How to justify the cost of a rapid prototyping system
By Chris Hoins, Controller, Stratasys, Inc.
To designers, engineers and product managers, the value of additive manufacturing machines for rapid prototyping is unquestionable. Yet, in spite of the obvious value, it may not be clear how to convince the management and accounting departments that the benefits justify the capital expenditure.
The challenge is two-fold:
• Conveying the value in objective terms
• Writing the business case in a style that executive management embraces and the finance department understands.
To improve the odds of gaining approval, here are tips and guidelines for creating a compelling business case for the acquisition of additive manufacturing equipment for prototyping.
The “business case” is a tool that demonstrates the value of the proposed capital expenditure (capex) to management. Its goal is to validate a purchasing decision by transforming benefits into concrete, tangible returns.
A well-written business case shows that the capex proposal offers a great return with manageable risk. Describe the advantages and financial gains in three parts:
1. Executive Summary
2. Situational Analysis
3. Financial Justification
1. EXECUTIVE SUMMARY
The executive summary holds the two most important paragraphs of the business case. If written well, half the battle has been won. The decision maker has been hooked and has begun to buy into the proposal. In some cases, the executive may read no further. Instead, he/she may approve the proposal with the contingency that support staff confirms the details.
If the executive summary has been poorly written, the proposal may be flatly denied with no further investigation. The executive summary is that important.
A good executive summary is succinct. Limit it to two paragraphs, each with two to three sentences. Include a statement of the problem, the solution and the intended results. Be clear about the investment and the financial return, which will be stated in the company’s preferred financial measure (such as ROI). While it may be beneficial to project the financial gains over a number of years, place more focus on the short-term gains.
Although the executive summary will be the first item that decision makers read, write it last. Because it summarizes the key points that follow in the situational analysis and financial justification, a strong executive summary can be crafted only after the business case has been fine-tuned.
2. SITUATIONAL ANALYSIS
The situation analysis documents four areas that influence the decision-making process: Current situation, Proposed solution, Alternatives investigated, and Risks. Like the executive summary, write the situational analysis concisely.
This is a statement of the aspects of the business that the additive manufacturing system will address once installed. In a sense, it is a “diagnosis” of a problem, and the proposed capex request is the recommended “treatment.” Using concrete financial data as the foundation, state the current process and expose the associated problem or opportunity. In addition, note which departments/divisions the current situation impacts and who stands to gain from any improvement.
Incorporate facts with measurable financial components to them. However, do not go overboard or off on a tangent. Stick to the current challenge that is the basis for the financial justification.
State the proposed solution—purchasing a system—and the measurable benefits that will result. As long as the description of the solution remains on-topic and succinct, it is okay to reference the benefits that are difficult to quantify, such as speed. However, use such benefits as added-value items that the company will also realize.
State end results rather than the intermediate returns. For example, if a capex proposal would increase operational efficiency, in terms of labor hours state how the time will translate into profit. Would it decrease head count? Would it increase departmental output? Get to the point and tell the decision-makers the bottom-line results.
The last item in this section is a statement of what the proposed solution will cost and how long it will take to get it operational. For the cost, use the up-front investment needed to start making parts.
Show that primary alternatives were considered; that a reasonable investigation was performed. Rather than be comprehensive, state the most obvious alternatives. For each, follow up with a short statement of why it is an inferior option.
All capex proposals have some risk associated with them, so don’t pretend that the additive manufacturing solution is risk-free. Instead, discuss the risks to show that they are manageable and that the investigation considered all contingencies. As with the alternatives, include the most obvious risks. Dispose of each with a short statement of the countermeasure should they occur. Then be prepared to field the questions from management regarding the risks not listed in your business case.
3. FINANCIAL JUSTIFICATION
The core of the business case is the financial justification. It presents the anticipated return on the capex investment. There are two parts:
—Capital expenditure and related expenses
When combined, these items produce the financial indicators that measure the value of the investment.
Seek guidance from your finance department staff, as they will assist you in selecting the proper performance measures—such as return on investment (ROI) or payback period. They can also assist with data collection and calculation methods and offer guidance on items such as “hurdle” rates.
Ideally, the justification will show a large return for a small investment. This is the winning combination, but the process of getting to it may not be simple. It is often best to include only what is necessary to show a compelling return. And be realistic in your claims about what the proposed system will do.
To achieve a balance between compelling and realistic, fine-tune the numbers through several revisions. After each pass, review the return on investment. If it is too low, add more prototyping work. If unnecessarily high, remove items that create questions or conflict.
In general, a rapid prototyping system will replace an existing system, add to the existing system, or enable you to make parts faster. Here are tips for each of these scenarios.
Replace an Existing Prototype
You will need historical data for any models, prototypes, patterns and tools that are representative of the parts the new additive manufacturing system will make. Use a 12- to 36-month look-back period.
Whether parts have been outsourced or made in-house, include not only additive manufactured parts but also those that are machined, molded, cast, formed and hand-fabricated. Collect data for all items that could be made with the proposed additive manufacturing system. However, include in-house parts after careful consideration of corporate dynamics, process ownership, and budgetary approval level.
Building from the historical data, project the additive manufacturing workload for the near term, typically one to five years. Estimate if the same or similar parts will require prototyping and pair that with corporate projections related to changes in R&D spending, rate of new product development and changes to product mix. This review provides a baseline of all potential part candidates.
Calculate the actual cost of all of these prototype parts when made with conventional manufacturing processes or by third-party additive manufacturing companies. For outsourced work, use invoices to determine average costs for each category of parts. Make sure to include all expenses, such as: Part cost, engineering charges, labor charges, expedite fees, shipping/handling charges, and taxes.
In a cost justification worksheet (figure 1), enter the sum of all of the costs in the first year column for return (value). This value does not reflect the net “true” return since it excludes the cost of making the additive manufactured parts, which will be calculated in the expenditures section of the justification.
Increasing Prototyping Activity
If larger financial returns are needed to obtain approval, move to the next area of benefits that additive manufacturing offers. Place a dollar amount on the inherent value of developing concept models, prototypes and prototype tooling. Use machine capacity that remains after the scenario of replacing existing equipment; the business case will show that additive manufacturing enables the production of more models, prototypes, and tools.
The strategy for these benefits is to leverage what corporate management has already accepted as fact. Use any acknowledged values of prototyping in the calculation of return from the additive manufacturing machine. For example, if a rule-of-thumb exists for a ratio of prototyping investment to money saved from error avoidance, use it in the justification.
Apply the value of prototyping to the additive manufactured parts and add it to the first scenario savings in the return row of the cost justification worksheet.
Additive manufacturing’s greatest benefit is making things fast. While it is advisable to stress the time advantage, exclude it from the financial justification and include it in the situational analysis. Use the speed advantage as the item that puts a financially justified proposal over the top. Show a significant financial return that concludes with a statement that the company will achieve the stated savings while decreasing cycle time for prototypes, product development, and product launch.
INITIAL INVESTMENT AND ONGOING EXPENSES
The investment component of a financial justification includes all of the expenses to acquire the equipment, get it up and running, and to operate it. There are two expenditure categories: initial investment and ongoing expense. For additive manufacturing, the initial investment is a straightforward calculation with easily defined expenses. The ongoing, or annual expenses, are a bit more difficult to calculate since they are dependent on how many parts are made.
Ongoing expenses may include:
• Maintenance contracts
• Routine maintenance costs
• Other consumables: Items such as cleaning solutions, tips, build platforms, sandpaper
• Labor: Direct labor for machine operation, maintenance and part finishing
• Facility charges
In both categories of expenditures, include only the incremental costs for items such as labor, IT expenditures and facility charges. This is the difference between current expenses and those incurred after system acquisition. For example, if no employees will be added, there will be no labor costs listed even if direct labor will be needed.
To present an accurate assessment of the expenditures, the additive manufacturing vendor will supply much of the data, so a trusting business relationship is crucial. This is especially true for ongoing expenses. Supply the vendor with information on the parts included in the value section of the justification. The vendor will be able to estimate the cost of materials and related operating expenses.
Combine all elements of ongoing expense and enter them in the year one column in the cost justification worksheet’s on-going expenses section (figure 2). Do the same for years two through five, using the same, if any, multiplier that was applied to the annual returns for those years. Beyond a breakdown by expense category, no other detail should be presented in the business case to keep it concise.
However, it is vital to document all calculations, assumptions, and detailed expenses for reference. There will be questions, so be prepared to answer them with supporting, well-documented data.
Return on Investment (ROI)
The hard work is complete. The financial data that you have put together can be used to generate any company-desired metric that proves the value of the capex. Simply enter the financial data in the equations for return on investment (ROI), payback period, net present value (NPV) or internal rate of return (IRR). Calculate the results for the appropriate measures, note them on the financial worksheet, reference them in the situational analysis and stress them on the executive summary (figure 3).
With this approach, additive manufacturing’s value is connected to financial gain, which gives management objective data in the favored language of profit and loss.