One challenge that frequently arises between business owners and the technical experts they employ is a lack of common language and understanding about what is important to each party. Every day, management in manufacturing settings is asked to balance competing interests for capital investments. Meanwhile, the advocates for these investments all believe in the particular importance of the projects they propose.
With multiple projects competing for the same money, business and finance professionals compare the expected return of your project to what is often called the hurdle rate, or the minimum return required for them to invest in your project. If the proposed project is risky, it often comes with a risk premium, or a higher rate that must be cleared for your project to begin.
In order to 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 to quantify. Nonetheless, it is essential to describe the precise scope of the problem. There are multiple metrics you can use to quantify a problem:
- Work hours (number of workers x average hours worked)
- Compliance rates (represented as percentages or actual numbers)
- Material waste (which can be related back to money lost if you have access to financials)
- 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 a set period after the implementation of the solution. If the metric in question has a monetary value, determining return on investment (ROI) is the next step. This is trickier than it seems, as ‘profit’ does not always mean ‘cash.’ As 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, Business Analyst