The ROI of Root Cause Analysis An intuitive sense approach
For an RCA program to survive, it must stand on its own value. Individuals within an organization who engage in an RCA program have an intuitive sense of the program’s value and believe it serves as a cost-saving tool.
Individuals not familiar with the RCA program might only notice the expenses for employee training and software or perhaps register infrequent value when a high-profile event is analyzed. Thus, it is important to develop and communicate a tangible understanding of the associated benefits, cost savings and profit generation within the context of revenue goals.
EXAMPLE ROI RESULTS USING THE APOLLO ROOT CAUSE ANALYSIS METHODOLOGY
Client savings data indicates that many companies see the immediate return on money invested in Apollo Root Cause Analysis training.
If one trained person completes an RCA and implements solutions, the savings will more than pay for the training course and software. Providing an immediate ROI (Return on Investment) which grows exponentially when additional people from the same training course perform RCAs on a regular basis.
Once the RCA program is up and running, the paybacks start to roll in, as the following companies reported.
- A global chemical company evaluated over 100 RCAs performed by their reliability engineers and found the average value returned on each RCA was $75,000 USD per year. The average cost per RCA, including solutions, was $1,500 yielding an ROI of 4900% after one year. RCA is also a key part of this company’s safety program, where they have realized more than a 75% improvement in their injury and illness incident rate from 2.4 to 0.59 in an eight-year period.
- A second global chemical company found that each RCA resulted in $17,000 USD per year savings by eliminating maintenance problems. Their average ROI on each RCA was 1100% after the first year
- A manufacturing company saved $1,300,000,000 USD through RCA by discovering an innovative solution to one of their product problems. In that same RCA, they also discovered $19,000,000 USD per year in waste that was previously unknown and could thus be eliminated.
- A global telecommunications company has saved millions of dollars by using the Apollo Root Cause Analysis methodology to analyze and
correct problems in their global mobile phone and networking business through reduced service interruptions and outages.
CALCULATING RETURN ON INVESTMENT
Use conservative data to develop defend-able metrics which demonstrate the value of your RCA.
Calculating the results of qualitative programs enables the program champions to evaluate program effectiveness individually and collectively. When done thoroughly and reasonably it earns credibility within the organization.
ROI Formula:
Return on Investment (ROI) = Net Savings / Cost x 100%
Net Savings = Annual Cost of a problem before RCA minus annual cost of problem after RCA solutions are implemented minus cost to implement RCA and solutions
Cost = Annualized Cost of RCA + Solution + RCA Training
Identify the initial costs that include training and software.
* If unable to define the initial investment numbers a one-time cost of $1,500 – $2,000 per person is common.
Identify the costs to conduct an RCA.
* If there’s uncertainty or wide variability with the cost to conduct an RCA using a high estimate will lend greater credibility to the calculations.
EXAMPLE ROI CALCULATION
The following is the ROI of a problem where the Apollo Root Cause Analysis methodology was applied successfully.
A product dryer was experiencing 30 failures per year. Lost profit from lost product sales due to dryer downtime was approximately $750,000 per year. Out-of-pocket repair costs were running approximately $150,000 per year. The RCA resulted in a solution with a capital cost of $180,000 with an annual operating cost of $10,000. The RCA costs (team meeting and lab testing time) totaled $25,000. The failure rate after solution implementation went to less than one per year. (Note: a conservative assumption of one failure per year will be used.) Assume five-year life for capital, RCA and training costs. (Note: A conservative assumption will be made to charge all training cost against this RCA. Otherwise, this cost would be spread over many other RCAs.)
With annualized one-time costs over a (5) year period:
ROI = Net Savings/Cost x 100%
Net Savings = (Reduction in total costs – Cost to implement RCA -solutions)/ (Cost to implement RCA + solutions)
Net Savings/yr. = [(30-1) (failures/year) x ($750,000+$150,000)/30 (cost/failure)] = $870,000/yr.
Cost of training/yr. = $1,500/5 x 5 people on team = $1,500/year
Cost of solution/yr. = $180,000/5 (capital) + $10,000 (operational costs) = $46,000/year
Cost of RCA/yr. = $25,000/5 = $5,000/year
Cost to implement RCA + solutions = $46,000 + $5,000 + $1,500 = $52,500
ROI = ($870,000-$52,500) / $52,500 x 100%
ROI = 1,557%
Extracted from ARMS Reliability – authorized global training provider of the Apollo Root Cause Analysis Methodology
