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Thanks for joining us again, Troubleshooters! We’ve talked here before about calculating the return on investment (ROI) of training. Over the next three weeks, we’re going to dig a bit deeper into that topic. We’ll be looking at how to accurately forecast the cost of investment and benefits of electrical troubleshooting training for your maintenance personnel, and then to calculate the ROI. In Part 3, we’ll have a training ROI calculator for you to use.
Why Do I Need to Know the ROI of Training?
Why do you need to know your training ROI? Well, maybe you’ve been thinking about training for your electrical troubleshooters, but aren’t sure if the payoff will justify the costs. Or, maybe it’s something you do see the need for, but first need to show senior management some solid numbers in order to get. The ROI will tell you whether it makes sense to spend money on training.
What is ROI?
ROI is a performance measure commonly used to evaluate the efficiency of an investment (in this case, the cost of the training). The standard formula for determining ROI is:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
Simple, right? Yes and no. ROI is easy enough to calculate after the fact, but if you are using this measure to determine what the ROI of a future event is going to be, be forewarned: it will involve some estimating. What we want to do is make the most accurate estimates possible so that we can predict a reasonable ROI and see whether training is worth it.
Okay, so let’s get on with it. The two parts of the formula that you will have to estimate are 1) the gain from investment, and 2) the cost of investment. Once you have those, it’s easy!
Today in Part 1 we’ll look at how to estimate the gain from investment, and next week in Part 2 we’ll break down the cost of investment.
Estimating your gain from investment
In order to know what your gain from investment will be, you need to determine a few numbers.
- Average downtime per month
You’ll need to know how much downtime on average your plant currently experiences due to equipment failure. This is the number of minutes or hours each month that you are not producing anything because the machines are down (unplanned). (Take an average of the last 12 months if you can). It’s basically the difference between the amount of time the company planned to operate, and the actual operating time:
Planned operating time – Actual operating time = Total downtime
(Of course, you would not count any major production stoppages that unrelated to equipment failure, such as planned downtime, labor actions, shutdowns due to severe weather, etc.)
- Cost of downtime
The other thing you need to know is how much downtime costs your company per minute. Tangible downtime costs are the obvious ones—the profits you lose when you are not able to produce your widgets. You’ll need to determine how much money (in terms of lost profits) production line downtime is costing your company. To establish that number, figure out what your production value is per minute of production.
The formula for cost of downtime (per minute) is:
# of units produced per minute × profit per unit
If you produce 100,000 widgets per day during an 8-hour day (480 minutes), that’s an average of about 200 widgets per minute. If you sell each widget for $5.00 but it costs you $1.00 to produce, you have a profit of $4.00 x 200 = $800 per minute.
So, if the production line is halted for 3 hours while maintenance tries to figure out what’s wrong and fix it, your company has lost $800 x 180 minutes = $144,000 in profits.
Your cost of downtime may be lower, or it may be much higher, depending on your industry. In the auto industry, for example, production downtime can cost as much as $22,000 per minute.
It’s worth mentioning here that there are also intangible costs attached to downtime. These include the compromised ability to keep customers happy; job orders lost because of missed deadlines; the stress that downtime causes for employees as well as on machines; and innovative ideas lost while everyone is stressed out and playing catch up (you can read more on both tangible and intangible costs here). For our purposes today, we’re going to skip intangible costs because they can’t be calculated. Just be aware that they’re there.
Once you know your cost of downtime and your average downtime per month, you can see what downtime is costing your company each minute production is halted:
Average downtime per month (in minutes) × Cost of downtime per minute = Monthly cost of downtime
The final step in this stage is figuring out your gain from investment, and that is done by simply subtracting your post-training monthly cost of downtime from your pre-training cost:
Before-training downtime costs – After-training downtime costs = Gain from investment
This number will tell you whether training has lowered your downtime, and by how much.
Training impacts length of downtime, not cost of downtime per minute
It’s important to realize that troubleshooting training will not affect your cost of downtime per minute. It can only affect the length of time that the machines are down (i.e., average downtime per month), which will directly affect your monthly cost of downtime.
Troubleshooting training makes your maintenance staff far more efficient at isolating electrical faults in high-tech production line machinery, because they are taught a systematic method for quick diagnosis. This means they don’t waste time guessing at where the problem lies, or waste money replacing parts unnecessarily. It also teaches them to repair machines safely, so they don’t cause more damage and further delays during the repair.
Estimating your after-training downtime costs
In order to accurately calculate your gain from investment, you’d have to know one more thing, and that is: how much downtime will be avoided as a result of training? Now, this is obviously something you can’t predict precisely in advance. You will only know for certain once you’ve implemented training and seen a drop in average downtime.
But, you can predict a reasonable range and compare your training costs against that.
Suppose your cost of downtime is $800 per minute, and your plant experiences just 1 hour of downtime per month. That one hour is costing your company $48,000 a month. Now you have something to measure your training costs against. Suppose through training you are able to reduce this hour of downtime by 25% to 45 minutes. That’s a savings of $12,000 for that month.
Suppose you are only able to reduce downtime by 10% – that’s $4,800 saved in one month. Of course, this figure will change depending on your company’s cost of downtime.
Okay, Troubleshooters! Tune in to Troubleshooting Thursdays next week, when we’ll talk about how to estimate your cost of investment.
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