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Jeff Freeman

Quality Insider

Justify ROI Before You Buy

But how?

Published: Wednesday, September 3, 2014 - 12:14

You’re about to head off to IMTS next week in search of a solution for your latest manufacturing challenge. With myriad technologies available, it is likely you will find one or more possible solutions. Maybe you have a budget in mind to help you reach the next level of productivity, or maybe you’re only attending the show to explore the possibilities. Regardless of how you get there, you will eventually have to justify the expense to management. You know the solution will save time and money and increase productivity, but how do you prove it?

Companies don’t buy capital equipment on impulse, and your experience and intuition are simply not enough of a justification. If you want to buy technology, you need to prove the benefits gained from the investment. There are a variety of methods that can be used to determine if a technology is a viable option for a company. One such method considers return on investment (ROI). The ROI methodology is a systematic approach to evaluating programs that has been adapted through years of trial and error. The process includes several components:
• Knowing the time period (in years) your company uses to justify capital equipment purchases
• Financially proving improved performance over present performance
• When calculating ROI for a project or task, consider both tangible and intangible benefits.
• Consider your company’s budget cycle. Most companies have an annual budgeting process, which may or may not correspond with the calendar year.

Plugging in the numbers is the easy part; getting the numbers themselves is harder. Don’t do this alone. Recruit as much help as you can get, and be sure to bring in someone from every part of the company. Keep in mind there is no better ally than someone from the accounting group. The more people involved, the easier the process.

Where do we start?

Like many daunting tasks, the best place to start is by identifying opportunities for improvement. A natural place to begin is with your current technology. After all, no one knows your current processes better than you. Is the current process productive? Where are the bottlenecks? Is old technology getting in the way of productivity? For example, at one time a company may have been forced to use a coordinate measuring machine (CMM) to meet a customer’s requirements or to acquire new business. The smallest investment was made, likely a manual CMM, to satisfy the requirement. Today the number of parts measured may have increased and manual measurement may present a bottleneck in the process. Could a newer, automated CMM do the job more efficiently? Is data being gathered and utilized effectively?

Next, establish a baseline for comparison by starting with your current measurement processes. Map the current process by which all analyses and evaluations will be measured. Consider the experience curve and how it relates to your current process. Document to a level needed to exceed the justification of the purchase.

Now that you have a baseline, choose the basis for comparative measurements. Select the parts to be documented, being sure to consider the size and complexity of the part, the quantity of parts, and part numbers. Document each step or task in the process. Don’t overlook anything—often we know a process so well we combine steps or skip them altogether. Now calculate the costs associated with each part, including both recurring costs as well as non-recurring costs.

Go upstream and downstream in your processes, and look at each process and its associated costs. Gain a thorough understanding of how your current process affects upstream and downstream processes and their related costs. Document your findings, compile your analysis, and take a good, hard look at the data. What do you see? Do you have a complete picture of the process? If not, fill in the gaps. If so, it is time to compare other measurement technologies against the baseline for their suitability.

Benchmark each measurement technology candidate against the baseline and each other. Use the same approach that was used to establish the baseline, again considering how processes upstream and downstream will be affected. Rank the possible solutions by performance, price, capability, and how each compares against your ROI requirements. Select those technologies that have the best suitability and ability for justification and repeat the upstream/downstream comparison process for each technology selected. The role of the measurement technology suppliers is important. Suppliers have the solutions and data needed for comparison purposes, and a supplier’s applications engineers have the knowledge to operate the equipment.

Select your preferred solution, as well as other options, and perform your ROI calculations. Here is one such calculator to help you through the process. Collect the information for your analysis and prepare the documentation and justification. Finally, submit the final ROI analysis and documents for approval.

I know from experience that the budget for new technology may not get approved on the first go-around. In smaller shops, where the owner runs the business, the process may be a bit less formal and go more quickly, especially if the owner sees the immediate benefit to the business and decides to make the purchase. In larger companies, with formalized annual budgeting processes, it may take one or more budgeting cycles to procure the equipment. Metrology technology is often not a priority, so you may have to work harder to justify the purchase.

Still, the data collected during verification can be used to improve manufacturing and verification throughput, eliminate scrap and rework, reduce material cost and lower design cost. All of this will improve profitability. Unless you incorporate what you have learned during the verification process and integrate it into all of your business processes, you cannot maximize the investment.

To help you along this journey, visit booth E-5202 at IMTS or visit www.hexmet.us/justify for an ROI calculator, white paper, and video example.

Jeff Freeman is the director of North American Sales Operations for Hexagon Metrology, a Quality Digest content partner.

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About The Author

Jeff Freeman’s picture

Jeff Freeman

Jeff Freeman is the director of North American Sales Operations for Hexagon Metrology Inc. Freeman has more than 30 years of experience in multiple industries as a machinist, a user of most major types of metrology equipment, and in global sales of capital equipment. His passion is working with companies to identify the positive effects that investments in measuring technology can make on operations, as a means of justifying investments in capital equipment.

Comments

You need REAL ROI(tm) to avoid ROI pitfalls like 'justify'

‘Justify’ is a code-word for supporting a predefined decision.  Even though perhaps not intended, using the term predisposes one to cause the described otherwise-sound practices to fail.  This is just one of more than 21 pitfalls that commonly negate the value of typical ROI determinations.