The value of an effective cost-benefit analysis
Working in manufacturing and engineering, a cost-benefit analysis has become a staple tool used throughout projects – big and small.
When you are presented with various solutions for a problem, ensuring you decide on the right option is fundamental in reducing risk, resource and increasing the chances of success and addressing the objectives set.
Having clear parameters for evaluation is non-negotiable when it comes to running a profitable and effective factory setting, as you cannot manage what you cannot measure. Along with KPIs, a Cost-Benefit Analysis provides a mechanism for measurement. It is a data driven process that is structured to evaluate the key metrics around a particular project solution. All the known costs and benefits of a solution most be mapped out before an analysis on the proposed options can take place.
How do you undertake an effective Cost-Benefit Analysis?
Here at FESS we have a tried and tested method that involves our engineers obtaining key pieces of information they can put into an algorithm-based software to financial appraise the solutions. This is then carried out for each option presented, for example purchasing a new boiler for a plant room. Tenders are invited from several suppliers to provide a costing for the total package. It is imperative to ask for total cost without any deviation. From the ‘Fixed Cost’ quotation, the numbers are reviewed, and figures inputted into the analysis template.
The initial steps include:
- Having a clear understanding what the companies Return on Investment (ROI) is set at. Often this is around 25%
- Take into consideration other variables including capital expenditure, loans etc and direct and indirect costs associated with the option
- Look at the depreciation of the project- this can be based on 10, 15 or 20 years depending on the project
Non-financial data in Cost-Benefit Analysis
Alongside financial implications of a project, a cost-benefit analysis can also include non-tangible benefits including social advantages and disadvantages, employee engagement and morale or consumer brand image.
These can be also factor in ‘opportunity costs’ which are alternative benefits gained from choosing one option over another and also the cost of potential risks around regulation, competition and environmental impacts.
Forecasting does play an important role in Cost-Benefit Analysis which is key in analysing the results, given that if any of the forecasting is incorrect, this could have significant consequences on the chosen outcome.
Having a structured and clear process when it comes to implementing Cost-Benefit Analysis is fundamental for any food manufacturer.
As providers of engineering support to the food industry, FESS regularly carries out Cost-Benefit Analysis’ on project works within the sector, from plant room investments, to production and process line upgrades.
If we can help you on your next project or provide advice on your current evaluation and review process, please do get in touch.