TLIX4028A Lesson 4 (2) CostBenefitAnalysis

COST-BENEFIT ANALYSIS


• Technique used to aid in financial decisions

• Involves adding up benefits of a course of action and comparing

with the costs associated with it to determine whether there is a

return on investment

Step 1: Brainstorm Costs and Benefits

What are the benefits of the course of action? E.g. Increased efficiency, money saved, less errors in work

What are the costs of the course of action?E.g. Expensive investment, training programs needed, time of adjustment

Consider the long term – even if the costs are high initially , with time the investment may prove the better option for business


Step 2: Assign a Monetary Value to the Costs

Costs include: physical resources, human effort involved…

Think of all the related costs and determine their valueE.g. What will training cost?

Will learning a new system decrease productivity amongst employees?

Consider the costs that will continue to be incurred even after the project has finished.

E.g. Will you need additional staff? (increase in salaries to be paid)Will your team need ongoing training?

Will overheads increase?


Step 3: Assign a Monetary Value to the Benefits

This is more difficult than step 2, as predicting revenues accurately can prove difficult.

Consider the intangible benefits. While often difficult to place a monetary value to, it is important to

address these factors in your decision-makingE.g. Impact on the environment, employee satisfaction, health and safety

What is the value of these impacts?E.g. What is the value of a more relaxed work environment? What is the

value of decreasing your carbon footprint?Consult with stakeholders to determine the value of intangible items.


Step 4: Compare Costs and Benefits

Compare the value of your costs to the value of your benefitsThis analysis is what will help you decide you course of action.

Do your total benefits outweigh your total costs?

Consider the break even point (the point in time in which the benefits will have repaid the costs)

Where the same benefits are received every period, you can calculate the payback period. This is done by dividing the projected total cost of the project

by the projects total revenues:Total Cost / Total Revenue (or benefits) = length of time (payback period)

COST-BENEFIT ANALYSIS IN PRACTICE(FROM STAGE 3)

• In Task 2, your process of decision making was a form of cost-

benefit analysis. Lets look at the proposed pick rates and the

original pick rate again.

• Below is a table of the most notable data gathered from the task:

Current (220/hour)

Proposed Increase (260/hour)

Proposed Decrease (180/hour)

Cartons picked each shift 1542 1823 1262

Total weight picked each shift 15422 kg 18226 kg 12600 kg

Error rate: miss picks 4% 6% 3%

Error rate: short picks 2% 4% 1%

Cost for fixing errors $2,851.16 $4,565.17 $1,994.16

FTE 14.14 12.35 16.73

Hours worked 2149.20 1876.79 2542.68


Increase in Cartons Picked (260/hour)

• Firstly, lets look at the costs of increasing the pick rate to 260

cartons per hour

• Don’t forget to consider intangible items

Higher risk of injuries in the

workplaceLower staff morale

Cost of errors increases to $2’851.15

Likely loss of casual staff

Higher agency rates to cover the increased workers

compensation costs

Threatened legal action from agency



• Now, lets look at the benefits of increasing the pick rate to 260

cartons per hour

• Don’t forget to consider the intangible factors

Cartons picked each shift

increases to 1823

Hours worked decreases to

1876.79

FTE decreases to 12.35



• Here, it is easy to determine that the costs of increasing the

picking rate greatly outweigh the benefits

Costs Benefits

Agency complications

More injuries + higher risk

Lower staff morale

Errors: $2’851.15

Cartons picked each shift: 1823

Hours worked: 1876.79

FTE: 12.35

• While the increase in the cartons picked each shift and the lower number of FTE are valuable changes, the cost of the intangible factors such as the higher risk to staff as well as the possible legal issues hold too high of a risk to reason increasing the pick rate.


Decrease in Cartons Picked (180/hour)

• Now lets look at the costs and benefits of decreasing the pick rate

to 180 cartons per hours. Firstly, consider the costs

• Don’t forget to note intangible factors

Cartons picked per shift

decreases to 1262

Hours of work increase to

2542.68

FTE increases to 16.73


Decrease in Cartons Picked (180/hour)

• Now, lets look at the benefits of decreasing the pick rate to 180

cartons per hour


Safer workplace

Happy, healthier staff

Cost of errors decreases to

$1’994.16

Stronger relationship with staff

COST-BENEFIT ANALYSIS IN PRACTICE(FROM STAGE 3)Decrease in Cartons Picked (180/hour)

• Comparing these costs and benefits, it is difficult to make a decision as to

whether the benefits of lowering the pick rate are worth the costs that

come with it

• It may seem as though the benefits outweigh the costs, however the value in each benefit may be much more minimal than that of the costs

• While reducing the risk of injuries and providing a safe workplace is crucial to any organisation, in this case such a large decrease in cartons might not be wise, as it leads to a much higher FTA as well as longer work hours and lower productivity

Costs Benefits

Safer workplace

Happier, healthier staff

Errors: $1’994.16

Stronger relationship with staff

Cartons picked: 1262

Hours worked: 2542.68

FTE: 16.73

COST-BENEFIT ANALYSIS IN PRACTICE(FROM STAGE 3)• The cost-benefit analysis has helped you determine that neither

increasing the pick rate to 260/hour or decreasing the pick rate to

180/hour are completely beneficial to your organisation. However,

the issues still exist in your current pick rate, therefore something

has to change.

• This is the point in Task 2 where you determined a new pick rate,

finding a middle ground in which the benefits outweighed the cost.

In this case, let’s make the new unit pick rate 205 cartons/hour

• The data for this new value are:

Carton pick rate/hour

Average hours worked7.6 - .59 (indirect hours)

Estimated total number of carton picked for shift

Estimated carton weight

Estimated total weight picked for 1 hour

Estimated total weight picked for shift

205 7.01 1430 2050 10 kg 14370

COST-BENEFIT ANALYSIS IN PRACTICE(TASK 2)

New Pick Rate (205/hour)

• Now lets look at the costs and benefits of decreasing the pick rate

to 180 cartons per hour. Firstly, consider the costs

• Don’t forget to note intangible factors

Cartons picked per shift decreases to

1430

Increase in hours of work

Increase in FTE

Time taken out of day for exercises to keep staff from

risk of injury


New Pick Rate (205/hour)

• Now, lets look at the benefits of decreasing the pick rate to 205

cartons per hour


Safer workplace Happy, healthier staff Decrease in errors/cost of errors

Recruitment agency happy – casual staff

remain with your organisation

Long term beneficial to keeping staff

Long term beneficial in lower risk of injuries - lower chance of being

faces with compensation expenses for workers being injured due to

unsafe work practices

COST-BENEFIT ANALYSIS IN PRACTICE(FROM STAGE 3)New Pick Rate (205/hour)

• This time, while cartons picked per shift still decreases and FTE and hours

worked decrease, the changes are not particularly drastic and will do little

damage in the long term

• Therefore, the benefits of lowering the pick rate to 205 cartons per hour greatly outweigh the costs involved

Costs Benefits

Safer workplace

Happier, healthier staff

Less future expenditure on compensation

Recruitment agency satisfied

Cartons picked decreases: 1430

Hours worked increases

FTE Increases

TLIX4028A Lesson 4 (2) CostBenefitAnalysis

Education

Transcript of TLIX4028A Lesson 4 (2) CostBenefitAnalysis