2011 IEEE International Conference on Prognostics and Health Management, Denver, Colorado, June 20-23, 2011

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


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

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