1 justifying automation november 19, 2003 revised september 13, 2006
TRANSCRIPT
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Justifying AutomationJustifying Automation
November 19, 2003
Revised September 13, 2006
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AgendaAgenda
The Anatomy of a Capitol Request
– Example
The Project Roadmap
The 10 Steps to Justification
– Example
The 7 Deadly Sins of Failed Justification
A New ROI Tool to Do It Right
Credits
Demo
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One Winter Day in Wisconsin….One Winter Day in Wisconsin….
Honey, we need a new snowblower.
Why?
Ours is old..
How Much?
$2,200…..on sale!.
Our’s work?
yes.
no.
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The Anatomy of a Capitol Request:The Anatomy of a Capitol Request:
“Honey, we need a new snowblower.”
Economic buyer,
Management
End-user,Gaining buy-in,
Ownership
Justification?
Specifications
Scope of Work
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What Did We Miss?What Did We Miss?
The cost of not buying a new snowblower.
Any money we can make with a new snowblower.
E-bay value of old one.
The intangible joy of owning a new one.
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Project Road MapProject Road Map
REALIZEREALIZE
SPONSOR/SUPPORTSPONSOR/SUPPORT
DIRECTIONDIRECTION
JUSTIFYJUSTIFY
DESIGNDESIGN
BUILDBUILD
Checkmetrics
?
Checkmetrics
?
Consider
Board/Management?
Feasibility, Preliminary Cost/Benefit, Options
Return On Investment,
Select a team,
Execute…Support,Monitoring
Re-direct
In House
Partner
Both
Monitoring
Re-justify
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Realizing the NeedRealizing the Need
• Supply Side Requirements• EDI• JIT• Volume Discounts• Technology Demands
• Demand Side Requirements• Can’t Meet Demand• Can’t Make Quality• Losing Market Share• Losing Profits• Technology Demands
• You• Gut• Data• Experience• Standards• Directives
Supplier You Customer
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Sponsor/SupportSponsor/Support
Identify the “affected and involved” and develop support– Senior Management / The Economic Buyer…involved– The Current or Future Owner….affected– Technology Partners….involved– The Customer(s)….affected
Maintain your position as an agnostic soldier Provide data to supplement your gut Leverage:
– Fear of competitive disadvantage.– Worst case scenarios– Guilt by association: ”now that you know about this problem…”
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Your ConstraintsYour Constraints
Your NeedsYour Needs
Pick a DirectionPick a Direction
Develop aTeam
Develop aTeam
Secure aBudget
($+Time)
Secure aBudget
($+Time)
ChampionChampion
Users(Buy in)Users
(Buy in)
3rd Parties(HK)
3rd Parties(HK)
Study What’sBeen Done
Study What’sBeen Done
FreshIdeasFreshIdeas
Prelim DesignsPrelim Designs
PricePrice PlanPlan SchedSched
Prepare Your CasePrepare Your Case
ProjectSponsorProject
Sponsor
Pre-Justification Feasibility Testing(aka “Concept Study”)
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The 10 Steps to JustificationThe 10 Steps to Justification
1. Define the real task at hand
2. Define the planning horizon
3. Define your objectives based on your “Realization”
4. Specify the alternatives
5. Estimate the cash flows for each alternative
6. Specify the interest rate
7. Compare the alternatives
8. Perform sensitivity analysis
9. Select the best alternative
10. Check your results
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1. Identify Your 1. Identify Your RealReal Task Task
“To Protect and Serve”
Your task is NOT to justify theproject, it is to make the BEST use of your company’s money.
You’ve GOT to be willing to walk away.
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2. Define Your Planning Horizon2. Define Your Planning Horizon
Factors to Consider– Short term thinking kills companies. It is entirely possible to become
so efficient that you go out of business.
– Long term thinking kills companies in tough times.
$
timeExpense
EfficiencyProfit
$Expense
Profit
Revenue
time
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2. Define Your Planning Horizon2. Define Your Planning Horizon
Factors to Consider– Your vision gets worse as you age.
Proposal:– Study the rate of change in your environment
• Will the features of a new 2003 DVD player matter in 2020?
– Compare the life spans of the alternatives and evaluate the overlap.– 10 years?
%
time
Accuracy of Estimations
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3. Define Your Objectives3. Define Your Objectives
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3. Define Your Objectives3. Define Your Objectives
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• Moral• Obsolete Components• Unsafe/OSHA• Business Changed• Customer/Supplier
Demands
3. Define Your Objectives3. Define Your Objectives
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IBM Crane Replacement: ObsolescenceIBM Crane Replacement: Obsolescence
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• Pure ROI• Labor• Maintenance• Parts
3. Define Your Objectives3. Define Your Objectives
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Automating Car Assembly: Pure ROIAutomating Car Assembly: Pure ROI
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• Expansion Capacity• Increased Customer
Demand• Quality Demands• Reduced Delivery
Time
3. Define Your Objectives3. Define Your Objectives
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Automating Delivery To Press: Automating Delivery To Press: Extending Time to PublishExtending Time to Publish
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• Image• Enter New Markets• Improve Market Share• Improve Reputation
• Quality• Delivery• Price
3. Define Your Objectives3. Define Your Objectives
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Automatic Library: Space Saving & Very CoolAutomatic Library: Space Saving & Very Cool
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If you do nothing … over time, your situation will shift to the left
3. Define Your Objectives3. Define Your Objectives
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4. Specify the Alternatives4. Specify the Alternatives
A - Automation Project
B - Do Nothing
C - Upgrade Current
D - Hybrid Solution
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5. Estimate Cash Flows for Each Alternative5. Estimate Cash Flows for Each Alternative
Identify the complete cost of doing the project– Initial investment
• Include labor and expenses of your company staff
– Cost to cover the gap between today and completion– Long term costs of ownership and use
• Do these costs change over time?• How do economic changes influence these costs (inflation)?
Determine what it will cost you to do something else…or nothing.– Do these costs change over time?– How do economic changes influence these costs (inflation)?– Will there be other subtle investments required later?
Can you increase revenue with this investment? Make intangibles tangible
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Back to our ExampleBack to our Example
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Figure out what time frame you care about– At what time will the investment results and your current situation
become indistinguishable? ( At what time will your new snowblower be in the same shape as your current snowblower?)
– When does the cost-of-ownership and revenue data become fuzzy?– 10 years?
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Identify the complete cost of doing the project– Buying the 14hp Sears 2WD 2-stage blower $2,200– Will need a shop rebuild once in 10 years $
210– Oil changes the other years 9 x $30 = $ 270
TOTAL $ 2,680
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Determine what it will cost you to do something else…or nothing.– Need to hire the kid around the corner
when it’s broken. 4 x $30 x 10 years = $ 1,200– Will need shop maintenance every 3 years
$210 x 3 $ 630
– Oil changes the other years 7 x $30 = $ 210– Auger will last 1 more year $ 230– Burns 1qt oil per month $2 x 5 mo x 10 yrs $ 100
TOTAL $ 2,370
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Can you increase revenue with this investment?– Son can clear neighbor’s driveway 10 x $30 = $ 300– Can sell the old one to your friend at work $
60
TOTAL $ 360
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Make intangibles tangible– The effect of morale:
If you are not screaming about the old snowblowerwhen you come in the house, your wife will not beirritated with you and may cook you dinner insteadof demanding that you take her out to dinner to compensate for your bad attitude. 10 years x 2 times x $30 ea. Save: $ 600
– Competitive advantage
Your neighbor will be very jealous Priceless
TOTAL: $ 600
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Determining Real Cost Benefits - ExampleDetermining Real Cost Benefits - Example
Net Result– Investment - $ 2,680
– Plus money made + $ 360
– Plus the intangible savings + $ 600
TOTAL COST - $ 1,720
– Do nothing cost - $ 2,370
NET SIMPLE DIFFERENCE + $ 650
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What Did We Miss?What Did We Miss?
How does the effect of the economy impact cost?– Does the cost of oil changes go up every year?– Will your son raise his prices?
Will time impact the volume or frequency of costs?– If you lose a quart of oil per month now, will it be more over time?
What is the lost investment opportunity for the $2,200?– At 8%, in 10 years it would be $ 4,700!
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6. Specify the Interest Rate6. Specify the Interest Rate
This will account for the effect of inflation Does NOT account for the change in frequency or
volume of a cost item. Tie to:
– Historical Trends in your field– An accepted index (CPI?)– A fixed number that you can explain away in the future
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7. Compare the Alternatives7. Compare the Alternatives
You have 2 choices...
– A Beauty Contest
A vs. B vs. C vs. D
– A Control Scenario Comparison
A vs. B A vs. C A vs. D
}Less likely to be hypnotized intofocusing on the differences betweenthe challengers. Compare to astable control Alternative.
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Forgetting the Objectives When ComparingForgetting the Objectives When Comparing
I can’t be bothered by some crazy salesman,I’ve got a battle to fight!!!
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8. Perform Sensitivity Analysis8. Perform Sensitivity Analysis
Adjust– Rates– Interest rates– Annual change in frequency and volume of a cost item
Perform “What if” Scenarios– Interject periodic unplanned events– Revenue opportunities– Intangibles bear fruit
Watch Your Output– Are the categories of influences balanced?– Is the change in time smooth or drastic?– Does it make sense?
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9. Select the Best Alternative9. Select the Best Alternative
Is This a “Have To”?……….
Intangibles Override ROI?– Market Position– Future Interface & Integration
What’s the ROI?– Payback Method (months)– IRR (%)– NPV ($)
Compare to Other Uses for That Money
• Moral
• Obsolete Components
• Unsafe/OSHA
• Business Changed
• Customer/SupplierDemands• Moral
• Obsolete Components
• Unsafe/OSHA
• Business Changed
• Customer/SupplierDemands
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The 7 Deadly Sins of Failed JustificationThe 7 Deadly Sins of Failed Justification
Not accounting for the costs of not conducting the
project.
Assuming all costs are one-time or recurring and
ignoring random periodic costs.
Looking only at costs not potential income opportunities.
Ignoring salvage and resale values.
Blowing off the intangibles. Misunderstanding the effect of the economy. Confusing the change in volume and frequency of cost
with the inflation of costs.
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10. Check Your Results10. Check Your Results
REALIZE
SPONSOR/SUPPORT
DIRECTION
JUSTIFY
DESIGN
BUILD
Checkmetrics
?
Consider
Board/Management?
Feasibility, PreliminaryCost/Benefit, Options
Return On Investment,
Select a team,
Execute…Support,Monitoring
Re-direct
In House
Partner
Both
Monitoring
Re-justify
All Good Control Systems Need Feedback Tune Your Process for the Next Time Establish Credibility…so there is a Next Time
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An ROI Tool - OverviewAn ROI Tool - Overview
Listof
Costs&
Revenues
EstimatedCash Flow
if weAutomate
EstimatedCash Flow
if wedon’t
Automate
• Net Cash Flow
• Impact of Inflation
• NPV for various durations
• ROI to-date per year
• Month investment pays back
• Graphs
INPUT OUTPUT
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An ROI Tool - List of Costs & RevenuesAn ROI Tool - List of Costs & Revenues
Listof
Costs&
Revenues
EstimatedCash Flow
if weAutomate
EstimatedCash Flow
if wedon’t
Automate
INPUT
Definition/ Example
COSTSAutomation Project Investment The total cost of going forward with the project
Remedial / Upgrade Costs of Current Asset What will it cost to make current asset viable for 10 years of operation?
Periodic Major Upgrades/Rebuilds To overcome obsolescence, wear, technology upgrades, etc
Ownership Costs (Indirect) Non-operating (day to day added value production) costs
Operational Costs (Direct) Day to day added value operational costs
REVENUESProject Related Money in due to conducting the project
Business Related Added profits resulting from conducting the project
INTANGIBLESValue of "Best Practices" Value to the company to do things the "right way"
Secondary value of information availability Results of having better access to information
Employee Satisfaction Vlaue of having motivated, dependable employees
Customer / Market Effect Is there an advantage in the marketplace to automation?
Economic Impact
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An ROI Tool - Data Entry: AutomationAn ROI Tool - Data Entry: Automation
Listof
Costs&
Revenues
EstimatedCash Flow
if weAutomate
EstimatedCash Flow
if wedon’t
Automate
INPUT
UoM
Value per Year (Hrs, etc) UoM
Rate (Curr.
Yr $) Total 1 2 3 4 5 6 7 8 9 0
3 Mgr 2000 hrs 120$ 720,000$ 100% 1 1
2 SW 1000 hrs 100$ 200,000$ 100% 1
-$ 100%
1 PM 2000 hrs. 100$ 200,000$ 100% 1 1
12 Trps 3 days 500$ 18,000$ 100% 1
AUTOMATION
Year Applies (1/0)Chng per year
%
Quantity (No.
People, etc)
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An ROI Tool - Data Entry: AlternativeAn ROI Tool - Data Entry: Alternative
Listof
Costs&
Revenues
EstimatedCash Flow
if weAutomate
EstimatedCash Flow
if wedon’t
Automate
INPUT
UoM
Value per Year (Hrs, etc) UoM
Rate (Curr. Yr $) Total 1 2 3 4 5 6 7 8 9 0
1 ea 1 upgr. 240,000$ 240,000$ 100% 1 1
2 eng 2000 hrs 115$ 460,000$ 100% 1
1 kit 1 parts 55,000$ 55,000$ 113% 1 1 1 1 1 1 1 1 1 1
-$ 100%
1 ea 1 kit 10,500$ 10,500$ 100% 1 1
-$ 100%
Year Applies (1/0)
ALTERNATIVEChng per year
%
Quantity (No. People,
etc)
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An ROI Tool - Results: ROI DataAn ROI Tool - Results: ROI Data
1 2 3
(COST) / REVENUE SUMMARY
Automation ImpactToday's Dollars (7,457,800)$ (3,249,550)$ (1,788,550)$ Today's Dollars Accumulative (7,457,800)$ (10,707,350)$ (12,495,900)$ Escalated (7,457,800)$ (3,379,532)$ (1,934,496)$ Accumulative Escalated (7,457,800)$ (10,837,332)$ (12,771,828)$
Alternative ImpactToday's Dollars (4,761,200)$ (4,656,400)$ (4,940,900)$ Today's Dollars Accumulative (4,761,200)$ (9,417,600)$ (14,358,500)$ Escalated (4,761,200)$ (4,842,656)$ (5,344,077)$ Accumulative Escalated (4,761,200)$ (9,603,856)$ (14,947,933)$
RETURN ON INVESTMENT
Payback Method - Today's Dollars
Cost of Automation Investment (6,204,200)$ (1,476,000)$ -$ Accumulative Cost of Automation (6,204,200)$ (7,680,200)$ (7,680,200)$ Annual Savings 3,507,600$ 2,882,850$ 3,152,350$ Annual Total Payback / (Cost) (2,696,600)$ 1,406,850$ 3,152,350$ Accumulative Payback / (Cost) (2,696,600)$ (1,289,750)$ 1,862,600$ ROI to Date Per Year -43.5% -16.8% 24.3%Month Project Pays Back
Payback Method - EscalatedCost of Automation Investment (6,204,200)$ (1,535,040)$ -$ Accumulative Cost of Automation (6,204,200)$ (7,739,240)$ (7,739,240)$ Annual Savings 3,507,600$ 2,998,164$ 3,409,582$ Annual Total Payback / (Cost) (2,696,600)$ 1,463,124$ 3,409,582$ Accumulative Payback / (Cost) (2,696,600)$ (1,233,476)$ 2,176,106$ ROI to Date Per Year -43.5% -15.9% 28.1%Month Project Pays Back
Net Present Value
F = Annual Total Payback/(cost) n = period analyzed in years I = interest rate
n
i
ni iFNPV
1
)1(
9 10 TOTAL IMPACT AVERAGE/YR
(1,988,550)$ (1,773,550)$ (23,006,200)$ (24,779,750)$ (24,779,750)$ (2,477,975)$ (2,721,468)$ (2,524,315)$
(25,877,939)$ (28,402,254)$ (28,402,254)$ (2,840,225)$
(3,890,900)$ (3,890,900)$ (37,714,400)$ (41,605,300)$ (41,605,300)$ (4,160,530)$ (5,324,965)$ (5,537,964)$
(43,991,984)$ (49,529,948)$ (49,529,948)$ (4,952,995)$
-$ -$ (7,680,200)$ (768,020)$ (7,680,200)$ (7,680,200)$ 1,902,350$ 2,117,350$ 24,505,750$ 2,450,575$ 1,902,350$ 2,117,350$ 16,825,550$ 1,682,555$
14,708,200$ 16,825,550$ 16,825,550$ 1,682,555$ 191.5% 219.1%
-$ -$ (7,739,240)$ (773,924)$ (7,739,240)$ (7,739,240)$ 2,603,497$ 3,013,649$ 28,866,934$ 2,886,693$ 2,603,497$ 3,013,649$ 21,127,694$ 2,112,769$
18,114,045$ 21,127,694$ 21,127,694$ 2,112,769$ 234.1% 273.0%
YEAR
22
19
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An ROI Tool - Results: Cost/Savings GraphsAn ROI Tool - Results: Cost/Savings Graphs
COST/SAVINGS COMPARISON PER YEAR
$(8,000,000)
$(7,000,000)
$(6,000,000)
$(5,000,000)
$(4,000,000)
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
1 2 3 4 5 6 7 8 9 10
YEAR
Esc
alla
ted
$
Automation
Alternative
ACCUMULATIVE COST/SAVINGS COMPARISON PER YEAR
$(60,000,000)
$(50,000,000)
$(40,000,000)
$(30,000,000)
$(20,000,000)
$(10,000,000)
$-
1 2 3 4 5 6 7 8 9 10
YEAR
Acc
um
. Esc
alla
ted
$
Automation
Alternative
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An ROI Tool - Results: Category Analysis An ROI Tool - Results: Category Analysis
-7000000
-6000000
-5000000
-4000000
-3000000
-2000000
-1000000
0
$
1 2 3 4 5 6 7 8 9 10
YEAR
PROJECT INVESTMENT
-5000000
-4000000
-3000000
-2000000
-1000000
0
$
1 2 3 4 5 6 7 8 9 10
YEAR
PERIODIC UPGRADES
0
100000
200000
300000
400000
500000
$
1 2 3 4 5 6 7 8 9 10
YEAR
REVENUES
-12000000
-10000000
-8000000
-6000000
-4000000
-2000000
0
$
1 2 3 4 5 6 7 8 9 10
YEAR
TOTAL CASH FLOW
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Navagating the SpreadsheetNavagating the Spreadsheet
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4 Pages
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Thanks To:Thanks To:
John Usher, Professor - University of Louisville John M. Hill, Principal - ESYNC
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Demo TimeDemo Time