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Delivering Better Financial and Business ROI on DFSS Projects

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What we will cover today:

- Performing financial analysis on DFSS projects

- Performing sensitivity analysis on financial analysis

Agenda

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Performing Financial Analysis on DFSS Projects

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The DFSS Process: DMADV

Opportunities & Goals

Voice of Customer

Sub-systems, inputs, processes

Design satisfies VOC

Product/Service/ Process Options

Verify Design Analyze Measure Define

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The DFSS Process: Tollgate Reviews

Verify Design Analyze Measure Define

Review Customer CTxs (Requirements)

Review Financial Analysis

Review Project Risk

Review Resource Needs

Review Timeline

Approve Charter

Close Project Review

Charter

Approve

Investment Approve

Concept

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Financial Analysis

Initial

Financial

Analysis

Financial

Sensitivity

Analysis

Update & Review

Financial Analysis

Validate

Financial

Performance

Update & Review

Financial

Analysis

Verify Design Analyze Measure Define

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Key Financial Metrics

There are a few key financial metrics to measure the financial benefits of DFSS projects

The most popular are the following: • Net Present Value (NPV) • Internal Rate of Return (IRR) • Payback Period • Cost Income Ratio (CIR) • Return on Investment (ROI) • Return on Capital Employed (ROCE)

etc.

Make sure that you use metrics that are well understood in your business

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The Basics

Profits = Revenue - Costs

Revenue = Price x Volume

Costs = Variable Costs + Fixed Costs

Variable Costs are costs that are directly proportional to the number of units produced; this can be raw materials, utilities, labor etc.

Fixed Costs are essentially constant and independent from number of units produced; this can be depreciation, R&D costs, advertising costs etc.

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True Product or Process Costs

True product or process costs are a function of Bill of Material costs and:

Costs of defects and rework costs to correct defects

Inventory carrying costs

Scrap costs

Inspection and other appraisal costs

Warranty costs

Idle resources costs, etc.

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Most Popular Financial Metrics

NPV (net present value)

NCF – Net Cash Flow, t – time period, i – cost of capital

IRR

i – Internal Rate of Return

n

t

tt

i

NCFNPV

0 1

n

tt

t

i

NCF

0 10

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Sensitivity Analysis

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© BMGI. Except as may be expressly authorized by a written license agreement signed by BMGI, no portion may be altered, rewritten, edited, modified or used to create any derivative works.

Financial Analysis

Initial

Financial

Analysis

Financial

Sensitivity

Analysis

Update & Review

Financial Analysis

Validate

Financial

Performance

Update & Review

Financial

Analysis

Verify Design Analyze Measure Define

!

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Sensitivity Analysis - Basics

Sensitivity Analysis is the study of how the uncertainty in the output of a model can be apportioned to different sources of uncertainty in the model input

In our case the output of the model is selected financial metric (i.e. NPV, IRR)

Potential sources of uncertainty in the model inputs are related to volume, selling price, fixed costs, variable costs and cost of capital

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Sensitivity Analysis - Example

Company ACME wants to launch product X

They believe that they are able to sell the product for 0.55 per unit, they also believe that they are able to sell 120 units

They assume that fixed costs will be 20 and variable costs 0.35 per unit sold

Using these assumptions, the “most likely case” or “base case” profit is: 120 x 0.55 – 20 – (120 x 0.35) = 66 – 20 – 42 = 4

But………..

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Sensitivity Analysis - Example

The volume of products can be between 50 and 200

Average selling price can be between 0.5 and 0.7

Estimated variable cost can be between 0.32 and 0.4 per unit

Estimated fixed costs can be between 15 and 25

In such a case we are not sure to have profit of 4

The potential profit is impacted by uncertainty in our assumptions around inputs/errors

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Sensitivity Analysis - Example

In this case we should first focus on volume of the products sold

We need to take actions in the next stages of the DFSS project to reduce uncertainty related to volume

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-10

-5

0

5

10

15

20

25

ASP Volume VC FS

Best

Worst

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Sensitivity Analysis

In this case NPV is the most sensitive to price fluctuations

NPV is least sensitive to investment

-1500

-1000

-500

0

500

1000

1500

25% 75% 125% 175%

NPV

(MM

-$)

Investment

Volume

FC

VC

Price

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Financial Analysis – Summary

Develop cost and benefit model for the project that includes all direct and indirect costs and all sources of benefits

Never present “Best Case” or “Most Likely Case” scenario only

Document all of your assumptions

Perform sensitivity analysis to determine which assumptions have the most significant influence on the financial results of the project

Make appropriate changes to the project objectives, project plan and resource plan

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Learn more about DFSS

Classroom courses in Europe • 25-29 June, Amsterdam: Full 5 Day Training Course

• 24 May, Brussels: One-Day Innovation Workshop

More information: http://www.bmgi.com/training

“I had hit a wall with DMAIC... with DFLSS I now have a new arsenal of new tools for breakthrough.”

Master Black Belt, Siemens VDO Automotive

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Questions & Answers