NPI: A How To Guide for Engineers & Their Leaders
Leading from the Front
Marcel Tremblay: The Olympic Mindset & Engineering Leadership
Nathan Ackerman on NPI: Do The Hard Thing First
JDM Operational Excellence in NPI
Building the Team
Quality is Set in Development & Maintained in Production
3 Lessons from Tesla’s Former NPI Leader
Maik Duwensee: The Future of Hardware Integrity & Reliability
Reject Fake NPI Schedules to Ship on Time
Leadership Guidance for Failure to Meet Exit Criteria
Screws & Glue: Getting Stuff Done
Choosing the best CAD software for product design
Screws vs Glues in Design, Assembly, & Repair
Best Practices for Glue in Electronics
A Practical Guide to Magnets
Inspection 101: Measurements
A Primer on Color Matching
Developing Your Reliability Test Suite
Guide to DOEs (Design of Experiments)
Ten Chinese phrases for your next build
NPI Processes & Workflows
Production: A Primer for Operations, Quality, & Their Leaders
Leading for Scale
Production Processes & Workflows
ROI-Driven Business Cases & Realized ValueEstimated reading time: · link copy link
“The only ideas that get funded are the ones that fund themselves.” – some CFO (probably)
97% of manufacturing leaders are pursuing smart technologies, and yet, 30% of leaders say their biggest obstacle to meeting their business needs is not having the tools they need to be successful (Rockwell Automation, 2023).
This article is about getting through one of the largest barriers leaders and visionaries face in getting those tools: leadership buy-in and budgetary approval. I’ve focused on providing real tactics and examples working in small and large organizations. This playbook can be adapted for any kind of investment in an organization – whether it be Instrumental, other technology, or even human capital and headcount. Leaders who can leverage this playbook will not only be able to drive technological change in their organization and impact the business metrics but also articulate that impact to expand funding and obtain recognition for the visionary and their team.
(Do you prefer to watch this content instead? Fast forward to the end of the article.)
Use ROI to Assess Potential Investments
New technologies typically require investment – whether that’s monetary, team time, or cultural change. To earn that investment from leadership, visionaries must be able to articulate and demonstrate the potential Return on Investment (ROI) that the organization will receive from that investment. ROI can be thought of as I pay $1 to save $3; it’s a simple metric to give quick, measurable insight into an investment. Demonstrating potential ROI is critical to having a broader organizational impact outside your immediate role.
ROI is the value of the investment to the organization divided by the total cost of ownership (evaluated for a given period, such as annually). While formal definitions of ROI only include net value in the numerator, from conversations with leaders who consume these analyses, they assume it means total value. If you’re presenting to leadership, my recommendation is to use the total value to the organization while being transparent about what’s included.
Total value includes money saved by cutting costs and any net new profit. The cost of ownership includes the cost of the technology, the cost of integration (amortized), and the operational cost – not just the cost of what you’re paying the technology partner.
Calculating ROI Feels Harder Than It Is
Visionaries who have attempted to put together a business case to calculate ROI probably found it to be challenging. Calculating ROI can feel difficult because, in manufacturing, the person with the problem (a quality manager, for example) is often not the same person who has all of the data and knows the true cost of that problem (perhaps someone in finance).
There are two kinds of ROI you’ll encounter: hard ROI and soft ROI. Hard ROI is the easiest to project and to measure after the fact. Soft ROI requires estimations that will always feel a little “soft”, even after the fact. For example, avoiding a recall that didn't happen would be soft ROI – there still might be real value here, but it will need to be estimated and defined. Avoiding having to hire a person because you automated them, would be hard ROI.
Your mission in building a business case is to build a model based on some reasonable assumptions – for both hard ROI and soft ROI. A hesitance to attempt to quantify the “soft ROI” can lead to over-reliance on a single value driver (we’ll get to this in a minute) or even unattractive ROI calculations, even when you know in your heart that the impact of a particular technology will be huge. This dissonance comes from not including enough value drivers in the model – whether they are hard or soft.
Always Pick Three Value Drivers
Something we learned the hard way at Instrumental which has made a significant difference in our conversations with customers, is that you must build your model with at least three value drivers. A value driver is a category of value for the organization, phrased as an outcome, such as: reducing total cost per unit, saving engineering time, or reducing returns. In other words, these are quantifiable goals that your investment should help your organization achieve. A vague goal like “make a better product” or “improve efficiently” might be organizational priorities, but need to be rephrased to be value drivers.
If you really want to get your investment funded, you must make sure at least one of those value drivers aligns with the organizational goals of the business. For example, at one customer, the top organizational goal is to work through a new product development roadmap as quickly as possible, so the aligned value drivers will all be about team efficiency and time savings. At another customer, the top organizational goal is to improve profitability, so the aligned value drivers will be focused on things that impact margins, like increasing yield, reducing rework, and increasing line speed.
Always pick three value drivers, even when you think the ROI from just one is enough. What generally happens with leadership is that the ROI gets negotiated. After leadership has slashed your first driver in half, you’ll be glad you have two additional drivers to ensure you are still presenting a strong ROI. In our experience, a strong ROI is typically three or higher.
The graphic below shows some potential avenues of value you might consider – though more specifics would need to be added to turn them into true value drivers. Notice that different drivers impact different levels in the organization. For a product like Instrumental, we find that we need to hit at least one value driver at the level of our purchasing executive, such as at the business unit level, and the remaining two can generally be lower level.
Step 1: Build the Business Case
In order to build the business case, you will:
- Connecting your challenge to at least three relevant value drivers.
- Build a simple model for each driver leveraging some known data and some assumptions
- Scope the technology sufficiently to build out the denominator
- Present leadership your “value sandwich”
Case Study: $8B Industrial Electronics Leader
Let’s make things concrete with an example inspired by a real customer, with enough detail changed to protect their anonymity. This customer was embarking on a multi-factory scaleup of its products. For the manufacturing organization, this meant that they had to bring up a bunch of new lines and team members while maintaining a quality standard for the product. If they failed to maintain quality, they would have escapes that would cause expensive in-field repairs that would undermine the product margins.
Given this organizational challenge, the value drivers of a product like Instrumental could be:
- Improve first-pass yield
- Reduce field failures
- Bring up lines faster
Determine value drivers and run calculations
Now that you’ve identified the value drivers, it’s time to build some models. This might sound challenging initially, but it’s exactly the kind of puzzle that engineering brains love – if you give it a chance. Besides, who doesn’t love a spreadsheet?
Let’s dig into the details of the first value driver: improving first-pass yield (FPY). Since FPY is a measurable metric, after a pilot, you’ll actually know the improvement, so this can be an input to your model. To start, you’ll pick an (arbitrary) amount of improvement that you think is at least within the realm of possibility – in this case, we’ve started with 5%. Later, you’ll come back and adjust this number, and the rest of your model will update accordingly.
Now, think through what a change in FPY would have on the rest of the manufacturing operation. A naive approach is to just focus on the “hard ROI” – or the easiest to measure things – one of which is often headcount cost or time. If you have a higher FPY, you’ll have less rework and will save rework time. I recommend building this as two rows – # hours of rework technician time saved and $ / hour for a rework technician. Making these variables will make it easier to react to objections in the future. Based on some example inputs, doing this would result in $80K of potential savings.
However, this naive approach misses out on a lot of potential value that might be slightly harder to calculate:
- Reduction in debug staff needed to triage rework units
- Reduction in test operator time across the test line – fewer testing cycles because more units only go through the test once
- Opportunity to reduce testers when replicating – fewer testing cycles means less equipment will be needed to load balance the line
- Engineering efficiency improvement from fewer issues getting escalated to engineering or leadership
- Higher effective throughput leads to increased profit
- I could go on…
As shown above, including these other factors can significantly increase the impact of the technology over the naive approach by 4X or even 7.8X – so it’s worth it to try to model them. The more detailed you can be about the different impacts the technology has on the value driver, the easier it will be to actually count them towards the ROI. Every little bit adds up.
Build a Value Sandwich for Leadership
Having built a model for each value driver, you’re now in a position to package your results up for leadership to make your case.
I recommend putting together a one-slide executive summary that includes your recommendation for the investment, a one to two-sentence description of the problem and solution, and the “value sandwich”:
- The savings opportunity: your total potential dollars from your calculations
- The cost of the investment
- The potential ROI
I also recommend linking your spreadsheet as your calculations are bound to be called into question either in the meeting or the follow-up. When leadership opens your model and can clearly see that you made reasonable assumptions, maybe even conservative ones, they start to feel more confident in the investment.
Something that is common is that leadership will often discount your value. Maybe you present your “Improve FPY by 5%” value driver and they say, “There’s no way that’s possible – maybe 2%, but not 5%.” You can very easily change the number right in the meeting to get an updated potential dollar savings and ROI. This is why it’s critical to go to leadership with at least three value drivers and extra “ROI budget” (more than 3X ROI).
Step 2: Implement a Proof of Value
Hooray! You’ve received buy-in to pilot your proposed solution. The next step is to implement a Proof of Value (POV) – not a Proof of Concept (POC).
This isn’t just a semantic argument, POV and POC are two different things. A POC tests the functions of a technology, a POV tests the value of a technology.
People in manufacturing are often pragmatic and a bit cautious – they don’t want to put unproven technology on a live production line, so their first instinct is to run a “pilot in the corner” on something that no one really cares about. They want to make sure it’s good before letting it touch anything else. When you do this, it doesn’t matter if you have “success”, because no one in leadership will care about the problem in the corner. Especially now that you’ve argued to leadership to invest in the technology based on value, you need to demonstrate that the technology can move those value drivers.
Upgrade your POC to a POV: run it where it hurts. Pick a big pain point for the organization to test POV, such as the flagship product’s NPI, the production line with the highest fallout, the SKU with the most field issues. You don’t have to run your pilot recklessly – you can still set it up offline or in series with your existing process. But by testing the technology on a real problem, you maximize your chances for demonstrating impact on the value drivers in your model. You’ll also have the opportunity to potentially discover entirely new value drivers you didn’t previously consider, which should be included in your model. You’ll also get a better sense of the total cost of ownership.
Remember that POVs do not need to be ROI-positive on their own. Technologies may have integration that creates a start-up cost and those costs can be amortized over time. What you need to be showing is that at scale, the technology will return the value described in your model (or the updated version of it).
Step 3: Present Realized Value to Expand
Once you’ve got real data from your POV, you’ll be able to update many of your initial assumptions with real numbers, or numbers that better approximate reality if you still must make some assumptions. Then you’ll want to package up all of your learnings to present back to leadership the realized value from the POV as well as the potential value of a larger-scale roll-out.
Case Study: $8B Industrial Electronics Leader
To return to our case study, one of the $8B electronics leader’s original value drivers was to eliminate field failures by catching those issues on the line with Instrumental technology. They estimated that Instrumental might be able to catch 1000 units per year that would otherwise escape. During their POV, an issue came up where unqualified parts were mixed into qualified parts – which couldn’t be caught in their testing but could be caught by Instrumental. As a result, they found the technology prevented an escape of 10,000 units with the unqualified parts – something that would have been a huge field issue. Thus, that impact wound up being a much higher value driver than originally contemplated.
Discovering this value driver also changed some of their assumptions. Preventing the escapes meant the time investment was a lot less because the field failures didn’t happen. This is the kind of update to make in your realized value model.
After recalculating the value, also recalculate the total cost of ownership. Make sure you account not just for direct costs, but also indirect costs like line space, added cycle time, and cultural shift and training within your organization.
When you re-present to leadership, build a one-summary slide that indicates how much each value driver contributed to the overall ROI and have your spreadsheet on hand to defend your numbers. With this data, make the recommendation to stop, continue, or expand the investment, and how to roll out the plan for what you want to do next.
Articulating how your work impacts larger organizational goals is one of the best high-visibility moves you can make in your organization to accelerate your career – and to close the loop for the next time you ask to make another technology investment.