Every day, manufacturing managers are asked to balance competing interests for capital investments. Advocates for each of these investments all believe in the importance of the projects they propose, and for good reason. One of the challenges that frequently arises between business owners and the technical experts they employ is a lack of common language and understanding of what things the parties pay closest attention to.
With multiple projects competing for the same money, business and finance people frequently compare the expected return of your project to what is often called the hurdle rate—the minimum return required for them to invest in your project. If the project proposed is a riskier one, that project often comes with a risk premium—in other words, a higher return rate will be needed for your project to begin.
To help establish a rate of return for your project, you must first quantify the problem you are attempting to solve. Some of these are easily connected to a cash value, and some are a bit more difficult. Nonetheless, it is essential to describe the precise scope of the problem. There are multiple metrics you can use to put a metric on the problem:
- Work hours (number of workers multiplied by the average hours worked)
- Compliance rates (represented as percentages or actual numbers)
- Material waste (which can be related back to lost money by you if you have access to financials or it can be done by finance itself)
- Throughput (or similar measures of efficiency/output)
This list is non-exhaustive, as there are other metrics you can apply to quantify the problem you are attempting to solve. What matters is not simply discussing the problem, but discussing the scope of it through actual measures.
It is also important for technical professionals to analyze the return realized that can be attributed to the project. This means analyzing the change of the metric(s) established at a set time period after the implementation of the solution. If the metric in question has a monetary value, determining ROI is the next step.
This can be trickier than it seems because profit does not always equal cash. Since your initial capital investment is in cash, it is wise to compare it to cash after the fact. This requires working with your accounting department, vendor or a combination of the two to determine your outcome and better prepare leadership for smart capital investments in the future.
Lee Lohff is business analyst at Interstates Control Systems Inc., a certified member of the Control System Integrators Association (CSIA). For more information about Interstates Control Systems, visit its profile on the Industrial Automation Exchange.