ROK methodology

Rona Consulting Group calculates a return on investment for each of its projects. 

Returns are expected in four broad categories:

  1. Increased revenue resulting from the reduction of process lead time and resulting improvements in the throughput of patients, lab samples, or other revenue producing units (RPUs).

  2. Decreased expenses that result from the elimination of all types of non-value-adding wastes, including the overproduction of reports and reductions in unnecessary overtime.
  3. Increased cash flow as the result of inventory reduction.

  4. Hours of productive time saved as the result of non-value-adding wastes such as walking, searching, and unnecessary transportation; and

The annualized monetized value of improvements in each category is estimated based upon the client’s current demand and actual prices and costs as well as published benchmark cost data. Improvements are measured and then verified during kaizen workshops by the client using direct observation and standardized measurement techniques. 

Potential returns
Next, the value of improvements in the first three categories is summed and a net present value (NPV) calculation is performed based upon the assumptions of an 8% cost of capital and a 3-year time horizon. This calculation makes two assumptions: a) all capacity freed as the result of lead time reduction can be sold at current market prices; and b) the direct labor cost associated with all non-value-adding time eliminated through kaizen can be avoided. Thus, this value represents the full potential of improvement in market expansion and cost reduction. 

Expected returns
The same calculation is performed by handicapping expectations in the following two ways. First, the value of market expansion is reduced by applying a subjective probability of success. The client is asked to judge on a scale of 0 to 1 the likelihood that any new capacity will be utilized by patients. The full market value of the new capacity is multiplied by this likelihood, yielding and expected market value of the improvement. Second, the value associated with category 3, the direct labor cost of eliminated waste, is eliminated from the calculation if it has no immediate market value. Thus, this value represents the bottom line potential of improvement.

Return on investment
Once the NPV of potential and actual savings have been calculated, their respective return on investments (ROIs) are calculated the traditional ROI formula.

Note: These returns are not a substitute for audited returns. Furthermore, improvements are based upon the implementation of standardized work that has been replicated in controlled experiments. The degree to which actual returns match returns forecast by this method depend in part upon the ability of leadership to provide adequate resources (mainly in terms of management and staff time) for follow-up, and to become directly involved in verifying that projects begun are completed according to plan.