Department of Systems
Engineering and Operations Research
OR 651 – Military Operations Research: Cost Analysis
Spring, 2008
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 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 communities; 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, Special Assistant to
the President for International Projects
Institute
for Defense Analyses
sbalut@ida.org
Andrew
Loerch, Associate Professor
aloerch@gmu.edu
Timothy
Anderson, Adjunct Professor
tandersb@gmu.edu
Time: Thursday,
Location: Institute for Defense Analyses
Prerequisites: STAT 344 (or equivalent) – Probability
and Statistics for Engineers
OR
541, OR 542 (or equivalent) – Introduction to Operations Research
Textbooks: Course Pack (available at the book store)
Optional texts: Quade,
E.S., Analysis for Public Decisions, 3rd
Edition.
Fisher,
G.H., Cost Considerations In Systems
Analysis.
Proposed Topical Outline and Lecturers:
January 24 Cost Analysis Overview and Statistics
Review
Rm. 1313 D. McNicol,
Institute for Defense Analyses, and
Timothy
Anderson,
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 and
cost-effectiveness 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 short review of the
statistics needed for the course will be given.
January 31 Cost
Effectiveness Analysis
Rm. 1313 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 7 Economics in Cost Analysis
Rm. 1313 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 14 Estimating Relationships - I: Factors and Simple Models
Rm. 1313 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 21 Cost Data
Rm. 1313 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 28 Estimating Relationships - II: Complex Models
Rm. 1313 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 Force Costing
Rm. 1313 L. Roark,
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.
March 13 Spring Break
March 20 Midterm Examination
Rm. 1313
March 27 Cost Progress Curves
Rm. 1313 T. Anderson,
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.
April 3 Production Rate Effects
Rm. 1301 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
Rm. 1313 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
Rm.
1313 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 Software Costing
Rm. 1313 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.
May 1 Project Presentations
Rm. 1313 T. Anderson,
Final Examination Thursday,
May 8,
Rm. 1301 T.
Anderson,
Performance Evaluation:
Homework
Assignments 10%
Midterm Examination
25%
Final Examination 25%
Project in Cost
Analysis 30%
Participation in
discussions 10%