It’s a fact that in every process improvement that you do, the ROI is always an important matter to consider.
Here’s another good resource for you. Anand Paropkari’s article on iSixSigma is a good discussion on how to estimate the return of investment (ROI) for a process improvement program.
ROI Fundamentals
ROI is the ratio of the amount of resources invested in a project to the net benefits reaped from it, often expressed as percentage. It can be used in cases where management needs to know how the business is going to benefit from a project that carries significant costs. The percentage can be calculated with the following formula:
ROI = ((Total benefits – Total cost)/Total cost) x 100%
For example, if an initiative that cost $10 million provides total benefits of $17.5 million, then, according to the formula, the ROI is 75 percent.
It is obvious from the above equation that:
- ROI less than 0 percent is not economical
- ROI equal to 0 percent is considered a “no loss, no gain†situation
- The greater the ROI, the larger the benefit
Essentially there are two factors to take into account when calculating ROI: cost and benefit.
