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transcript
copyright © 2007 Lignum Consulting Inc.,
Sepp Gmeiner September 19th, 2012
Equipment JustificationNetwork Meeting
copyright © 2007 Lignum Consulting Inc.
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Questions you should ask about the investment
What exactly do you want?
What does it do for you?
Do you need it now?
What are the alternatives?
What happens if you do not get it (or get it now)?
What are the benefits?
What are the risks involved?
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Questions you should ask…
What assumptions did you make?
What if… The assumptions do not materialize You lose customers Exchange rate changes
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Process
(*) Capital Appropiation Request(or AR = Appropiation RequestDocument of capitalinvestment justification
Modify, delay, cancel…
Recognize the need for capital investment
Request preliminary proposals from possible
Vendors
Analyse the costs / benefits
Assess associated risks
C.A.R. (*)
Time line and project management description
Recommended solution
Project approved
Final project definition, Final negotiation
Start Project Execution, Purchase
ProjectExecution
No
YesYes
No
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Focus today
(*) Capital Appropiation Request(or AR = Appropiation RequestDocument of capitalinvestment justification
Modify, delay, cancel…
Recognize the need for capital investment
Request preliminary proposals from possible
Vendors
Analyse the costs / benefits
Assess associated risks
C.A.R. (*)
Time line and project management description
Recommended solution
Project approved
Final project definition, Final negotiation
Start Project Execution, Purchase
ProjectExecution
No
YesYes
No“Must have”
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How urgently do we need it?
“Must have” Compressor, Dust collector Sprinkler Safety upgrade mandated by Ministry of Labour Unfixable mission-critical equipment
“Much better off with this investment” Upgrading existing, still functioning equipment New processes New technology
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“Must have”
Impossible to calculate a financial justification for the investment, because the “doing-nothing” option is (practically) not available
Use to compare different investment option
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Methods to calculate justification
Payback Period
Return-on-Investment Calculation Accrual Accounting rate-of-return method (ROI) Internal rate of return Net Present Value
etc.
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Payback period
Total I nvestment
Payback period =
Benefit (per year)
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“Much better off with this investment”
All investment justification calculations are useful
Payback period is the right “starter” calculation
All calculations depend on good input data Result depends on accuracy of input data Some Input data are based on assumptions Some input data are based on forecasts Some input data are based historical data with
questionable accuracy
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Example
Current cost: 2 persons x 16 $/ hour x 8 hour/ day = 256.00$ per day
Projected cost 1 person x 16 $/ hour x 6 hour 96.00$ per day
Cost savings 160.00$ per day
Working days 250 per year
(52 weeks per year-10 Holiday=50 weeks x 5 working days/ week= 250 working days)
Cost savings 40,000$ per year
Total I nvestment 95,000$
Payback period = = 2.375 = 2.5 years
Benefi t (per year) 40,000$
Example: Purchase price of equipment: 95,000$
Benefit: improved operation
currently 200 pcs/day done by 2 persons ($16/hr)full time
1 piece 1.5min /piece with only 1 operator (200 pieces in 6 hours)
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Total Investment
Main supplier purchase price/ cost Equipment price, Exchange cost Initial tooling Test run (material, travel cost)
Secondary suppliers purchase price /cost
Additional cost Freight, insurance, duty, offloading, rigging
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Total Investment
Installation cost Technicians Connect to infrastructure (electricity, compressed
air, dust collection… Changes to building (walls, pits…) Test material
Removing old other equipment incl. disposal cost
Start-up cost Hiring cost Training
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Assumptions
Sales
Material cost
Labour cost
Etc.
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Benefits
Type of investments Benefits
New processes - incremental sales/gross margin
Capacity - incremental sales/gross margin
Quality - incremental sales, increased margins, lower warranty cost
Reduced lead time - increased sales, increased margin, WIP reduction
Inventory reduction - less capital tied up in company, reduced obsolescence, increased flexibility, less inventory control cost.
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Benefits
Type of investments Benefits
Process improvement – material cost reduction, labour cost reduction, consumable reduction, overhead reduction, capacity increase, waste reduction, energy consumption improvement
Replacement investment – maintenance cost reduction, labour cost, up-time, capacity
Flexibility improvement – set-up time reduction, product variety, mass customization, lean manufacturing,
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Benefits
Think or simulate:
If you do this investment, what details will change on:
profit and loss statement
balance sheet
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Historical data
Data is seldom in the format you need them
Data is often mixed with other data
Data is not available
Accuracy is questionable
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Intangible
Not measurable in dollars & cents
Difficult to quantify Brand name Customer Service Ease of doing business with On-time & complete performance
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Intuition - Gut feeling
"Never ignore a gut feeling, but never believe that it's enough.
Indicators
“Sorry Sepp, I’m not happy . I can feel it my bones!”
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Thank you.
Questions?
You can reach me at:Sepp Gmeiner Lignum Consulting 6-91 Rameau Dr. Toronto, ON M2H 1T6 Cell: 416-707-8776 Phone: 416-497-1849 Fax: 416-497-26 Skype: seppgmeiner E-mail: s.gmeiner@lignum-consulting.com Web: www.lignum-consulting.com
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Intuition