# Posts Tagged "Pay for PLM"

In the previous posts regarding PLM ROI ( Part 1, and Part 2, we introduced the hierarchy of strategic objectives, business targets and business costs. Examples were provided of all these categories.

In this post, lets look at some examples of how to calculate business costs and how savings can be derived from these. We will look at two examples: time searching for documents and manufacturing rework. The first example represents an efficiency gain and the second is a cost saving.

### Time searching for documents or information

Assumptions:

• Burden rate for engineer = \$70/hr
• Number of engineers = 120
• Hours per week = 40
• Weeks per year = 48
• Time spent looking for documents (before PLM) = 2 hrs/week
• Time spent looking for documents (after PLM) = 1.5 hrs/week

Cost:

• Before PLM – \$806,400 (this is obtained by multiplying the first five quantities together)
• After PLM – \$604,800 (this is obtained by multiplying the first four and the last quantities together)

Savings:

\$201,600

### Manufacturing Rework

Assumptions:

• Manufacturing Costs = \$2,290,000,000
• Rework as a % of manufacturing costs = 1%
• % of rework costs resulting from engineering (before PLM) = 25%
• % of rework costs resulting from engineering (after PLM) = 20%

Cost:

• Before PLM – \$5,725,000
• After PLM – \$4,580,000

Savings:

\$1,145,000

A few comments on these example calculations:

1. The majority of the business costs can be calculated using addition or multiplication
2. Efficiency gains are normally smaller than cost savings because of the nature of production centered businesses
3. Calculation of ROI for PLM can easily be handled in a spreadsheet; this can also be used to produce graphs

Of course, anyone looking at these calculations will immediately have two questions: what is the source of the raw data and how do you arrive at the savings?

Here are some suggestions for deriving the data required:

1. In the case of the time spent looking for documents, one can conduct interviews and ask participants to estimate the quantity
2. A more efficient way of doing this is by sending out a online survey to selected individuals
3. It is possible that IT have logs of various systems and can derive data on time spent in these systems
4. Manufacturing rework is often recorded in the official accounts of the organization and can be derived form this source
5. Alternatively, rework may be tracked on the shop floor to measure efficiency
6. In the case of savings, there are industry benchmarks available from research firms who track this information
7. Often, participants will be able to give ranges of what they think the savings will be
8. If an organization has an issue or quality tracking system, then this can be a useful source of data

Once all the savings are calculated, it is a matter of spreadsheet manipulation to produce results and graphs. Below is an example of a cash flow projection:

Tata Technologies has a complete suite of tools that can help with ROI calculations. Consult any of your contacts in our organization or email

info.americas@tatatechnology.com

In our previous blog post Does PLM Pay? Part 1, we set the stage for calculating PLM return on investment and defined the hierarchy of Strategic Objectives, Business Targets and Business Costs.

Lets look at an example of this hierarchy:

The strategic objective is reducing time to market. The example shows two ways this can be done:

1. Improving your bid response process will allow you to get back to potential customers quicker and speed up the overall time of enquiry to delivered product. PLM can certainly help with the bid response process by automating approval workflows, having all documents in one place and producing accurate BOM’s.
2. Once a customer order is received, the delivery of product will have to be managed by some sort of project management team. PLM can help here by providing a inclusive project management environment that coordinates a large team. Poor project management will result in overruns and increase time to market.

Given these business targets, we need to put actual costs against them. The example gives four savings to which we can attach costs:

1. Effort to process bids – it takes a time to respond to a bid request or query. In organizations that are dealing with complex products, this effort can be spread across multiple people (engineering, finance, manufacturing etc.) and can take a large amount of cumulative time. A cost can be attached to this. Any reduction in this cost as a result of implementing a PLM system will be a saving. Note this is an example of a efficiency gain (see Part 1).
2. Profit from additional bids – Assuming that a PLM system allows bids to be turned around more quickly and with greater accuracy, the organization can expect to be more successful with winning business. More bids can translate into additional revenue and profits. Profits can be viewed as negative costs and would contribute to an ROI as a subtraction from costs. Note that this is an example of cost savings (see Part 1).
3. Effort to manage programs – Often a product producing organization will have a separate function which focuses on managing programs and projects. (office of program management, Director of Programs etc.). If the process of managing programs could be improved by a PLM system, then the potential exists to have less program managers and save personnel costs. Note this is an example of a efficiency gain (see Part 1).
4. Late Penalties – Product delivered late to a customer can result in contractual late penalties, which are a direct expense to an organization. If we can improve project management by implementing PLM, this can prevent project overruns and late penalties. Note this is an example of a cost savings (see Part 1).

These four examples represent the 43 total business costs that can be impacted by a successful PLM implementation.

In Part 3 we will look at some examples of calculating actual costs.  For more information, email us at Info.Americas@tatatechnologies.com

Here is a scenario familiar to many PLM professionals:- a project is initiated to implement or enhance a PLM system within an organization. All the participants are excited and everybody can clearly see the benefits to processes, collaboration and data security. All the pieces are in place; pricing, implementation schedule, software requirements, training plan – down to the last detail.

The champion starts getting all the signatures required to issue the purchase order. VP of engineering – done. CIO – done. CAD manager – done.

Then the fateful moment arrives and the champion walks into the CFO’s office. The first question out of his mouth is “You want to spend this money! What’s the return on investment?” And there it stops.

So, how do you calculate an ROI for a PLM initiative? The remainder of this post and the follow on articles will give an answer to the question. Here are the various reasons why you would want to calculate an ROI for PLM:

1.  To justify the project to a Finance department (scenario above)
2. For presentation to a Board of Directors. If the project is substantial enough, this is a possibility
3. The object of the CFO is correct – a PLM project should result in real, quantifiable savings
4. Savings from the investment over a period of time will improve the organization’s competitiveness
5. Savings will allow for company expansion as improved cash flow can be invested in other areas

The approach relies on breaking down PLM impact areas into categories that align with business targets. Consider the following hierarchy:

The strategic objectives at the top of the pyramid are common to all companies and can be supported by PLM systems in one way or another. Of course, PLM is not the only contributor to these objectives as other business initiatives can help meet these goals. Supporting these strategic initiatives are 22 business targets (more on this in Part 2) which are further divided into 43 business cost (more on this in Part 3).

Before we start describing the targets and costs, a definition of the types of costs used in ROI calculations is needed. There are two categories of costs – referred to as efficiency gains and cost saving. The illustration below gives examples of this division

We will start looking at some specific targets in Part 2.   For more information, email us at Info.Americas@tatatechnologies.com