March 20 Midterm Examination
March 27 Software Costing
T.
Frazier, Institute for Defense Analyses
Describes the background and history of
software cost estimating. The discussion
will focus on software metrics used today; software cost estimation methods;
software cost models; and the predictive accuracy of current models. Finally, the lecture will deal with the
impact of new software engineering practices and tools on software cost
estimating.
April 3 Production Rate Effects
S.
Balut, Institute for Defense Analyses
The relationships between direct and
indirect costs, and fixed and variable costs will be discussed, along with related
implications for possible error in forecasts of the costs in future
periods. A method for separating fixed
and variable costs will be presented.
Two methods for forecasting future costs will be described, both of
which take into account the component of cost that is fixed, thereby avoiding
this source of error in estimates.
April 10 Schedule
Estimating
B.
Harmon, Institute for Defense Analyses
As proposed defense system acquisition programs
approach major decision points, the reasonableness of planned acquisition
schedules must be assessed by DoD representatives. Research into this problem had included the
development of databases and methods of assessing the reasonableness of proposed
acquisition schedules for tactical aircraft, tactical missiles, and unmanned
space systems. The cornerstone of the
methods consists of time estimating relationships (TER’s). TER’s are analogous to CER’s, where the
dependent variable is a time interval instead of cost. This lecture will focus on both the
development of the methods and their application, illustrated using examples.
April 17 Life-Cycle
Costing file2
J.R.
Nelson, Institute for Defense Analyses
Life-cycle cost estimating relationships
and procedures will be presented in the context of the DoD acquisition
process. A hypothetical fighter aircraft
will be used to illustrate the methodology.
The phases of the life-cycle (development, production, operating and
support) will be described, and the components of costs for each element of the
fighter aircraft (airframe, engine, and avionics) will be addressed for these
phases. Constant, then-year and
discounted life-cycle cost funding streams will be discussed.
April 24 Force Costing
J.
Wilson, Institute for Defense Analyses
Introduces the concepts of force and
infrastructure costing. An example will
be used to demonstrate how the tools and techniques taught in earlier sessions
can be used to create a cost estimate for a change in force structure of a
defined force. Infrastructure categories
will be defined and their relationship to forces will be discussed. Important questions the analysts must
consider will be identified along with possible approaches to overcome inherent
shortcomings of available analytical tools and methods. A brief history of force costing and trends
for the future will be presented.
May 1 Project Presentations
Final
Examination Thursday, May 8,
16:15-18:55
Performance
Evaluation:
Midterm Examination 30%
Final Examination 30%
Project in Cost Analysis 40%