Profitability and benefits
In the five previous articles we have looked at what Product Lifecycle Management involves and what a PLM system does; everything from document management, CAD vaulting, BOM handling, change management, workflows and integration with other IT systems such as ERP. It involves managing all information associated with the products developed and sold by the company, from cradle to grave. But is it profitable to invest in a PLM system? In other words, what are the benefits and what are the financial consequences? This topic is obviously an interesting one, all investments should be profitable, but it is not a walk in the park to calculate or understand why and when a PLM system is profitable. In this final article of the PLM School, we take a closer look at benefits and profitability.
If a baker were to be slightly late in delivering his goods, just one day late, he would not survive. He may be able to sell his bread at half the price but it would not be very profitable. If the baker manages to deliver his goods while they are still fresh then he has more of a chance, but if the bread does not taste good he might as well close his shop. He will not gain anything by working excessively and generating lots of waste in his baking oven! A key factor for today’s industrial companies is to use time efficiently and reach the market before your competitors to capture market shares; “time-to-market” is a central criterion for success.
The baker has to deliver his goods in time, and at the right level of quality, to survive. Time and quality are also two of the most vital elements that make a PLM system profitable for an industrial company. If the baker manages to have an attractive range of products, constantly adding new flavors and types of bread, then he will sell more, perhaps become ”best in town” and earn the most! A PLM system supports companies seeking a higher rate of innovation and improved use of their product portfolio.
The PLM system affects everyone in the company
A PLM system affects both the earnings side (efficiency and savings) and the revenue side (increased sales) of the accounts. Part of the challenge of quantification is that PLM affects so many parameters and all of these are linked together in complex interplay. An attempt has been made at illustrating this in diagram 1. One of the connections highlighted in the diagram illustrates that ”more precise product information leads to fewer errors which leads to improved product quality which leads to reduced costs which results in greater profit!” There are many such connections and it is not always as easy to see either why things are so expensive or how they can be made more profitable. Much is dependent on the quality of the information about the products and processes and this is where PLM comes in as a central tool.
Dig. PLM affects many areas of a development process and financial relations.
Benefits and profitability parameters
A financial assessment and risk analysis of the project are usually performed before an investment decision is made. As mentioned above, a PLM solution impacts on both increased revenue and enhanced profitability in the operations. The first is a strategic consideration, while the latter involves enhancing efficiency and making savings. Diagram 2 illustrates the cost profile for a product’s lifecycle, shown with and without the use of a PLM system. Where PLM is used, the costs for the development process are lower, time-to-market shorter and finally – revenue higher through, for example, better use of product variants and a larger share of the market.
Every company should identify the most important benefits and savings as part of a PLM process itself. Some of the most typical savings and strategic benefits are listed below:
Reduce time consumption
- Reduce time spent searching for information
- Reduce time for managing changes
- Reduce time for generating a BOM
- Reduce time for transferring design data to production
- Reduce time for handling errors and complaints
Reusing skills
- Reduced time for creating new parts and products based on older solutions
Change management
- Reduction in the number of changes
- Reduction in the time spent on handling changes
- Changes are detected and made at an earlier stage of the development process
Customer care management
- Reduced number of errorsReduced time spent preparing offers
Annual growth in revenue, for example
- Quicker introduction of new products
- Quicker offer processes, more offers with the same resources
- Better use of the product portfolio
- Larger and more market-adapted product aspects
Organizational efficiency
- Quicker introduction of new employees
- Quicker adaptation process in the event of takeovers, for example
Other cost elements and benefits – strategic gains
In addition to the above benefits, a PLM system will influence the quality of both processes and products. But what is the value of high quality? What does it cost to be late with a product? What does a project delay cost? What does an error in delivered equipment cost? What opportunities are presented by efficient outsourcing? How is the company to handle rapid growth in a global perspective? These are strategic elements for which the financial benefits of a PLM solution are not easy to calculate but where the connections are quite clear; the quality of product data and processes forms the basis of the quality in the remainder of the value chain.
Profitability analyses – practical tools are available
It may be relevant to calculate the profitability of the project as part of a risk assessment of a PLM project. Several methods for calculating profitability exist, for example, payback-time, present value analysis, ROI (return on investment) or internal rate of return calculations. We will not go into these calculation methods in detail here, they should be well-known in your accounting department. A common factor for all of these methods is that both cost elements and benefits (savings and increased revenue) must be identified and quantified. Some of the methods are more complete and take a long-term view of investments. A payback analysis provides a general outline but does not saying anything about what happens after an investment has been repaid, for example. However, this is perhaps when a PLM investment really begins to yield results. US organization CIMdata has developed practical tools for ROI analyses of PLM systems that can be recommended as useful aids.
Profitability analyses depend on good “data”
It is obvious that the quality of the profitability analysis is entirely dependent on the quality of the estimates made of time and cost savings. If these estimates are associated with a high level of uncertainty, then so are the results. Accordingly, such analyses are made relatively simple for many companies. Very many companies value strategic gains above savings and for this reason do not perform a detailed profitability analysis.
Total Cost of Ownership – the overall cost profile
It is the overall cost profile that is important to take into account in all investments. For PLM systems, the investment in software, implementation and training of users will be the key elements. It is also vital to be fully aware that a PLM solution will, in all probability, change and develop over time in line with the company evolving. Accordingly, costs will be accrued for this work, just like for an ERP system. Another important consideration is that companies now have a very high number of IT systems with different functions. A PLM system may often replace many specialist systems and provide the company with a simpler and easily controllable IT landscape. In the same way as ERP systems now handle most of a company’s accounting and personnel requirements, PLM systems can handle everything associated with product data. Specialist systems for handling deviations, managing changes, workflows, requirement management, etc. can be grouped together in a single system. Taking a holistic approach, this could generate substantial savings for many companies that currently wrestle with 10-15 different systems.
Summary – an investment in PLM is a strategic and profitable decision
In this article, we have identified some benefits and savings that a PLM system can contribute and that can also be utilized to calculate the profitability of such a project. Many companies invest in PLM solutions without performing detailed profitability analyses. The strategic opportunities are the decisive factors, for example, higher rate of innovation, more new products, production outsourcing, rapid growth, globalization, etc. It is also a matter of winning ground in the marketplace, being the first and offering the right quality. The most successful companies in almost all product-development industries currently use a PLM solution – the others trail behind – as do the small companies. The baker knows that his bread will not sell if it comes too late or is of poor quality. The same applies in all industries at some point. For this reason, PLM is going from strength to strength since more companies have discovered the strategic benefits of making an investment in this system.
Dig. PLM influences both cost reductions and increased revenue for the total profitability of a product