When was the last time you purchased an item for home based on return on investment (ROI)? Most of the time, we make up our minds on what we are going to buy without doing any numbers and we just go shopping based on price and value. But for an example of an ROI analysis, I will look back at the purchase of my current smartphone.
I used to carry around a regular cell phone which I loved because it was small, light and had a long battery life. So when I went to buy a new phone I was not sure about getting a smart phone. As any industrial engineer would do, I did an ROI analysis to see if it made sense.
My approx. labor time
= $100,000/year / (50weeks x 40 hours/week) = $50/hour (very rounded numbers)
My extra time working thanks to smartphone
= 10 trips/year x (2 hours usually idle at airport/trip
+ (1 hour work recovered between meetings x 3 days/trip))
= 50 hours/year
Savings /year = 50 hours/year x $50/hour = $2500/year
Investment Cost = $200 for the phone
Recurring Cost/year = $700 data plan + $100 IT support = $800/year
Payback is less than one year !
The ROI calculation would have been the smart thing to do, but who does that? Not even my IT department. The justification for smart phones is obvious and does not really need this type of analysis. The intangible benefits alone are even greater than the tangible ones listed above.
The intangible benefits of the smartphone include:
• Email anywhere. What is the cost of missing an opportunity because I didn’t get the email on time or upsetting a customer who was waiting for a reply to his urgent email.
• GPS. I will never get lost in an unknown city again. There is also a tangible cost savings here for not having to rent the GPS with my car rental.
• Web access anywhere. I can look for a nearby restaurant using Urbanspoon, or Google that trivia that came up during dinner conversation.
• Music player. I don’t have to carry around an additional device like an MP3 player anymore.
• Apps. I cannot live without the flight status application from the airline. I have used it to determine when I was going to miss connections and rebooked right from my phone. Priceless!
I have been wondering if the same buying patterns apply to some purchases at work including purchases for some information systems. Were the purchases made based on ROI? Perhaps ROI should not be the only criteria.
In the report titled “Insufficiently Defined Business Cases and Application Strategies Are Holding Back the Value of MES,” Gartner states that the lack of a clear ROI is one of the biggest obstacles for Manufacturing Execution System (MES) projects listed by manufacturing Operations management executives. However, the same month Gartner’s report titled “Extend the Value of MES Beyond the Plant” lists that manufacturers have actually reported many greater intangible significant values for MES and most of them realized after the first year of implementation. Perhaps we shouldn’t need an ROI study to get MES projects approved. The intangible values identified include (a) using data from MES as the basis for continuous improvement, (b) increased product quality, (c) standardization of processes, (d) reduction of cycle time for resolution of issues, and (e) easier new product introductions. These Gartner reports have a lot more details and are worth downloading if you have access to them via Gartner or MESA. MESA is also publishing a new ROI Guidebook for manufacturing systems in the next few weeks.
Users at companies that have successful MES implementations say that they do not want to go back to the old paper-based forms. I was at a plant that had implemented a new paperless process with MES at one building for a new program and those employees dreaded going on loan to the other building. Just like I would dread going back to my old plain cell phone. I do not want to lose all the functionality I have in my new smartphone.
Of course, if you just use your smartphone to play Angry Birds, then there is no ROI. The same applies to the MES purchase. If your company doesn’t use the MES to its full extent, then the company will not realize the full expected value until it is fully implemented.
Do we really need to do the numbers when the decision is that clear? Or do we need to make these decisions the same way we make our smart phone decisions? Did the same companies, holding up MES projects, do the ROI for their ERP systems? Or was that decision obvious to the CFO and did not require the same level of justification? With all the documented success stories for MES, the only debate companies should be having is which MES fits the business better and who should help implement the MES, not whether or not there is a need for MES in the factory.
What do you think?
- “Insufficiently Defined Business Cases and Application Strategies Are Holding Back the Value of MES”, Jacobson and Dornan, Gartner, 2014
- “Extend the Value of MES Beyond the Plant”, S. Jacobson, Gartner, 2014
- Manufacturing Operations Management, Quality and Aerospace Talk