ReliaSoft’s Reliability ROI: Difference between revisions

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= ReliaSoft's Reliability Return on Investment(RRROI or R3OI)  =
#REDIRECT [[Target_Reliability_Tool]]
 
== Tradional ROI  ==
 
First, traditinal Return On Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. In general to calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; and the result is expressed as a percentage or a ratio.
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" width="400" align="center"
|-
| <math>ROI=\frac{Gain\,from\,Investment\,-\,Cost\,of\,Investment}{Cost\,of\,Investment}</math>
| valign="middle" nowrap="nowrap" align="right" | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1)
|}
 
&nbsp;In this formula "gains from investment", refers to the revenue or proceeds obtained the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Reliability ROI, is similarly computed by looking at the investment as the the investment in improving the reliability.
 
== Reliability ROI  ==
 
To illustrate consider the case of ACME's Widgets. The current design has had an average reliability performance in the field, yielding ACME a 10% market share. To stay competitive ACME offers the same warranty as it's competitors (1 year) and prices the product similarly. Some high level specifics are given below in Table 1.
 
{| border="1" cellspacing="1" cellpadding="1" width="400" align="center"
|+ '''Table 1. ACME's Widget Specifics'''
|-
| valign="middle" align="center" | Units Sold
| valign="middle" align="center" | 100,000
|-
| valign="middle" align="center" | Warranty Returns Per year
| valign="middle" align="center" | 6%
|-
| valign="middle" align="center" | Market Share
| valign="middle" align="center" | 10%
|-
| valign="middle" align="center" | Sales Price Per Unit
| valign="middle" align="center" | $200
|-
| valign="middle" align="center" | Cost to produce&nbsp;a&nbsp;Unit
| valign="middle" align="center" | $100
|}
 
<br>
 
ACME's management believes that they can build a more reliable widget, and by doing so reduce both warranty costs and increase market share. Based on some preliminary studies they believe that they can reduce the warranty returns to 2%&nbsp;per year. By building a better product they also believe that they can more than double their market share.
 
=== ACME Numbers  ===
 
Now improving reliability will come at a cost.&nbsp; These costs are going to be t fixed costs (investments in tools, facilities&nbsp;and people to&nbsp;improve the reliability)&nbsp;and variable per unit cost for better&nbsp;material etc.&nbsp; For this example lets assume a 10%&nbsp;increase in the production costs per unit and an additional $500,000 fixed upfront investment.&nbsp; Then based on these numbers:
 
==== Current  ====
 
&nbsp;
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" align="center"
|-
| align="center" |
<math>Sales\,Revenue=</math>&nbsp;&nbsp;
 
| align="center" | <math>100,000\cdot \$200=</math>
| align="center" | <math>\$20,000,000</math>
|-
| align="center" |
<math>Production\,Costs=</math>&nbsp;&nbsp;
 
| align="center" | <math>100,000 \cdot \$140=</math>
| align="center" | <math>\$14,000,000</math>
|-
| align="center" | <math>Other\,FixedCosts=</math>&nbsp;
| align="center" |
| align="center" | <math>\$1,000,000</math>
|-
| align="center" | <math>Expected\,Returns=</math><math>100,000 \cdot 0.06=</math><math>6000</math>
| align="center" |
| align="center" |
|-
| align="center" | <math>Warranty\,Cost\,Per\,Unit=</math><math>\$140+\$400=</math><math>\$540</math>
| align="center" |
| align="center" |
|-
| align="center" | <math>Total\,Warranty\,Costs=</math><math>6,000 \cdot \$540=</math><math>\$3,240,000</math>
| align="center" |
| align="center" |
|-
| align="center" | <math>Gross\,Profit=</math><math>\$20,000,000-\$14,000,000</math><math>-\$1,000,000-\$3,240,000=</math><math>\$1,760,000</math>
| align="center" |
| align="center" |
|}
 
<br>
 
==== New Design  ====
 
With an increase in reliability then
 
<br>
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" align="center"
|-
| align="center" | &nbsp;<math> \text{Sales Revenue}=250,000\cdot \$200=\$50,000,000</math>
|-
| align="center" |
&nbsp;<math> \text{Production Costs}=250,000 \cdot \$154=\$38,500,000</math>
 
|-
| align="center" | &nbsp;<math> \text{Other Fixed Costs}=\$1,000,000</math>
|-
| align="center" | &nbsp;<math> \text{Expected Returns}=250,000 \cdot 0.02=5,000 </math>
|-
| align="center" | &nbsp;<math> \text{Warranty Cost Per Unit}=\$154+\$400=\$554</math>
|-
| align="center" | &nbsp;<math> \text{Total Warranty Costs}=5,000 \cdot \$554=\$2,770,000</math>
|-
| align="center" | &nbsp;<math> \text{Gross Profit}=\$50,000,000-\$38,500,000-\$1,000,000-\$2,770,000=\$7,730,000</math>
|}
 
<br>Our only costs not counted in was the initial investment of $500,000. The gain from the investment was
 
<br>
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" width="200" align="center"
|-
| <math>\$7,730,000-\$1,760,000=\$5,970,000</math>
|}
 
==== R3OI  ====
 
Then<br>
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" width="200" align="center"
|-
| <math> \text{R3OI}=\frac{Gain\,from\,Investment\,-\,Cost\,of\,Investment}{Cost\,of\,Investment}</math>
|-
| <math> \text{R}^3\text{OI}=\frac{\$5,970,000-\$500,000}{\$500,000}=10.94=1094\%</math>
|}
 
<br>
 
&nbsp;

Latest revision as of 00:37, 22 August 2012

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