Calculation and Use of Production Opportunity Cost to Optimize Project Decisions
In today's construction projects, we often develop and manage budgets without considering the opportunity cost of production. Our commitment is to manage project costs effectively by consistently seeking cost-efficient solutions. This may involve making trade-offs in time and design enhancements to achieve cost savings. However, taking a broader perspective that includes a thorough analysis of total costs and benefits, including opportunity costs, can lead to decisions that are most advantageous for the business, even if project expenses increase. By calculating net present value and assessing intangible benefits such as speed to market, we can identify optimal solutions that maximize profitability, even if they result in higher project costs.
Incorporating Manufacturing Opportunity Costs for Optimal Project Returns
By determining the lost opportunity cost for manufacturing and factoring that cost into overall project costs, greater economic returns can be realized for manufacturing capital projects. Opportunity cost here represents the revenue stream that would have been realized if that manufacturing system had been in operation or operating more efficiently. By determining this cost (or in simple terms the probable lost sales-COGS), comparisons to project costs can be undertaken, and decisions made that optimize returns for the entire organization. Methods to determine the manufacturing opportunity costs can be explored in a working seminar, along with examples of how it can be used to make better project decisions.
Dr. Demming frequently espoused optimizing not the individual elements of a business but rather the system as a whole. Put another way, the larger the system examined, the larger the optimization.
Optimizing Returns: Evaluating Premium Time Costs and Other Project Expenses for Manufacturing Gains
All of these things are frequently removed during value engineering exercises under the guise of cost savings, but a realized short-term cost savings for the capital budget may incur a much larger potential loss in missed manufacturing opportunities. Sometimes, a modest change in design with the attendant increase in capital costs will result in dramatic increases in production increases (Think >10%), but the changes are never discussed in these terms.
Bothwell consultants can help you explore how to apply the determination of opportunity cost against potential project costs. Does the additional cost incurred for premium time become justified by the additional production days gained? We can discuss the cost of other project work vs the potential gains within manufacturing. This analysis would look at:
1. the potential revenue gains vs the cost of additional equipment (redundant systems)
2. the cost of specialized monitoring equipment, the cost of contract labor and the cost of flexible facility designs.
Methods to determine the manufacturing opportunity costs can be explored in a working seminar, and examples of how it can be used to make better project decisions.
We’ll close with some helpful information for optimal support in budget procurement.
For optimal support in budget procurement, we'll close with some helpful information you may find useful.
Most project budgets are typically developed and funded from within the engineering department of organizations. Including manufacturing, site management, and other end users, a better perspective on costs, and prospective funding can be realized.
Louis Traglia brings 40 years of Engineering management expertise to life science organizations. An expert in GMP project optimization and Advanced Risk Based C&Q verification approaches among other industry protocols, his expertise consulting with Bothwell Engineering allows projects to get it completed efficiently, compliantly and on time.
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