SHOW ME THE ROI!!!

---

Ok, maybe channeling my inner Jerry Maguire was a bit over the top, but we can't be serious all the time.

In Thomas Corbett's book ("Throughput Accounting"), he illustrates a simple company with 2 machines, 1 for cutting material & the other for sewing 2 products (women & men's shirts) to illustrate the results when your business decisions are based in Cost Accounting.

Weekly demand for both shirts are 120 units. Women’s selling price = $105; men’s price = $100. Raw material for women’s shirts = $45; men’s cost = $ 50. Cutting time for Women’s shirts = 2 mins, men’s = 10 mins. Sewing time for Women’s shirts = 15 mins, men’s = 10.

Each machine has an operator who work 8 hours a day, 5 days per week, which equals 2400 minutes a week. The investment and cost for each resource are the same while the company’s weekly operating expenses are $10,500.

The company is unable to meet the demand of 120 shirts for both women and men's orders.  So, they must decide how the maximize the company’s profitability.  When we compare Price, Raw Material Costs & Process time, our Cost Accounting decision points to the superior choice - Women’s shirts.

Cost Accounting Scenario (Maximize Women's shirts): If we focus on meeting the weekly demand of the women’s shirts (120 units), we find that we can only make 60 Men’s shirts (2400 Sewing minutes – 120 women’s shirts x 15 minutes sewing time leaving only 600 minutes for sewing for men's shirts).  Our Gross Margin is $ - 300 ($ 10,200 - Weekly OE).

Scenario 2: If we maximize men’s shirts of 120 units per week (women’s 80 units per week), our Net Profit is $300 or 1.47% Profit Margin – marginally better.

Scenario 3: If we apply TOC, we identify the Capacity Constraint Resource (CCR) as the Sewing Time for the Women’s shirts. A project is proposed to invest $1000 in a project that would decrease the Sewing Time for women’s shirts by 1 minute, but would require increasing Cutting Time for Women’s shirts by 3 minutes. We will meet the demand of 120 Men’s shirts AND increase Women’s shirts by 5 yielding 2x Net Profit of $600 or a Margin of 2.87%

Throughput is the value of the products / services you deliver to customers minus direct Cost of Goods or Services or paid to outside vendors. Throughput PMO models view any cost that is not contributing to throughput is considered waste.

Portfolio Sizes: traditional PMOs track less than 50% of their portfolio projects, but when you right size your portfolio, PMOs can track more that 75% of their portfolio thus increasing better visibility and ensuring timelier & accurate data for decision makers.

Here's where the rubber hits the road...

Portfolio Visibility savings: the constant search for acceleration opportunities and threats should yield a minimum return of 10% against your Total Project Portfolio budget.

Overages: projects on average overrun by 25%. An average IT Project Budget = $500K. A 25% overrun adds an additional $125K. If you just start applying Critical Chain framework and reduce those overruns by 25%, you will save 6.25%

Additional projects: with your constant search for acceleration opportunities, you will flow more projects to completion faster. Just closing an additional 4% of your projects will yield $1M in Project Value x 4% of your projects.

Cancelled projects: many businesses fail to recognize the need to cancel projects that are no longer warranted. Either the benefits were overblown or requirements underreported, but a Throughput Model PMO will help PMs report on problem projects sooner. So, instead of spending 80% of a doomed project’s budget, what if the project was stopped at 50% sunk costs or even 10%. 74% of IT projects fail every year.  With a failure rate 10% (x Total # of Projects) x $500K (Avg IT Project Budget) x 50% is your savings.  Another gain would be the quicker turn around of project resources & capital saved on these failed projects.