Investing for Excellence in NPD Performance
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Freedom from
Project Surprises Newsletter - Issue #36
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April 2008 |
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When
considering a New Product Development process improvement is the
general attitude one of costs or investment? Productivity efforts with
an emphasis on cost generally focus more on expense control of the
effort than on the potential impact to an organizations revenue stream.
I have found that emphasizing Return on Investment (ROI) enables
a
productivity initiative that is naturally motivated towards clarity of
end results and the impact to the organizations revenue stream. This
month's topic is a look at ROI as a path to intrinsically driving
excellence in process improvement projects.
Jeff Jorvig, NPD Process Consultant
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Leadership Quote of the month:
"If there is
anything I would like to be
remembered for it is that I helped
people understand that leadership is helping other people grow and
succeed.
To repeat myself, leadership is not just about you. It's about them."
--Jack Welch |
Investing in NPD Excellence
Frequently
when an organization identifies the possibility of an improvement to
their process the very next concept is one of cost. This then leads to
an inability to afford it, or a limited ability in being able to "sell"
management on the idea. Almost immediately the improvement concept
becomes relegated to the fact that it is solely an expense item and any
possibility of a quantifiable net positive is lost. Return on
Investment (ROI) analysis is routine for any product related project
being considered by an organization. Why does this not typically hold
true for an improvement project?
 Any
improvement project should only be considered if it is expected to
bring value, a value that is minimally characterized as a reduction in
development time. Compression of the timeline to production release
creates two fiscal components that positively impact profits. The first
is a decrease in the expense for product development and the second is
the additional revenue associated with an earlier production ramp. The
total additional income due to a realized improvement becomes the sum
of saved development costs plus the early production income. There are
also expenses associated with any improvement and these subtract from
the saved development costs and early revenue to provide a net
additional income that can be described as a ROI.
Obviously to
generate an ROI figure there must be a well thought out analysis of the
improvement effort to produce an expected timeline savings. This is a
complicated endeavor, however I maintain this is essential to properly
frame any productivity effort where realization of specific results is
the objective. This is the beauty of an ROI driven initiative given
that it will inhibit an easy path to fictional end results. There must
be quality homework completed to scope both the intended improvements
and the expected NPD time reduction, effort that is essential to
properly establish objectives and measurement criteria to be utilized
for a believable ROI.
Any improvement effort that fails to
identify an ROI will be perceived as a pure expense, have weakly framed
objectives and be easy prey to cancellation or delays. Tie the effort
to a realistic ROI and enable the healthy emphasis, visibility and
direction that will result from a project that is defined to positively
impact business financial objectives. Include this information in a
fully developed business case and you will have created a compelling
case for a your productivity improvement, one that gets noticed, funded
and supported to completion.
Process
Improvement = Cycle time improvement = Increased Revenue
It's worth
investing in!
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Examples
of Typical ROI Calculations
I
wanted to share you with some examples of ROI calculations I have
completed to get you started down the path of planning your
improvements as and investment that will positively impact to your
revenue stream. The main components of a ROI for a process improvement
can be seen below:
- Net investment in the improvement ($)
- Expected timeline impact to a NPI (weeks)
- Expected revenue from the new product ($/week)
- Product margin (%)
- NPD Burn Rate ($/week)
With
the above figures on hand you have everything needed to calculate ROI
for a given process improvement effort. As an example I have created a
set of curves below that assume an investment of $75K and 40% margin
revenues ranging from $25K/wk ($1.3M annual) to $200K/wk ($10.4M
annual). With the lowest revenue product a three-week improvement is
the point where the $75K investment pays off and begins positively
impacting the revenue stream, it becomes profitable.
The
next set of curves is the same as the previous one except that the
improvement investment is $150K. In this case the lowest revenue
product requires a six-week improvement to yield a net positive, a time
easily recovered if the improvements implemented removed a silicon spin
from the path to production release. The higher revenue producing
projects easily show net positive with as little as three and a half
weeks or less in cycle time improvements.
In
both of the examples above the curves are representative of the first
product development after an improvement implementation. Assuming the
improvements stay around for future products the ROI increases
considerably, since there are no new improvement investments while
follow up projects reap the full timeline improvement benefits of the
initial project.
Questions about ROI for your Improvement Project? Email here.
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How we
can Help
There are several areas where we can help with investing in
your NPD process:
- Development of an ROI analysis for a productivity
improvement effort you have been considering.
- Development
of an objective implementation plan and measurement criteria for a
potential process improvement project under consideration.
- NPD process analysis to quantify potential
areas of improvement for your organization.
- NPD process reengineering to optimize your time
to revenue.
Contact us today via email, 480-895-0478 or
877-895-0478
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Feedback
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