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 12

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 2 Life Cycle Costing The 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 reduce costs and 2. improve life cycle performance 1. reduce costs and 2. improve life cycle performance

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 3 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.

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 4 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.

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 5 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

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 6 Life Cycle Costing Information Gap Why? Disposal costs are just the tip of the iceberg costs for disposal other life cycle costs

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 7 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.

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 8 Life Cycle Costing Cost Reduction & Profitability Enhancement Why? You pay at least 3 times for your non-product output (NPO) costs of NPO Total costs of NPO costs of NPO ++= 1. Procurement 2. Processing InputOutput desired products unwanted NPO Throughput (Marketing) 10-30% of total production costs 3. Disposal Source: Fischer et al.

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 9 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 %! A reduction of total costs by 1-5% equals increased profits of %!

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 10 Life Cycle Costing Increased Profitability Why? Profit Production and other costs NPO costs Production and other costs NPO costs Profit Additional profits of % Source: Wuppertal Institute Additional profits of %

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 11 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 ADVANTAGE

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 12 2.Use improvement potentials Life Cycle Costing Steps to take How? Non-product output (NPO) as a starting point Make your NPO transparent 3. Check results and review

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 13 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 NPO transparent Key questions:

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 14 Life Cycle Costing Step 2 How? Key questions: 2.Use improvement potentials 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 low hanging fruits first!”

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 15 Life Cycle Costing Step 3 How? 3. Check results and review Monitoring performance. Evaluation of performance. Development and implementation of further improvement measures. Key elements: Ensure continuous improvement

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 16 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) Further opportunities NPO is a good starting point for implementing LCC especially in SMEs, but LCC offers more...

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 17 Life Cycle Costing Further Opportunities 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 projects Source: Objective: Promoting a worldwide adoption of sustainable buildings and construction practices

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 18 Life Cycle Costing Further Opportunities Example Source: 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

CSCP, UNEP, WBCSD, WI, InWEnt, UEAP ME Life Cycle Management Navigator: 12_PR_LCC 19 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.