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People often ask questions like 'how should we cost-justify an investment in EDM/PDM', 'what's an acceptable payback period' and 'what are typical EDM/PDM benefits'. For questions involving cost-justification, the two key factors appear to be the industry sector, and the extent to which the company's culture allows intangible benefits to be used in cost-benefit calculations. The industry sector is important because there a few sectors (such as leading-edge aerospace, automotive and electronics) where companies feel they must get involved with EDM/PDM - either because they know their competitors are doing it, or because their customers are requesting it. In these cases, cost justification plays a minor role and EDM/PDM system introduction and selection is based primarily on the technical capability of particular EDM/PDM products to meet short- and long-term data management requirements. Although this is the way things are in practice, it could be argued that it doesn't lead to the best results for the users, since they are not forced to understand in detail how they will use EDM/PDM, or how they will measure its success. 'You get what you measure', so users who aren't forced to define business-related measures of EDM/PDM success aren't likely to develop solutions that solve business problems. They may judge success by measures such as the number of EDM/PDM seats installed - and this may have no relationship to business requirements such as reducing product development times, or increasing product quality. Even in sectors where cost-justification may appear unnecessary, it may therefore be helpful to address it. In most sectors, the question of cost-justification has to be addressed and answered in detail. First of all it has to be shown that the money to be spent on EDM/PDM could not be more beneficially invested elsewhere in the company. This shouldn't be too difficult. In theory, EDM/PDM can lead to major benefits, e.g. reducing product development times by 25%, reducing engineering cost by 15%, and improving product quality. There are not many other investments a company can make that offer this type of benefit. Once this general comparison has been made, a cost/benefit analysis has to be carried out to highlight the differences between individual EDM/PDM systems. Whatever basis of calculation is used for this analysis - payback, Net Present Value, or Discounted Cash Flow Return on Investment, the problem is basically the same. The costs of EDM/PDM are easy to identify and measure, but the benefits are very difficult to measure. As the costs are easy to measure, they don't cause a problem for cost-justification - EDM/PDM vendors can tell you how much their systems cost, what kind of support they need, and how much system maintenance will cost in the future. It is the measurement of the benefits of EDM/PDM that causes the problems. Benefits can only occur in one of two ways. Either they come from a reduction in the company's costs or from an increase in sales. At the level of a general comparison between EDM/PDM and another technology, or capital expenditure, it is not necessary to go into a lot of detail about exactly where these benefits will occur. The calculation takes place at a macro level, at which it may be acceptable to assume a 25% reduction in lead time, resulting in a reduction from 12 months to 9 months. However, when comparisons are made between different EDM/PDM systems, there has to be more understanding of exactly how, where and why improvements will occur. The relationship between the use of a particular EDM/PDM system and these factors is not always clear. Where it is clear, the benefits are referred to as tangible or direct benefits. Where there is not a direct relationship, the benefits are referred to as intangible benefits. Tangible benefits are relatively easy to identify, but there are not many of them, and they are often difficult to achieve in practice. One of the most tangible benefits is to shut down a department or group, and fire everyone who was connected with it. In theory, the company knows how much the department cost to run, so it will know how much it will save by closing it. In practice of course it is extremely difficult to shut down an engineering department, or group, and fire everyone involved with it. Some of the people generally have useful know-how, so they are kept on, some of the functions are transferred to other groups, so these will have less time to do whatever they were doing before. Then there is the issue of overhead absorption. Overhead is often shared out between departments, so if one department is closed, the overhead charge on other departments will increase. Extending this logic it soon becomes apparent that, under most circumstances, the actual benefit is nowhere near what it might appear to be. Another issue that is difficult to handle is that some direct benefits can be achieved by redefining work practices, and are not fully attributable to the introduction of EDM/PDM. For most companies the major benefits to be expected from EDM/PDM are intangible benefits related to increased sales. This is where the cultural problem starts since there is no generally agreed principle for estimating intangible benefits. The financial formulae are not the problem, since they are well known. The problem is to know what values to use in the formulae. The types of benefit that can occur are also well known. The problem is to assign agreed values to them. For example, one person in a company may estimate that EDM/PDM will reduce product costs by $10 million, and because of reduced product development cycles, increase sales by $50 million. Another person may estimate a sales increase of $30 million, and a reduction in product costs of $30 million. A first step to finding a reasonable and widely accepted figure is to take a cross-functional approach, in which people from all departments, including finance, are involved in the cost-justification process from the beginning, so that they all really understand what they are doing and take responsibility for the conclusions. The Sales Department should estimate the increase in sales, and the Engineering Department should estimate the reduction in product costs and time-to-market. Similarly, Manufacturing should estimate the benefits it will achieve. The Finance Department has to be involved from the outset so that it really understands the values proposed, can explain the calculations, and can help to find consensus among the departments. One of the results of this activity is generally to show that a lot of the costs of EDM/PDM are in Engineering, while the benefits are found in other departments. Looked at from a pure Engineering view, the costs may exceed the benefits - particularly in the short term. Without a cross-functional approach this could mean that the EDM/PDM opportunity would be neglected. |