Equipment Justification Network Meeting

1. Equipment JustificationNetwork Meeting Sepp Gmeiner September 19th, 2012

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?

3. Questions you should ask… • What assumptions did you make? • What if… • The assumptions do not materialize • You lose customers • Exchange rate changes

4. Process

5. Focus today “Must have”

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

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

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.

9. Payback period

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

11. Example

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

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

14. Assumptions • Sales • Material cost • Labour cost • Etc.

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.

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,

17. Benefits Think or simulate: If you do this investment, what details will change on: • profit and loss statement • balance sheet

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

19. Intangible • Not measurable in dollars & cents • Difficult to quantify • Brand name • Customer Service • Ease of doing business with • On-time & complete performance

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!”

21. Thank you. Questions? You can reach me at:

22. Intuition