Return on Investment for Engineers

When scientists and engineers need to talk with their management about significant purchases, they need to talk in terms of Return On Investment (ROI). ROI is not something typically taught in science or engineering curricula. It is an essential part of a business curriculum. A business can only exist if it makes a profit. Because of this, every businessman knows that he must make a profit on the money he spends. The money spent is the investment. The money made is the return. The return on the investment is the profit. When you want your management to invest in your work (through new equipment, materials, education, etc.), it is in your best interest to be able to state the expected return on that investment, or the ROI. When you put money in a bank you are making an investment (a very safe one!) with a very low ROI — typically less than 1% these days. A well-managed, diversified stock portfolio (a 401K, perhaps) can expect a 10% Return On Investment over a long period of time. ROI is typically expressed as a percentage. To calculate %ROI, you need to divide the profit (the return minus the investment) by the investment.
Here's an Example
Suppose you would like to have Design of Experiments training for 20 of your co-workers. (The same principle holds for new equipment, materials etc. but this example will be for education.) How can you convince your management to spend the money? You can provide your management with an estimated ROI. You can find an ROI calculator for this example at Objective DOE ROI Calculator Suppose you want to have 20 students take our core DOE workshop “Performing Objective Experiments.” You will need to know the cost of the workshop (the calculator looks this up for you). You will also need to know how much your company spends to have you as an employee. This number will include your salary, benefits, and any overhead (technician support, office space, etc.). You may have to ask someone in your finance department to get this number. For this example we will assume that the average for the 20 students is $60,000 each per year. You will need to know the cost of software. For this example we will assume you are going to use JMP 8. (The calculator will look this up for you too.) Here's what the calculator provides: Estimated Initial Software Expense for JMP8*: $12856 Estimated Annual Software Expense for JMP8 (Renewal Fee, after the first year)*: $6428 Workshop Cost for 20 Students (Travel Included) = $23900 Student Salary Expense = $9863 Initial Investment = $46619 Estimated First Year Return = $80000 Estimated First Year Return on Investment = 72% 5 Year Investment (includes initial investment and software renewal fees) = $72331 Estimated Five Year Return = $400000 Estimated Five Year Return on Investment = 90.6% per year
How was This ROI Calculated?
Estimated software costs are based on current pricing from JMP. The workshop cost is $8,000 plus $795 per student. The salary expense is $60,000 / 365 x 3 x 20 to account for 3 days of lost productivity while attending the workshop. The initial investment is the sum of these expenses, $46,619. The first year return is estimated using certain assumptions (Assumptions are a necessary part of any ROI calculation. You will need to justify your assumptions to make a compelling argument.): Students complete work in 1/3 the time after training. ( Based on 3 factor experiments. Reference is “Statistics for Experimenters,” by Box, Hunter and Hunter, p. 313, ISBN 0-471-09315-7.) Thus 2/3 of the time spent experimenting will be saved. Studying more than three factors will increase the Return on Investment. Student spends 10% of time at work experimenting. The rest of the time is spent in meetings, writing reports, and performing other tasks. So, for one year of work, your company would invest $60,000 x 20 = $120,000. After training you can accomplish the same amount of work in 365 - (365 x 0.10 x 2/3) = 0.9333... years. Thus the company will save ($60,000 x 20) - ($60,000 x 20 x 0.9333...) = $80,000. This is the return. Calculate the ROI as follows: %ROI = Profit / Investment x 100 = (Return - Investment) / Investment x 100 %ROI = ($80,000 - $46,619) / $46,619 x 100 = 71.6% The stock market is considered a good investment with an ROI of 10%. An ROI 0f 72% is an extraordinary investment. Even if you only achieved half of this, the return would be well worth the investment! (Incidentally, this %ROI has been verified in the real world: Here's what a major customer said in Quality Progress: "...the expected average return on investment for [Objective Design of Experiments DOE] training is more than 70%. Our products go to market faster and are of higher quality." Quality Progress, November 2004, p. 81). How about the five year numbers? You have to include the recurring software renewal expense. The return should continue to be the same each year after training. So, 5 year investment = $12,856 + 4 x $6,428 + $23,900 + $9,863 = $72,331 5 year return = $80,000 x 5 = $400,000 5 year %ROI = {($400,000 - $72,331) / $72,331 x 100} / 5 = 90.6% per year Wow!
What do You Need?
Next time you need to make a significant purchase, take a little time to estimate the ROI. It can make a very compelling case to your management.
Objective Design of Experiments workshops will teach you to use DOE in your work with a high expected ROI. Design of Experiments is a fundamental technique for industrial experimentation. You will learn to apply DOE easily without excessive math and theory. We will help you be even more successful!