dfss webinar part 2: delivering better roi on dfss projects
DESCRIPTION
Creating a systematic process for design is important for any business – whether it’s designing a new product, creating a new process or leading a new service proposition. Design projects need to be structured to reduce risk, in-build efficiencies from day one and to ensure optimal financial return. But once you have selected your DFSS project and learnt the tools, how do you make sure you can track its success and optimize the business results?TRANSCRIPT
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Delivering Better Financial and Business ROI on DFSS Projects
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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.
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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© 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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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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© 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.
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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© 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.
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