ReliaSoft’s Reliability ROI: Difference between revisions

From ReliaWiki
Jump to navigation Jump to search
No edit summary
Line 1: Line 1:
=ReliaSoft's Reliability Return on Investment(RRROI or R3OI)=  
= ReliaSoft's Reliability Return on Investment(RRROI or R3OI) =
 
== Tradional ROI ==


==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.  
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.  


Line 20: Line 21:
<br>
<br>


==Reliability ROI==
== Reliability ROI ==
 
<br>Relibility ROI, is similarly computed by looking at the investement as the the investment in improving the reliability.  
<br>Relibility ROI, is similarly computed by looking at the investement as the the investment in improving the reliability.  


Line 51: Line 53:


<br>
<br>
=== ACME Numbers ===
 
=== ACME Numbers ===


Now improving reliability will come at a cost.&nbsp; These costs are going to be t fixed costs (invetsments 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 invetstment.&nbsp; Then based on these numbers:  
Now improving reliability will come at a cost.&nbsp; These costs are going to be t fixed costs (invetsments 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 invetstment.&nbsp; Then based on these numbers:  


====Current====
==== Current ====


<math> \text{Sales Revenue}=100,000\cdot \$200=\$20,000,000</math>  
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" align="center"
|-
| <math> \text{Sales Revenue}=100,000\cdot \$200=\$20,000,000</math>
|
|-
|
<math> \text{Production Costs}=100,000 \cdot \$140=\$14,000,000</math>


<math> \text{Production Costs}=100,000 \cdot \$140=\$14,000,000</math>  
|
|-
| <math> \text{Other FixedCosts}=\$1,000,000</math>
|
|-
| <math> \text{Expected Returns}=100,000 \cdot 0.06=6,000 </math>
|
|-
| <math> \text{Warranty Cost Per Unit}=\$140+\$400=\$540</math>
|
|-
| <math> \text{Total Warranty Costs}=6,000 \cdot \$540=\$3,240,000</math>
|
|-
| <math> \text{Gross Profit}=\$20,000,000-\$14,000,000-\$1,000,000-\$3,240,000=\$1,760,000</math>
|
|}


<math> \text{Other FixedCosts}=\$1,000,000</math>
&nbsp;
 
&nbsp;
 
&nbsp;


<math> \text{Expected Returns}=100,000 \cdot 0.06=6,000 </math>
&nbsp;


<math> \text{Warranty Cost Per Unit}=\$140+\$400=\$540</math>
&nbsp;


<math> \text{Total Warranty Costs}=6,000 \cdot \$540=\$3,240,000</math>
&nbsp;


<math> \text{Gross Profit}=\$20,000,000-\$14,000,000-\$1,000,000-\$3,240,000=\$1,760,000</math>
&nbsp;


====New Design====
==== New Design ====


<br>With an increase in reliability then  
<br>With an increase in reliability then  
Line 91: Line 120:
&nbsp;  
&nbsp;  


Our only costs not counted in was the initial investment of $500,000. The gain from the investment was <math>\$7,730,000-\$1,760,000=\$5,970,000</math>.
Our only costs not counted in was the initial investment of $500,000. The gain from the investment was <math>\$7,730,000-\$1,760,000=\$5,970,000</math>.  


====R3OI====
==== R3OI ====


Then  
Then  
Line 101: Line 130:
<math> \text{R3OI}=\frac{\$5,970,000-\$500,000}{\$500,000}=10.94=1094\%</math>  
<math> \text{R3OI}=\frac{\$5,970,000-\$500,000}{\$500,000}=10.94=1094\%</math>  


<br>


 
<br>&nbsp;
 
&nbsp;

Revision as of 20:26, 1 March 2011

ReliaSoft's Reliability Return on Investment(RRROI or R3OI)

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.

[math]\displaystyle{ ROI=\frac{Gain\,from\,Investment\,-\,Cost\,of\,Investment}{Cost\,of\,Investment} }[/math]                              (1)


 

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


Relibility ROI, is similarly computed by looking at the investement as the the investment in improving the reliability.

To illustrate consider the case of ACME's Widgets. The current design has had an average reliability perfromance 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 simlarly. Some high level specfics are given below in Table 1.

 

Table 1. ACME's Widget Specifics
Units Sold 100,000
Warranty Returns Per year 6%
Market Share 10%
Sales Price Per Unit $200
Cost to produce a Unit $100


ACME's management believes that they can buiilt 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% per year. By builting 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.  These costs are going to be t fixed costs (invetsments in tools, facilities and people to improve the reliability) and variable per unit cost for better material etc.  For this example lets assume a 10% increase in the production costs per unit and an additional $500,000 fixed upfront invetstment.  Then based on these numbers:

Current

[math]\displaystyle{ \text{Sales Revenue}=100,000\cdot \$200=\$20,000,000 }[/math]

[math]\displaystyle{ \text{Production Costs}=100,000 \cdot \$140=\$14,000,000 }[/math]

[math]\displaystyle{ \text{Other FixedCosts}=\$1,000,000 }[/math]
[math]\displaystyle{ \text{Expected Returns}=100,000 \cdot 0.06=6,000 }[/math]
[math]\displaystyle{ \text{Warranty Cost Per Unit}=\$140+\$400=\$540 }[/math]
[math]\displaystyle{ \text{Total Warranty Costs}=6,000 \cdot \$540=\$3,240,000 }[/math]
[math]\displaystyle{ \text{Gross Profit}=\$20,000,000-\$14,000,000-\$1,000,000-\$3,240,000=\$1,760,000 }[/math]

 

 

 

 

 

 

 

New Design


With an increase in reliability then


[math]\displaystyle{ \text{Sales Revenue}=250,000\cdot \$200=\$50,000,000 }[/math]

[math]\displaystyle{ \text{Production Costs}=250,000 \cdot \$154=\$38,500,000 }[/math]

[math]\displaystyle{ \text{Other FixedCosts}=\$1,000,000 }[/math]

[math]\displaystyle{ \text{Expected Returns}=250,000 \cdot 0.02=5,000 }[/math]

[math]\displaystyle{ \text{Warranty Cost Per Unit}=\$154+\$400=\$554 }[/math]

[math]\displaystyle{ \text{Total Warranty Costs}=5,000 \cdot \$554=\$2,770,000 }[/math]

[math]\displaystyle{ \text{Gross Profit}=\$50,000,000-\$38,500,000-\$1,000,000-\$2,770,000=\$7,730,000 }[/math]

 

Our only costs not counted in was the initial investment of $500,000. The gain from the investment was [math]\displaystyle{ \$7,730,000-\$1,760,000=\$5,970,000 }[/math].

R3OI

Then

[math]\displaystyle{ \text{R3OI}=\frac{Gain\,from\,Investment\,-\,Cost\,of\,Investment}{Cost\,of\,Investment} }[/math]

[math]\displaystyle{ \text{R3OI}=\frac{\$5,970,000-\$500,000}{\$500,000}=10.94=1094\% }[/math]