ReliaSoft’s Reliability ROI: Difference between revisions

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=ReliaSoft's Reliability Return on Investment(RRROI or R3OI)=
#REDIRECT [[Target_Reliability_Tool]]
 
==Tradional ROI==
First, traditinal Return On Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. In general to calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; and the result is expressed as a percentage or a ratio.
 
{| class="FCK__ShowTableBorders" border="0" cellspacing="1" cellpadding="1" width="400" align="center"
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| <math>ROI=\frac{Gain\,from\,Investment\,-\,Cost\,of\,Investment}{Cost\,of\,Investment}</math>
| valign="middle" nowrap="nowrap" align="right" | &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1)
|}
 
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In this formula "gains from investment", refers to the revenue or proceeds obtained the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
 
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==Reliability ROI==
<br>Relibility ROI, is similarly computed by looking at the investement as the the investment in improving the reliability.
 
To illustrate consider the case of ACME's Widgets. The current design has had an average reliability perfromance in the field, yielding ACME a 10% market share. To stay competitive ACME offers the same warranty as it's competitors (1 year) and prices the product simlarly. Some high level specfics are given below in Table 1.
 
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{| border="1" cellspacing="1" cellpadding="1" width="400" align="center"
|+ '''Table 1. ACME's Widget Specifics'''
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| valign="middle" align="center" | Units Sold
| valign="middle" align="center" | 100,000
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| valign="middle" align="center" | Warranty Returns Per year
| valign="middle" align="center" | 6%
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| valign="middle" align="center" | Market Share
| valign="middle" align="center" | 10%
|-
| valign="middle" align="center" | Sales Price Per Unit
| valign="middle" align="center" | $200
|-
| valign="middle" align="center" | Cost to produce&nbsp;a&nbsp;Unit
| valign="middle" align="center" | $100
|}
 
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ACME's management believes that they can buiilt a more reliable widget, and by doing so reduce both warranty costs and increase market share. Based on some preliminary studies they believe that they can reduce the warranty returns to 2%&nbsp;per year. By builting a better product they also believe that they can more than double their market share.
 
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===ACME Numbers===
Now improving reliability will come at a cost.&nbsp; These costs are going to be t fixed costs (invetsments in tools, facilities&nbsp;and people to&nbsp;improve the reliability)&nbsp;and variable per unit cost for better&nbsp;material etc.&nbsp; For this example lets assume a 10%&nbsp;increase in the production costs per unit and an additional $500,000 fixed upfront invetstment.&nbsp; Then based on these numbers:
 
<math> \text{Sales Revenue}=100,000\cdot \$200=\$200,000</math>
 
 
<math> \text{Expected Returns}=100,000 \cdot 0.06=6,000 </math>
 
<math> \text{Warranty Cost Per Unit}=\$140+\$400=\$540</math>
 
<math> \text{Warranty Cost}=\600 \cdot \$540=\$3,240,000</math>
 
 
 
 
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Latest revision as of 00:37, 22 August 2012

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