Tool 45: Cost-Benefit Analysis

AKA

N/A

Classification

Evaluating/Selecting (ES)

Tool description

The cost-benefit analysis provides the team with the ability to estimate the costs associated with potential benefits of implementing a proposed solution or process-improvement opportunity. This analysis is especially useful when several options need to be evaluated for financial impact; the final selection should return the greatest overall benefit for incurred cost.

Typical application

• To compare among several options and select the option that offers the greatest return for the cost of implementation.

• To prepare a financial cost-benefit analysis for decision makers.

• To provide a cost-data rationale for proposing the implementation of a solution.

• To verify the cost effectiveness of a solution.

Problem-solving phase

→	Select and define problem or opportunity
	Identify and analyze causes or potential change
→	Develop and plan possible solutions or change
→	Implement and evaluate solution or change
	Measure and report solution or change results
	Recognize and reward team efforts

Typically used by

	Research/statistics
	Creativity/innovation
	Engineering
	Project management
	Manufacturing
2	Marketing/sales
3	Administration/documentation
	Servicing/support
	Customer/quality metrics
1	Change management

links to other tools

before

• Information Needs Analysis

• Data Collection Strategy

• Activity Cost Matrix

• Consensus Decision Making

• Resource Requirements Matrix

after

• Cost of Quality

• Starbursting

• What-If Analysis

• Different Point of View

• Presentation

Notes and key points

• When calculating costs, use actual labor and material rates. Remember, your conclusions are only as good as the data they are based on!

• Costs-benefit ratio = Benefits Costs

Step-by-step procedure

• STEP 1 The team first identifies the various costs involved for the activities to be completed within the options to be evaluated.

• STEP 2 Costing data are collected from some qualified source. These data cover labor rates, material costs, transportation, expenses, fees, and other charges. See example Provide Statistical Process Control (SPC) Training.

• STEP 3 The team next discusses the various options, selects those that show the greatest potential, and performs the calculations of total costs.

• STEP 4 Options are costed out and compared using a benefits/cost ratio as shown in the example.

• STEP 5 A final decision is made and the cost-benefit analysis data are saved for the development of a proposal or action plan.

Example of tool application

Provide Statistical Process Control (SPC) Training

Option A: Engage external trainer to conduct (6) 2-day SPC workshops for 100 employees		Option B: Prepare internal trainer to conduct the 2-day SPC workshops for 100 employees
$2,250	Airfare (3 roundstrips, conduct 2 classes per trip)	$ 750	Airfare for company trainer to be cross-trained
1,560	Expenses (12 days $130 per day)	700	Expenses (5 days workshop and reserch)
2,500	Materials ($25 per student)	3,000	Train-the-trainer charge
9,500	Tuition ($95 per student)	10,000	Master copy and repro rights
350	Shipping materials	1,080	Internal trainers's prep time ($45 per hr 24 hrs)
120	Local reproduction	4,320	conduct (6) 2-day classes (labor $360 per day)
		1,200	repro of 100 training binders
$16,280		$21,050
Benefit Estimate: Reduction of an estimated 25 hours of rework per week. Savings ($) = 25 hrs 50 wks $30/hr = $37,500 per year
Notes: Tuition discounted to $95 per employee Benefits/Cost ratio = 2.30 Based on the higher benefit/cost ratio, this is the better option.		Notes: Labor rates fully loaded Benefits/Cost ratio = 1.78