Copyright © 2007 Lignum Consulting Inc., Sepp Gmeiner September 19th, 2012 Equipment Justification Network Meeting

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: [email protected] Web: www.lignum-consulting.com


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Intuition

Documents

Copyright © 2007 Lignum Consulting Inc., Sepp Gmeiner September 19th, 2012 Equipment Justification Network Meeting