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Using Real Options to Manage Condition-Based Maintenance Enabled by PHM



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Using Real Options to Manage Condition Based Maintenance Enabled by PHM Gilbert Haddad Peter Sandborn and Michael Pecht Center for Advanced Life Cycle Engineering Department of Mechanical Engineering University of Maryland College Park MD USA ghaddad calce umd edu Abstract This work proposes a new economic approach that can form a cost benefit risk basis for optimum decision making for systems with prognostic capabilities and a method to assess the value of PHM for its user after a prognostic indication PHM potentially enables performance based logistics condition based maintenance and reduced life cycle cost When an anomaly is detected in a system and the remaining useful life is estimated the user has to make a decision about how to operate or manage the system given a set of constraints or requirements e g to maximize availability This paper proposes a new economic basis for evaluating the flexibility enabled by prognostic and health management systems The proposed framework is based on Real Options theory for valuating the options arising through the use of PHM In the context of PHM an option represents the purchase of an opportunity to take a particular action in the future The underlying assets are not tradable securities as they would be in financial options but rather they are cost avoidance opportunities or mission values We provide two potential applications to illustrate the new model for electronic systems in a commercial aircraft used by a commercial airline and wind farms Keywords component decision support system maintenance optimization real options economic analysis post prognostic indication PHM CBM avilability I INTRODUCTION Prognostics and health management PHM is discipline consisting of technologies and methods to assess the reliability of a product in its actual life cycle conditions to determine the advent of failure and mitigate system risks 1 2 It is a technology that allows complex systems to shift from traditional maintenance scheduled or



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