Quality Progress - January 2016 - (Page 47)
Return on Investment
eturn on investment (ROI) is a
powerful tool to add to your
repertoire of skills. It will help
you sell quality improvement initiatives and enable you to demonstrate
the benefits from such improvements.
Higher management is measured,
evaluated and often compensated based
on its contribution to the organization's
bottom line. To sell a project to top management, you must use the language to
which it best relates: profitability.
ROI is the ratio derived from the
sum of the improvement benefits
divided by the sum of the costs of the
improvement. A 12-to-1 ratio, for
example, means $12 of benefits were
derived from every $1 of cost. ROI can
help you justify the cost of quality
improvement projects and loss prevention actions, determine the value
of continuing a project already under
way and determine the overall organizational effectiveness of an implemented quality initiative.
Quality improvement projects are
often not subjected to preimplementation cost justification, and even fewer
projects are evaluated after implementation. For most short-term quality improvement projects, ROI is an
One example of selling a quality
improvement initiative to top management occurred while I was working
for a public utility in the mid-1970s.
I approached the VP and said, "If
you approve $8,500 for me to initiate a
pilot program to improve division
quality and performance, I will guarantee a documented payback of
$20,000 within the next six months.
Allow me to select 12 supervisors,
and release me from my everyday
responsibilities. Should I fail, fire me."
I spoke to him in the language of management and defined the consequences.
I did get the $8,500 and my choice of 12
participants, but I was not released from
When I proposed the initiative, our
division was last for all measurements
deemed critical. After the first pilot
group documented a $72,000 ROI within the first three months, the VP agreed
to expand the initiative, ultimately
I MAY 2005 I www.asq.org
by Russ Westcott
involving everyone in the division.
The initiative produced a documented net payoff of more than $1 million
over the three-year implementation
Use this simple tool
to demonstrate the
benefits of an
to upper management.
period. In that time, 72 projects were
implemented, with ROIs ranging from
5-to-1 to 400-to-1. I didn't get fired; I
launched a new career.
How To Compute ROI
To compute ROI, you need a baseline for comparison to measure an
improvement-a dollar value for the
process, operation, product or service
to be improved. These costs should
include labor, materials, supplies and
overhead. Don't overkill; just gather
the more substantive costs.
Assume, for example, you want to
remove a process step in an assembly
operation and need to establish the
ROI for eliminating the step. To do so,
you'll need data for the cost savings
of removing the step-the benefit.
In a typical run of 500 widgets, the
savings benefit from eliminating the
step is $4. An average of 43 runs are
made per year, and the projected
process change cost is $7,500. The projected annualized dollar benefit is 500
x 43 x $4 = $86,000. Divide that by
$7,500, the annualized dollar cost of
eliminating the step, and you end up
with an ROI ratio of 11.5-to-1.
In another example, assume your
customers' unintended use of your
product has resulted in product liability
settlements of $434,000 in the last 12
months. Legal actions pertaining to
both settled cases and cases not brought
to settlement amount to $1,739,000 for
the same period. A change in product
design, retooling and recall of existing
product aimed at eliminating the prob-
lem will cost $1,265,000. Using the previous year's costs, you calculate
$434,000 + $1,739,000 = $2,173,000.
Divide that by the cost to prevent recurrence of the problem, $1,265,000, and
you get an ROI of 1.7-to-1.
If the first-year estimated ratio is
relatively small, or even negative, you
can assume some prevention costs
will still be required for subsequent
years. If it will cost $126,500-10% of
$1,265,000-to maintain, then the second year ROI would be 17.2-to-1.
While the ROI calculation can be
extended past the first year, it is typical to deduct the entire implementation cost from the benefits derived in
the first full year following implementation. For larger and longer duration
projects, implementation costs can be
amortized until the year in which
It's a lot easier to sell your project
idea when you can propose an ROI.
Don't exaggerate. Work with the people who will be implementing the
improvement to ensure they agree
with the estimates and the feasibility
of the improvement. If they don't buy
it, it probably won't be successful.
Phillips, Jack J., The Project Management
Scorecard, Butterworth Heinemann, 2002.
Westcott, Russ, "How To Demonstrate a
Return on Investment for Quality
Improvements," Appendix G, Stepping
Up to ISO 9004:2000, Paton Press, 2003.
Westcott, Russ, "Return on Project Investment," chapter six, Simplified Project
Management for Quality Professionals,
ASQ Quality Press, 2005.
RUSS WESTCOTT is president of R.T.
Westcott & Associates, Old Saybrook, CT. He
is a Fellow of ASQ and an ASQ certified quality auditor and quality manager.
If you would like to comment on
this article, please post your remarks
on the Quality Progress Discussion
Board at www.asq.org, or e-mail
them to firstname.lastname@example.org.
January 2016 * QP 47
Table of Contents for the Digital Edition of Quality Progress - January 2016
According to Plan
Use Your Head
Stakeholder Management 101
All About Data
Eight Simple Steps
Which Six Sigma Metric Should I Use?
Turning ‘Who’ Into ‘How’
In the Beginning
Outputs and Outcomes
That’s So Random—Or Is It?
Improving a System
Putting It All on the Table
Know the Drill
It’s Fun To Work With an F-M-E-A
Solve Problems With Open Communication
Tell Me About It
Separate the Vital Few From the Trivial Many
To DMAIC or Not to DMAIC?
Breaking It Down
1 + 1 = Zero Defects
Curve Your Enthusiasm
Make a Choice
What Is a Fault Tree Analysis?
Successful Relationship Diagrams
The Benefits of PDCA
Return on Investment
The Art of Root Cause Analysis
Why Ask Why?
Get to the Root of It
Checks and Balances
Clearing SPC Hurdles
Supplier Selection and Maintenance
Building a Quality Team
Plan Experiments to Prevent Problems
Quality Progress - January 2016