Does PLM pay? – Calculating ROI for PLM (Part 3)

In the previous posts regarding PLM ROI ( Part 1, and Part 2, we introduced the hierarchy of strategic objectives, business targets and business costs. Examples were provided of all these categories.

In this post, lets look at some examples of how to calculate business costs and how savings can be derived from these. We will look at two examples: time searching for documents and manufacturing rework. The first example represents an efficiency gain and the second is a cost saving.

Time searching for documents or information

Assumptions:

• Burden rate for engineer = \$70/hr
• Number of engineers = 120
• Hours per week = 40
• Weeks per year = 48
• Time spent looking for documents (before PLM) = 2 hrs/week
• Time spent looking for documents (after PLM) = 1.5 hrs/week

Cost:

• Before PLM – \$806,400 (this is obtained by multiplying the first five quantities together)
• After PLM – \$604,800 (this is obtained by multiplying the first four and the last quantities together)

Savings:

\$201,600

Manufacturing Rework

Assumptions:

• Manufacturing Costs = \$2,290,000,000
• Rework as a % of manufacturing costs = 1%
• % of rework costs resulting from engineering (before PLM) = 25%
• % of rework costs resulting from engineering (after PLM) = 20%

Cost:

• Before PLM – \$5,725,000
• After PLM – \$4,580,000

Savings:

\$1,145,000

A few comments on these example calculations:

1. The majority of the business costs can be calculated using addition or multiplication
2. Efficiency gains are normally smaller than cost savings because of the nature of production centered businesses
3. Calculation of ROI for PLM can easily be handled in a spreadsheet; this can also be used to produce graphs

Of course, anyone looking at these calculations will immediately have two questions: what is the source of the raw data and how do you arrive at the savings?

Here are some suggestions for deriving the data required:

1. In the case of the time spent looking for documents, one can conduct interviews and ask participants to estimate the quantity
2. A more efficient way of doing this is by sending out a online survey to selected individuals
3. It is possible that IT have logs of various systems and can derive data on time spent in these systems
4. Manufacturing rework is often recorded in the official accounts of the organization and can be derived form this source
5. Alternatively, rework may be tracked on the shop floor to measure efficiency
6. In the case of savings, there are industry benchmarks available from research firms who track this information
7. Often, participants will be able to give ranges of what they think the savings will be
8. If an organization has an issue or quality tracking system, then this can be a useful source of data

Once all the savings are calculated, it is a matter of spreadsheet manipulation to produce results and graphs. Below is an example of a cash flow projection:

Tata Technologies has a complete suite of tools that can help with ROI calculations. Consult any of your contacts in our organization or email

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