Example ROI Calculations for Productivity Projects

I wanted to share you with some examples of ROI calculations I have completed to get you started down the path of planning your improvements as and investment that will positively impact to your revenue stream. This post is a follow on posting to a previous posting on the subject of "Investing in NPD Excellence" dated 3/31/08.

The main components of an ROI analysis for a semiconductor productivity improvement project can be seen below:

• Net investment in the improvement ($)
• Expected timeline impact to a NPI (weeks)
• Expected revenue from the new product ($/week)
• Product margin (%)
• NPD Burn Rate ($/week)

With the above figures on hand you have everything needed to calculate ROI for a given process improvement effort. As an example I have created a set of curves below that assume an investment of $75K and 40% margin revenues ranging from $25K/wk ($1.3M annual) to $200K/wk ($10.4M annual). With the lowest revenue product a three-week improvement is the point where the $75K investment pays off and begins positively impacting the revenue stream, it becomes profitable.
The next set of curves is the same as the previous one except that the improvement investment is $150K. In this case the lowest revenue product requires a six-week improvement to yield a net positive, a time easily recovered if the improvements implemented removed a silicon spin from the path to production release. The higher revenue producing projects easily show net positive with as little as three and a half weeks or less in cycle time improvements.
In both of the examples above the curves are representative of the first product development after an improvement implementation. Assuming the improvements stay around for future products the ROI increases considerably, since there are no new improvement investments while follow up projects reap the full time-line improvement benefits of the initial project.