Why It’s Hard to Recognize the ROI of Machine Automation Systems

Calculating the ROI on machine automation systems can be quite a challenge today, even for experienced business leaders.  Half of the challenge is found in quantifying the true benefit of project options, especially in the sense of rapidly evolving technologies promising value in new and unfamiliar terms versus traditional methods.  

The other half of the challenge is in reading the outward financial landscape, from market volatility to competitive opportunities, interest rates to overhead cost balancing.  Taken together, these factors can make project decisions today feel much less like slam-dunks and much more like loosely educated gambling. 

In the same way that traditional manufacturing solutions are less and less productive in today’s age of information, traditional project evaluation tools are decreasingly insightful as well. The most well-known financial tool that project leaders have historically relied on is ROI, or return on investment.  While still certainly useful, there are other tools that together or apart can give even better insight into potential projects, and drive that much better indication of looming shortfalls or highly probable success.  

Here we briefly discuss ROI, why it’s so difficult to use as a mechanism to realize project payback and what other tools better serve automation and manufacturing projects.

ROI Explained

This method looks at capital investment cost against the projected operational cost savings over time, calculating the amount of time it will take to recoup an investment. In effect, business leaders examine ROI to determine how long it’ll take to “get their money back.” While this is a routine early method for evaluating projects, it can be difficult to accurately quantify in practice. Worse, ROI may entirely miss applicable financial nuances in complex projects and lead to a bad decision on which opportunities to pursue.  

ROI is tough to apply to projects that provide many benefits not easily captured in terms of simple payback. It’s even tougher to use in confirming expected payback after the project has been implemented.  Business leaders may expect to see a clear and immediate cost reduction once a project is live, but are often left disappointed when company financial statements don’t reflect these savings (or worse, show an actual cost increase).  Leaders are left trying to assign dollar savings to intangible, ancillary benefits that don’t directly draw on a cost account, while simultaneously trying to defend cost jumps as either temporary or not the result of their project.  

ROI doesn’t provide a clear enough perspective on a project’s financial impact even after completion, so why rely on it at project inception? Our opinion: There are better ways.         

Alternative Project Financial Evaluation Methods

When helping clients discern the financial viability of their projects, we pull several other tools out of the toolbox beyond simple ROI. While we stop short of performing investment calculations for customers (since only you know all the pertinent factors of your business), we do definitely provide insight and methodical approaches that customers can further develop with their executive team. Automation has multiple ways to pay off, and to prove it, we share those tools below. 

Utilization 

We often describe utilization as “the value you gain from an investment based on how much you use it.” If a new automation investment is identified that offers significant per-unit net gain over existing methods, the overall impact toward the bottom line scales based on how many units it is used to produce. (In other words, how little or how much it is utilized.) Comparing machine automation systems investments based on raw cost alone misses this potential magnified benefit based on actual use. For example, Project A that has a 5 percent savings per unit used 12 hours a day would be less desirable than Project B that offers 4 percent savings per unit used 24 hours a day (assuming product rates are equal).

OEE 

Overall equipment efficiency (OEE) is a measure of how many “good” units a system can produce compared to total units. In other words, how few rejects or stoppages the system experiences. For example, a machine that makes 10 units in an hour, two of which fail inspection and must be reworked, would be rated at 80 percent OEE. The financial evaluation aspect of OEE provides us a method to compare projects by their relative performance. A marginal cost difference between project options that offers a large increase in OEE tends to justify a project that straight ROI would disqualify. 

NPV 

Net present value (NPV) is a standard capital finance calculation used to compare projects on the basis of their cash flows. While we’ll skip the technical use of NPV and leave that to our clients’ CFOs, we can take tangible inspiration from what NPV seeks to accomplish.   Net present value considers the future savings and expenses involved with a project decision in terms of today’s dollars. This can be especially important when evaluating machine automation systems that have a future phase, ongoing expansion or looming cost threat component to them. Further, future changes in interest rates as well as inflation rates play into NPV, none of which simple ROI picks up.   

For example, an automation project may at first appear unviable today based on mild cost savings and high initial expense. However, looking at the project over its entire lifespan, we can estimate a return stacking up each year thanks to an ongoing reduction in operating costs. Translating all of these yearly returns back to the cost of money today (which means taking out the amount of interest we’d pay on a loan), we can then compare the net lifetime return to the initial investment in today’s equivalent dollars. If the project were to cost $100,000 but our NPV in today’s dollars is $120,000, we can now see the positive lifetime value of the project and decide to move forward.   

Reallocation

We are often called in to help clients with process improvement projects, examining existing production lines for opportunities to automate.  In these cases, the primary financial challenge is that the operating margins for the products being produced are already long-since established, and that there is very little room to finance a CapEx investment within that locked margin. Clients will then look for immediately available savings against direct unit costs, but that rarely pans out. An example of the hope here is that an automaton project might be afforded by just direct labor savings, but on an already low cost, lower volume, commodity product, the labor improvement would have to be in the realm of 100x or 1000x over costs, and that is almost never realistic.   

Reallocation analysis gives us another tool by which to “find the money” in existing operating expenses. For example in a recent project, the proposed automated solution indirectly cut expenses not immediately tied to product margin, including:

• Reduced headcount enough to make a dent in company-wide labor overhead.
• Eliminated a high-hazard manual task enough to cut insurance premiums.
• Reduced energy consumption enough to see a savings on monthly utility bills.
• Took advantage of a state clean technology incentive that provided a tax credit.

Rolling up all of these indirect costs, a net reduction in company operating expenses provided a modest amount of available overhead reduction that could then be applied to the product’s unit costs. Through reallocation, we helped the client “find the money” for the project in these other containers, allowing the automation upgrade to be approved. 

Investing in a Machine Automation Systems

Whether you’re ready to invest in a fully automated system, or you’re just starting the discovery process with machine automation systems, we’d love to work with you. Book a virtual meeting with one of our pros to get started.