Comments on: Frugal or Cheap? http://www.caddmanager.com/CMB/2008/08/frugal-or-cheap/ Practical, proven insight into CADD Management from Mark W. Kiker Wed, 08 Feb 2012 05:07:09 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: JM http://www.caddmanager.com/CMB/2008/08/frugal-or-cheap/comment-page-1/#comment-816 JM Wed, 13 Aug 2008 11:52:21 +0000 http://www.caddmanager.com/CMB/?p=595#comment-816 These initial questions do well to define cost/benefit factors for any given solution. Take an additional step by comparing different solutions using the same cost/benefit criteria. This is the basis of forming budget projections and should include these additional questions: What is the cost/benefit of the most nearly comparable alternative product/solution? What is the cost/benefit of using existing alternative methods to address the initial issue or problem but changing other factors (i.e.: production timelines, resources and/or staff applied to tasks, etc.)? What is the cost/benefit of the loss of a solution to the next problem you would have addressed with the same money? It is also critical to consider the amount of money spent on any purchase by considering the diminishing marginal returns on that expenditure. Example: spending $5,000 on computer memory may save $50,000 a year in recouped productivity, however, the recouped savings on productivity may be $48,000 a year if only $3,000 is spent. The difference in expenditure ($5,000 - $3,000 = $2,000) equals the difference in increased productivity ($50,000 - $48,000 = $2,000). Consequently, there was no marginal return on spending the last $2,000 dollars (spending more doesn't always return more). More importantly, that $2,000 could have been spent on other matters which would provided additional production increases. Perhaps the most important thing to consider is that value of any purchase must be compared to the value of the purchase not made. In economic terms this is called "opportunity cost": literally, the cost of the opportunity you passed up. These initial questions do well to define cost/benefit factors for any given solution. Take an additional step by comparing different solutions using the same cost/benefit criteria. This is the basis of forming budget projections and should include these additional questions:

What is the cost/benefit of the most nearly comparable alternative product/solution?

What is the cost/benefit of using existing alternative methods to address the initial issue or problem but changing other factors (i.e.: production timelines, resources and/or staff applied to tasks, etc.)?

What is the cost/benefit of the loss of a solution to the next problem you would have addressed with the same money?

It is also critical to consider the amount of money spent on any purchase by considering the diminishing marginal returns on that expenditure. Example: spending $5,000 on computer memory may save $50,000 a year in recouped productivity, however, the recouped savings on productivity may be $48,000 a year if only $3,000 is spent. The difference in expenditure ($5,000 – $3,000 = $2,000) equals the difference in increased productivity ($50,000 – $48,000 = $2,000). Consequently, there was no marginal return on spending the last $2,000 dollars (spending more doesn’t always return more). More importantly, that $2,000 could have been spent on other matters which would provided additional production increases.

Perhaps the most important thing to consider is that value of any purchase must be compared to the value of the purchase not made. In economic terms this is called “opportunity cost”: literally, the cost of the opportunity you passed up.

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