ROI: Return on investment or rounds of insanity

ROI: Return on investment or rounds of insanity

ROI. What does ROI mean? It stands for “return on investment.” Yes, it’s an accounting term that is a method of ensuring that what ever is invested in pays for itself. It means when we deposit money in an account, we expect a rate of return; we expect some form of interest on the money we have put away. We expect the institutions to pay us for the use of the money we gave to them. The same holds true for when a business manager wants to buy something, expand something, develop something or replace something. Whatever the purchase may be, the acronym, ROI, is the justification and to ensure that emotion is not in the forefront of reason. For example, take square footage if we are going to build warehouse. The question is: Will we sell enough products to pay for the building? And, are we going to build enough widgets to pay for the manufacturing square footage? Henry Ford had a ROI for a $500 car, built them cheap for the common man and then sold thousands. These are all good sane questions to ask for purchase justification.

I do believe that, in most cases, the ROI process is one that has to be in place, but I also believe that it creates another kind of ROI – “Rounds of Insanity.” Let’s take a look at a few ROI examples.

Tractors?

A 10-year-old, million-mile tractor does 100,000 mile a year and has no depreciation on the books, no payment and cost per mile (CPM) is in the low teens. It has been well maintained and operates every day. The tractor is 10 years old and the repetitive, unforeseeable non-PM failures create operational failures. How do you figure out the ROI? No depreciation, average CPM, and now figure out a ROI using a $120,000 day cab in a state with sales tax and personal property or excise tax. Using fuel cost may help, but fuel is coming down.

Reefer trailers?

A 15-year-old reefer trailer was well spec’d when purchased and still looks OK, but has definitely aged. The costs have been somewhat reasonable, and damage dollars and accidents are not part of the CPM. The trailer is fully depreciated and typical wear and tear—brakes, tires, lights and rollup doors—are most of the cost. Don’t forget—those costs happen on a new trailer too. So does the ROI on a new trailer equal approximately $50,000? We can talk about the insulation integrity and the additional hours the refrigeration run and calculate the fuel used, but we still have to figure out the math for those who need to know and take hours to try to justify the cost.

Refrigeration units?

Reefer units need compressors and possible evaporators in the 25,000-hour realm, but the overall unit will be used thru the life of the trailer for 15 years and 2,000 hours per year at 30,000 hours total. The case of replacing the unit before the major expense of approximately $5,000 does not fit the ROI formula for replacement because of book values and residual values have no ROI crossroad; so, it stays on the trailer for its life.

Dry trailer?

With the cost of new dry van trailers, keeping them longer has endured the test of time. Doing a ROI when the trailer is off the books becomes difficult because spec’ing trailers for high utilization and minimum interior damages, proven specifications for uptime, raises the initial cost of the trailer. The normal brake and tire maintenance is done on newer equipment as well. There is also the chance that trailer may have been rebooked for accounting reasons. You cannot put enough data in a spreadsheet for a suitable ROI…

Shop pickup?

A pickup truck is 12-years-old with 300,000 miles, the replacement cost exceeds $30,000-plus. The costs have been cheap and spread over 300,000. It has been off the books for six years. How do you do an ROI on a 12 year-old-shop pickup truck, other than, “it is just time”?

Shop jack?

The jack is 15 years old and off the books. It needs to be repaired; how do you do an ROI on this one?

Filter crusher

You want to add one to the shop for waste minimization and the crusher is approximately $2,500 for a good one. What is the return on this and how long to figure out the ROI?

Shop make over?

You are having a hard time attracting technicians for employment because your shop needs a face lift, cleanup, new paint, new grinders and the heaters need to be replaced. You want to cleanup the 2-in. of crude on the floor, clean off the 15 years of dust and paint the walls, floor and ceiling to drastically improve the environment and lighting in the shop. You estimate that the cost could be has high as $100,000. How do you calculate the ROI?

Parts room?

The financial group has justified a new computer system with their own ROI, but now the parts room is a disaster and needs to be emptied, cleaned and put back together like a supermarket focusing on organization and cleanliness to achieve the efficiency needed to work with the new computer system and the needed employees you cannot currently attract. ROI this.

Summary

In many cases, it is not the ROI formula, because the numbers do not work; at least the correct ones. It becomes Rounds and Rounds of Insanity (ROI) to justify purchases. Often times, you have to accept that there is an end of useful life. It has surprised me how easy all the computers in the office can be replaced when whoever approves the purchase wants new ones. I wish someone would show me the ROI calculations on that purchase. It all must be in the eyes of whoever holds the pen and, probably, based on the fear of computer crashes. Sometimes you just have to invest in the future. Or just paint the truck because it looks ugly…

For more information, visit www.darrystuart.com or email comments or questions requests to Darry at [email protected].

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