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FINANCIAL ANALYSIS TOOL Supply Chain Management

INTRODUCTION This workbook has been developed to evaluate the value of a supply chain management technology decision. It is designed to be used with the Nucleus Research methodology to help you build a business case and support your technology decision by evaluating the real impact to the bottom line. Using the navigation buttons above or tabs at the bottom of the workbook, you'll go to areas of the workbook where you can enter appropriate cost and benefit information. You may then print a detailed report showing the financial results. Calculations such as return on investment (ROI), total cost of ownership (TCO), payback period, and net present value (NPV) are calculated and may be used to either select the best solution or negotiate better terms on a solution that may have the wrong cost structure. INSTRUCTIONS If this is your first time using the tool, consider visiting the tutorial using the button above. :: Navigate the workbook using the numbered buttons above, starting at step 1 to enter the cost information then step 2 to enter benefit information. :: At each step, scroll through the worksheet entering data in appropriate cells (light gray cells are calculated automatically). :: You may edit cost and benefit line descriptions and delete sample entries to meet your organization's particular situation. :: After completing steps 1 and 2, go to step 3 to view the detailed financial analysis. :: Step 4 provides a complete report and risk assessment. ABOUT NUCLEUS RESEARCH Nucleus is a global research firm providing technology research advisory services that include indepth analysis, tools, and analyst access to help companies make the best technology decisions. Nucleus Research is registered with the National Association of State Boards of Accountancy #108024.
TOOL VERSION 2007.1

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CONFIDENTIAL REPORT

FINANCIAL ANALYSIS REPORT Supply Chain Management

Supply Chain

SUMMARY RESULTS
Return on Investment (ROI): 0% Payback Period (Years): 3+ Net Present Value (NPV): 0

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Copyright Nucleus Research Incorporated, all rights reserved. This financial modelling tool may not be redistributed or modified in any way.

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EXECUTIVE SUMMARY
This report has been created to detail the financial results expected from the proposed supply chain project. The results in this report are based on the projected costs associated with the project and the reasonably expected benefits derived over a 3-year period. Table 1 shows a summary of the financial results.

Table 1. Summary Results Expected Case Annual return on investment (ROI) Payback period (years) Net present value (NPV) Average annual cost of ownership Total 3-year benefits #DIV/0! 3+ 0 0 0

RISK ASSESSMENT
The financial results outlined in Table 1 provide measurements to quantify the expected results from the supply chain project and its potential impact on the bottom line. These results are also useful in assessing the level of risk associated with the project. Table 2 shows the evaluation of three types of risk on a scale of low, medium, and high. These risks are: Investment Rate - Investing in anything involves the use of capital in the hopes of gaining a return greater than the cost of the capital employed. However, ensuring that the return exceeds the cost of capital is only half of the picture: the return must exceed the cost of capital by an amount that adequately compensates the company for the risk of undertaking the project. For example, a company with a 15% cost of capital would be ill advised to undertake a very risky project that returns only 16% to the company. The net 1% gain is unlikely to compensate the company for undertaking even the most risk-free project. The investment score measures the ratio of ROI to cost of capital, which is a more accurate assessment of the relative return of a project. The report generates a high risk score when the ROI is less than twice the cost of capital and a low risk score when it is more than 4 times the cost of capital. Capital Recovery - Making a decision to deploy a new technology at any point in time implies making an estimate about the pace of technology change. Market events, new technologies, and new products can quickly render even the most effective solution obsolete. However, obsolescence is not the only risk. New technology can create areas of competition along with new areas of opportunity. Having the flexibility to discard a solution for a new one that may offer even greater returns is an important competitive weapon. Projects that provide enough benefits in early years to cover costs allow for this flexibility. The capital recovery score is a measurement of the payback period the amount of time needed for the benefits from a project to outweigh the costs. A project with payback period of less than one year provides a low risk while more than two years indicates a high risk.

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The capital recovery score is a measurement of the payback period the amount of time needed for the benefits from a project to outweigh the costs. A project with payback period of less than one year provides a low risk while more than two years indicates a high risk.

Variance Potential - The financial results listed in this report are based on estimates of future costs and benefits. However, it is unlikely that these estimates will exactly match actual costs and benefits. Indirect benefits tend to be the most susceptible to small errors in estimates that can result in large changes in the actual return. The variance potential score evaluates the indirect benefits as a percentage of the total benefits listed. Indirect benefits amounting to more than 90 percent of the total generate a high score; those amounting to less than 50 percent generate a low risk score.

Table 2. Risk Assessment Investment rate Capital recovery Variance potential #DIV/0! HIGH RISK #DIV/0!

COSTS
Table 3 shows the expensed costs associated with the deployment of the solution. Costs include both onetime and ongoing or recurring costs. When appropriate, costs have been increased to account for additional users or extended deployment. When required, maintenance costs have been included as a recurring cost under either software or hardware. The following methodology was used to gather costs: :: Everything that is directly and exclusively associated with the project has been included at 100 percent. :: Purchases that are partially driven by this specific project have been included at a percentage representing the extent to which the project drove the expenditure. :: General infrastructure items not associated with the project were not included.

Table 3. Expensed Costs Software Hardware Consulting Personnel Training Other Total

Pre-start 0 0 0 0 0 0 0

Year 1 0 0 0 0 0 0 0

Year 2 0 0 0 0 0 0 0

Year 3 0 0 0 0 0 0 0

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Table 4 lists additional project costs that will be capitalized. Table 5 lists the depreciation during the 3-year period using a 5-year MACRS schedule.

Table 4. Capitalized Assets Software Hardware Project consulting Project personnel Total

Pre-start 0 0 0 0 0

Year 1 0 0 0 0 0

Year 2 0 0 0 0 0

Year 3 0 0 0 0 0

Table 5. Depreciation Schedule Software Hardware Project consulting Project personnel Total

Pre-start 0 0 0 0 0

Year 1 0 0 0 0 0

Year 2 0 0 0 0 0

Year 3 0 0 0 0 0

Figure 1 shows the total 3-year costs by category. Average and total cost of ownership per year may be found in Figure 2. These costs have not been balanced against benefits and are appropriate for use in longterm budgeting and planning.

Figure 1. Total 3-Year Costs Software Hardware Consulting Personnel Training Other 0 0 0 0 0 0

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Figure 2. Total Cost of Ownership Average Initial cost Year 1 Year 2 Year 3 0 0 0 0 Total 0 0 0 0

1 1 1 1 1 1 0 0 0 0 0 Initial cost Year 1 Year 2 Year 3

Averag e

BENEFITS
Benefits from this deployment are shown in Table 6. There are two types of benefits indicated: direct and indirect. Direct benefits of the application may include items such as saving paper costs, reducing accounts receivable, limiting express mail, reducing staff, and selling old hardware. Direct benefits can be thought of as the savings you can "touch." Examples of indirect savings include "reducing the time needed to test new software by 25 percent" or "the sales process workflow takes 1 day rather than 2 weeks." These are benefits that involve a change in a nontangible item such as productivity or efficiency. The expectation is that this change will manifest itself as an increase in work and thus eventual revenue for the company. One important point of caution is not to double-count the value of productivity. A change in productivity results in a measurable change in output, and therefore a change such as an increase in revenue can reasonably be assumed as the result of the productivity change. If there is a measurable change, it should be included as a direct benefit.

Table 6. Summary of Benefits All Direct All Indirect Total

Pre-start 0 0 0

Year 1 0 0 0

Year 2 0 0 0

Year 3 0 0 0

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Table 7. Select Direct Benefits

Pre-start

Year 1

Year 2

Year 3

Table 8. Select Indirect Benefits

Pre-start

Year 1

Year 2

Year 3

The total 3-year benefits by category are indicated in Figure 3. As noted under the section on risk, the ratio of direct to indirect benefits is an indicator of the potential variability of the expected results. Caution is urged when direct benefits make up less than 10 percent of the total benefits. Figure 4 shows the cumulative benefits of the project.
Figure 3. Total 3-Year Benefits All Direct All Indirect 0 0

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Figure 4. Cumulative Return Pre-start Year 1 Year 2 Year 3 0 0 0 0

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Pre-start

Year 1

Year 2

Year 3

DETAILED FINANCIAL RESULTS

Table 9 shows the detailed financial calculations and Table 10 indicates the basic financial assumptions used. The effect of various discount rates on the NPV can be found in Figure 5.

Table 9. Financial Analysis Net cash flow before taxes Net cash flow after taxes Annual ROI - direct and indirect benefits Annual ROI - direct benefits only Net present value (NPV) Payback (years) Total cost of ownership (TCO) Average annual cost of ownership (TCO/Y) 3-year IRR

Results 0 0 0% 0% 0 3+ 0 0 N/A

Year 1 0 0 #DIV/0! #DIV/0! 0 0 0

Year 2 0 0 #DIV/0! #DIV/0! 0 0 0

Year 3 0 0 #DIV/0! #DIV/0! 0 3+ 0 0 N/A

Table 10. Basic Financial Assumptions All government taxes Cost of capital 50% 15%

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APPENDIX
UNDERSTANDING THE METRICS: ROI - Return on Investment: This is the most important metric to use for evaluating a technology investment and prioritizing projects within your company. With ROI, you get an in-depth look at how much each dollar spent will yield in returns. Payback Period: This metric determines the time needed for benefits returned to equal the initial cost of a project, thereby quantifying the project's risk. Technology solutions with a payback period of less than a year are considered optimal to a risk-averse investor. NPV - Net Present Value: This metric quantifies the value of the ongoing benefits discounted back to the present year. This traditional textbook metric takes into account the time value of money when assessing benefits but does not examine the ratio of costs to benefits. TCO - Total Cost of Ownership: This financial metric is useful for budgeting concerns because it provides a holistic sense of the long-term financial resources required to undertake an investment. TCO, however, does not take a project's benefits or savings into account, so if you use TCO for project comparison, you're only seeing half of the picture. IRR - Internal Rate of Return: IRR calculates the effective interest rate of a project at which your project's cash flows would have an NPV equal to zero. However, IRR is built on dubious assumptions that prevent it from being a valid comparison metric. If an internal return metric is required by your company, consider using MIRR as an alternative. cROI - Cumulative ROI: This marketing metric provides a cumulative ROI measurement over a three year period. By summing the benefits over three years (as opposed to averaging them) cROI creates an inflated Return on Investment assessment with no direct correlation to actual cash flows. It is important that you know the difference so that you will be able to spot, and discard, a phony cROI measurement when evaluating your technology investments. Notice the fundamental difference between ROI and cROI:

ROI =

( net year 1 + net year 2 + net year 3 ) *

initial cost

1 3 * 100 vs.

cROI =

NPVyear 1 + NPVyear 2 + NPVyear 3 initial cost

* 100

UNDERSTANDING A BAD ROI: If your initial calculations yield an ROI less than expected, consider the following: Change cost timing: Move costs out of the initial year by spreading your variable costs. Negotiate on price: Small decreases in cost can drastically increase your ROI. Ramp cost with employees: Try gradually increasing the costs for training and other areas as employees begin using the technology. Change deployment strategy: Use the technology to support a small, key return group first, or try outsourcing. The technology can be more broadly deployed later. Re-examine your correction factors: If you've been too conservative in your correction factors and productivity gains estimates, you may be influencing a bad decision.

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Change deployment strategy: Use the technology to support a small, key return group first, or try outsourcing. The technology can be more broadly deployed later. Re-examine your correction factors: If you've been too conservative in your correction factors and productivity gains estimates, you may be influencing a bad decision.

Figure 5. Sensitivity Analysis Discount Rate 5% 10% 15% 20% 25% NPV 0 0 0 0 0

1 1 1 1 1 1 0 0 0 0 0 5% 10% 15% 20% 25%

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Company Name
SUMMARY
Project: Annual return on investment (ROI) Payback period (years) Net present value (NPV) Average yearly cost of ownership 3+ 0 0 Supply Chain

ANNUAL BENEFITS
Direct Indirect Total per period

Pre-start 0 0 0

Year 1 0 0 0

Year 2 0 0 0

Year 3 0 0 0

CAPITALIZED ASSETS
Software Hardware Project consulting and personnel Total per period

Pre-start 0 0 0 0

Year 1 0 0 0 0

Year 2 0 0 0 0

Year 3 0 0 0 0

DEPRECIATION SCHEDULE
Software Hardware Project consulting and personnel Total per period

Pre-start 0 0 0 0

Year 1 0 0 0 0

Year 2 0 0 0 0

Year 3 0 0 0 0

EXPENSED COSTS
Software Hardware Consulting Personnel Training Other Total per period

Pre-start 0 0 0 0 0 0 0

Year 1 0 0 0 0 0 0 0

Year 2 0 0 0 0 0 0 0

Year 3 0 0 0 0 0 0 0

FINANCIAL ANALYSIS
Net cash flow before taxes Net cash flow after taxes Annual ROI - direct and indirect benefits Annual ROI - direct benefits only Net Present Value (NPV) Payback (Years) Average Annual Cost of Ownership 3-Year IRR FINANCIAL ASSUMPTIONS All government taxes Cost of capital

Results 0 0

Year 1 0 0 #DIV/0! #DIV/0! 0 0

Year 2 0 0 #DIV/0! #DIV/0! 0 0

Year 3 0 0 #DIV/0! #DIV/0! 0 3+ 0 N/A

0 0 Err:523

50% 15%

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Consolidated Results

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Consolidated Results

Basic Financial Information

In this section, enter the basic information about the project and the assumptions about the tax rate and discount rate.

PROJECT INFORMATION Your company or group name: Project name: Date project starts: FINANCIAL ASSUMPTIONS Tax rate: Cost of capital: Depreciation method:

Company Name Supply Chain 6/1/2007

50% 15% 5-year straight-line

Cost Calculations
In this section we ask a few questions to help you get started assessing the cost of the supply chain project. The areas you fill in here will automatically populate the detailed cost sections below. If you have more detailed information, you can enter it in the detailed cost sections below.

INITIAL QUESTIONS TO DETERMINE PROJECT COSTS

In this section we ask a few questions to help you get started assessing the cost of the project. How many software licenses are you purchasing? What is the cost per license? TRUE Check here if this is a capital expense that should be depreciated. What is the annual maintenance rate for the software you are purchasing? What is the cost of hardware purchased for the project? TRUE Check here if this is a capital expense that should be depreciated. What is the initial cost of consulting for the project? How many total hours will IT staff spend on the project? What is the average annual fully loaded salary of your IT staff? How many IT staff will be assigned to ongoing system maintenance? How many users will receive formal training on the new system? How many hours will the average user spend in training sessions? What is the average annual fully loaded cost for those users? What fees will you pay for the training sessions? 0% 0 licenses 0

0 hours 0 .0 employees employees .0 hours 0 0

Now you can enter any detailed cost information that you did not include above. Enter the actual and expected costs associated with the purchase and deployment of the project and add any additional items by using the blank description areas or inserting new lines. Use the following methodology to gather costs: :: Everything that is directly and exclusively associated with the project should be included at 100 percent. :: Purchases that are partially driven by this specific project should be included at a percentage representing the extent to which the project drove the expenditure. :: General infrastructure items not associated with the project should not be included.
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Now you can enter any detailed cost information that you did not include above. Enter the actual and expected costs associated with the purchase and deployment of the project and add any additional items by using the blank description areas or inserting new lines. Use the following methodology to gather costs: :: Everything that is directly and exclusively associated with the project should be included at 100 percent. :: Purchases that are partially driven by this specific project should be included at a percentage representing the extent to which the project drove the expenditure. :: General infrastructure items not associated with the project should not be included.

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SOFTWARE
Software costs for any project include license fees for the product as well as license fees for any support software that may be required or upgrades of existing applications needed. Other costs may include operating systems or other desktop upgrades and network software changes. Enter the costs in either the expense section or the depreciation section if this is a capital expense. If you are outsourcing your deployment, enter the yearly cost below.

SOFTWARE - EXPENSED Product license charges Product per-user charges Database Operating system software Additional server software Additional network software Other Maintenance fees TOTAL SOFTWARE - EXPENSED

Pre-start 0 0 0 0 0 0 0 0 0

Year 1 0 0 0 0 0 0 0 0 0

Year 2 0 0 0 0 0 0 0 0 0

Year 3 0 0 0 0 0 0 0 0 0

Totals 0 0 0 0 0 0 0 0 0

SOFTWARE - CAPITALIZED Capital purchases - from above Capital purchases - Initial year Capital purchases - First year Capital purchases - Second year Capital purchases - Third year TOTAL SOFTWARE - DEPRECIATED

Pre-start 0 0

Year 1 0 0 0

Year 2 0 0 0 0 0

Year 3 0 0 0 0 0 0

Book 0 0 0 0 0 0

HARDWARE

Hardware costs include servers purchased to support the application and any additional networking or security hardware required as part of the deployment. You should also include the costs for any new desktop systems or upgrades to existing systems, depending on the type of project. Additional hardware may be needed to support databases or connectivity. Enter the costs in either the expense section or the depreciation section if this is a capital expense.

HARDWARE - EXPENSED Server hardware costs Network upgrades Additional desktop hardware Other Maintenance fees TOTAL HARDWARE - EXPENSED

Pre-start 0 0 0 0 0 0

Year 1 0 0 0 0 0 0

Year 2 0 0 0 0 0 0

Year 3 0 0 0 0 0 0

Totals 0 0 0 0 0 0

HARDWARE - CAPITALIZED Capital purchases - from above Capital purchases - Initial year Capital purchases - First year Capital purchases - Second year Capital purchases - Third year TOTAL HARDWARE - DEPRECIATED

Pre-start 0 0

Year 1 0 0 0

Year 2 0 0 0 0 0

Year 3 0 0 0 0 0 0

Book 0 0 0 0 0 0

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CONSULTING
In this section enter the costs for consulting, including the cost of contractor labor and professional services engagements. Commonly, the greatest project consulting needs fall in the pre-start period and first year. Later years usually show a decrease in consulting charges. You may be able to treat some of the initial consulting as a capital expense. If so, enter the expense in the depreciation section.

CONSULTING - EXPENSED Third-party consulting Deployment and upgrade consulting Integration Future project based Other TOTAL CONSULTING

Pre-start 0 0 0 0 0 0

Year 1 0 0 0 0 0 0

Year 2 0 0 0 0 0 0

Year 3 0 0 0 0 0 0

Totals 0 0 0 0 0 0

CONSULTING - CAPITALIZED Capital cost - Initial year Capital cost - First year Capital cost - Second year Capital cost - Third year TOTAL CONSULTING - DEPRECIATED

Pre-start 0

Year 1 0 0

Year 2 0 0 0 0

Year 3 0 0 0 0 0

Book 0 0 0 0 0

PERSONNEL

Personnel costs associated with any project can be broken into three main categories: project planning and management (likely to occur in the initial phase and the first part of year one), technical development and testing (likely to occur as new phases of the project are completed and launched), and ongoing support and maintenance (on an ongoing basis for as long as the application is used). You may be able to treat some of the initial personnel costs as a capital expense. If so, enter the expense in the depreciation section. To calculate the cost of an employee, use the number of hours worked on the project times the fully loaded cost per hour.

PERSONNEL Initial Management IS Employee staff Ongoing Administrators IS Management Accounting Other TOTAL PERSONNEL

Pre-start 0 0 0 0 0 0 0 0 0

Year 1 0 0 0 0 0 0 0 0 0

Year 2 0 0 0 0 0 0 0 0 0

Year 3 0 0 0 0 0 0 0 0 0

Totals 0 0 0 0 0 0 0 0 0

PERSONNEL - CAPITALIZED Capital cost - Initial year Capital cost - First year Capital cost - Second year Capital cost - Third year TOTAL PERSONNEL - DEPRECIATED

Pre-start 0

Year 1 0 0

Year 2 0 0 0 0

Year 3 0 0 0 0 0

Book 0 0 0 0 0

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TRAINING

Training costs are likely to occur in the initial phase and in the first year of the project, although some investment in additional training should be planned to support ongoing competency and new phases of the project. In calculating training costs, include the fully loaded cost per hour for each employee undergoing training as well as for facilities and trainer costs. TRAINING Employee time Trainer cost Outside location costs Other TOTAL TRAINING Pre-start 0 0 0 0 0 Year 1 0 0 0 0 0 Year 2 0 0 0 0 0 Year 3 0 0 0 0 0 Totals 0 0 0 0 0

OTHER

Enter any other costs associated with the deployment. These may include travel or communication costs associated with review of reference sites as well as expenses associated with promotions or awards given to users, customers, or partners. OTHER Telemarketing Direct mail and Webcast Airfare Other OTHER Pre-start 0 0 0 0 0 Year 1 0 0 0 0 0 Year 2 0 0 0 0 0 Year 3 0 0 0 0 0 Totals 0 0 0 0 0

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