copyright © 2007 Lignum Consulting Inc., Sepp Gmeiner September 19th, 2012 Equipment Justification Network Meeting

copyright © 2007 Lignum Consulting Inc. 2 Questions you should ask about the investment  What exactly do you want?  What does it do for you?  Do you need it now?  What are the alternatives?  What happens if you do not get it (or get it now)?  What are the benefits?  What are the risks involved?

copyright © 2007 Lignum Consulting Inc. 3 Questions you should ask…  What assumptions did you make?  What if… The assumptions do not materialize You lose customers Exchange rate changes

copyright © 2007 Lignum Consulting Inc. 4 Process

copyright © 2007 Lignum Consulting Inc. 5 Focus today “Must have”

copyright © 2007 Lignum Consulting Inc. 6 How urgently do we need it?  “Must have” Compressor, Dust collector Sprinkler Safety upgrade mandated by Ministry of Labour Unfixable mission-critical equipment  “Much better off with this investment” Upgrading existing, still functioning equipment New processes New technology

copyright © 2007 Lignum Consulting Inc. 7 “Must have”  Impossible to calculate a financial justification for the investment, because the “doing- nothing” option is (practically) not available  Use to compare different investment option

copyright © 2007 Lignum Consulting Inc. 8 Methods to calculate justification  Payback Period  Return-on-Investment Calculation Accrual Accounting rate-of-return method (ROI) Internal rate of return Net Present Value  etc.

copyright © 2007 Lignum Consulting Inc. 9 Payback period

copyright © 2007 Lignum Consulting Inc. 10 “Much better off with this investment”  All investment justification calculations are useful  Payback period is the right “starter” calculation  All calculations depend on good input data Result depends on accuracy of input data Some Input data are based on assumptions Some input data are based on forecasts Some input data are based historical data with questionable accuracy

copyright © 2007 Lignum Consulting Inc. 11 Example

copyright © 2007 Lignum Consulting Inc. 12 Total Investment  Main supplier purchase price/ cost Equipment price, Exchange cost Initial tooling Test run (material, travel cost)  Secondary suppliers purchase price /cost  Additional cost Freight, insurance, duty, offloading, rigging

copyright © 2007 Lignum Consulting Inc. 13 Total Investment  Installation cost Technicians Connect to infrastructure (electricity, compressed air, dust collection… Changes to building (walls, pits…) Test material  Removing old other equipment incl. disposal cost  Start-up cost Hiring cost Training

copyright © 2007 Lignum Consulting Inc. 14 Assumptions  Sales  Material cost  Labour cost  Etc.

copyright © 2007 Lignum Consulting Inc. 15 Benefits Type of investments Benefits  New processes - incremental sales/gross margin  Capacity- incremental sales/gross margin  Quality- incremental sales, increased margins, lower warranty cost  Reduced lead time- increased sales, increased margin, WIP reduction  Inventory reduction- less capital tied up in company, reduced obsolescence, increased flexibility, less inventory control cost.

copyright © 2007 Lignum Consulting Inc. 16 Benefits Type of investments Benefits  Process improvement – material cost reduction, labour cost reduction, consumable reduction, overhead reduction, capacity increase, waste reduction, energy consumption improvement  Replacement investment – maintenance cost reduction, labour cost, up-time, capacity  Flexibility improvement – set-up time reduction, product variety, mass customization, lean manufacturing,

copyright © 2007 Lignum Consulting Inc. 17 Benefits Think or simulate: If you do this investment, what details will change on:  profit and loss statement  balance sheet

copyright © 2007 Lignum Consulting Inc. 18 Historical data  Data is seldom in the format you need them  Data is often mixed with other data  Data is not available  Accuracy is questionable

copyright © 2007 Lignum Consulting Inc. 19 Intangible  Not measurable in dollars & cents  Difficult to quantify Brand name Customer Service Ease of doing business with On-time & complete performance

copyright © 2007 Lignum Consulting Inc. 20 Intuition - Gut feeling  "Never ignore a gut feeling, but never believe that it's enough. Indicators “Sorry Sepp, I’m not happy. I can feel it my bones!”

copyright © 2007 Lignum Consulting Inc. 21 Thank you. Questions? You can reach me at:

copyright © 2007 Lignum Consulting Inc. 22 Intuition