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The Four ROIs of Simulation

April 5th 2013

by Chad Jackson, President and Principal Analyst of Lifecycle Insights


A couple weeks ago, I wrote a post titled The Key to Championing Simulation here on the NAFEMS blog that looked at the best way to move the simulation capabilities of an organization forward. The key, I said, was to befriend the bean counter. The idea is to get their help building out an ROI case that is credible and specific to your company and, as a result,make a more convincing case to executive leadership.

While I've said that you should work with the finance folks to build out that justification organically, tailoring it to the specific financial challenges of your organization, that doesn't mean you can't walk into a discussion with the finance folks without some ideas. In this post, you'll find some starters along those lines. Let's take a look.

Saving the Engineering Budget

Engineering, like any other functional department in a manufacturer, carries a budget. Now, of course, most of engineering's budget is tied up in human capital expense(paying people). But individual development project budgets carry money to design and engineer new products, systems, assemblies and parts. That budget is often spent towards the back-end of the design phase in the form of building physical prototypes and testing, as this has to occur prior to design release. 

Simulation can play a significant role in this context. One of the primary advantages it provides is the verification and validation of a item's performance before any prototype is built and tested. If you can avoid building multiple prototypes and avoid multiple rounds of testing, then those are hard dollars the engineering organization would have spent that they now don't.

This all sounds great, except for one disadvantage to this ROI model: budgets for future development projects are based on the past. So if the expense related to prototyping and testing results in fewer monies being spent, then that just means the budget for the next development budget will be smaller. Any time a budget gets progressively smaller, the responsible executive leader, in this case that's the engineering Director or VP, gets uncomfortable. Tread carefully here.

Now of course, there are soft dollar advantages as well. Avoiding multiple rounds of prototyping and testing lets the organization save time. However, that time investment infrequently translates into delays in launching the product to market or delivering a product to a customer. Engineering often just has to work nights and weekends to make up for lost time. I know. It's ugly. But that's reality.

Product Performance Translating to Sales

In comparison, this ROI model is incredibly powerful, but it comes with certain risks. Essentially, this is all about increasing sales. An engineering organization can state that because they will run an order of magnitude more simulations, they will be able to meet all performance requirements and outperform competitive products in the marketplace. That, in turn, can be prospectively translated into increased product sales and ultimately an increase in revenue.

The thing that undermines this ROI model is proving the cause and effect between better product performance and increased sales. Unfortunately, many things affect sales including localized issues in a region, economic downturns, a poorly trained sales force and more. It can be hard for someone to sign up for this kind of trade off. But if you can, this wins you major kudos.

Reducing Product Costs

Another product related ROI model is based on the recurring costs built into the product. Simulation, and optimization in particular, enables engineering to use lower cost materials and less material overall. What's intriguing about this sort of ROI model is that it is recurring. Lowering the bottom line directly increases the profitability of the product without any other mitigating factors coming into play as it did for the increased sales ROI model. What's more, this ROI model is utterly black and white. There's no refuting it.

The barrier to overcome, in this case, is gaining the ability to make comparisons. It's great to say you shaved a certain amount of money out of the product, but you need to be able to compare it to something. You could compare the conceptual costs to pre-design release costs, hopefully showing a reduction. However, engineering and corporate management might simply say you would have accomplished that anyway. The way to address that objection is to show how product costs changed over time during past design cycles. If it always went down, you need to show it will go down even more. If it stayed level, then you need to show it decreasing over time.

Avoiding Downstream Cost

A fourth ROI category is the ability to save money during downstream activities that occur after design release that are the direct result of design errors. This is the long standing get-it-right-the-first-time mentality. Design errors that get downstream turn into scrap and rework, change orders, cancelled orders from unhappy customers and even incorrectly ordered parts.

The good news, at least in the context of this ROI, is that all of those things carry hard dollars. There's no arguing with them, other than how you can avoid them with more simulations.

Summary and Conclusion

So there you have it. In my experience, there are four major categories of ROI for simulation. You can walk into the room with the finance folks and begin to tailor them to the needs of your company from there.

Now, did I miss any? Are there any other pros and cons that need to be considered? Let me know your thoughts in the comments.

Takecare. Talk soon. And thanks for reading.