Cost Benefit Analysis

What was delivered? $27,000 in cost reductions

  • $10,000 due to the recovery of consumablesrefer to table1
  • $17,000 in reduced inventory costsrefer to table2

I was approached by an organisation that provided repair & maintenance services for large, heavy duty vehicles. The team were keen to prove to senior management that some proposed product changes would not only be at lower costs but also not compromise quality.

I suggested to use cost-benefit-analysis (CBA) to prove the future benefits of a particular change in product:

Table1
Benefits/Savings calc
total litres used current new saving
total annual usage (ltrs) 8,700 8,700  
unit price $1.05 $1.13  
annual costs $9,135 $9,831 -$696
plus reuse/recovery nil 50%  
cost of recovery/ltr n/a $0.23  
annual costs/recovery n/a $2,001  
total annual costs $9,135 $11,832  
net recovery (at 50%) nil -$5,916  
Overall annual costs $9,135 $5,916  
Net benefit per annum     $3,219
Net benefit over 3 yrs     $9,657
Table2 (simplified)
Spare parts rotation calc
parts used 6 mths >6 mths >12 mths
  498 267 152
Total cost of inventory $88,156 $41,027 $14,761
(excl interest)      
       
After line by line review 463 222 99
Total cost of inventory $83,553 $34,113 $9,614
(excl interest)      
       
Net benefit per annum $4,603 $6,915 $5,147
Total net benefit     $16,664

We also tackled their spare parts holding stock and worked through different scenarios to reduce inventory. Again we analysed which stock items moved how often and discovered that a number of stock items were only required once per year or even less.

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