When a custom automated machine integration costs six to seven figures and takes months or years, we’ve seen the first question become less about how to do it and more about if it can be done within a practical budget. This level of capital investment requires long-term expectations, the involvement of owners and CEOs, and in most cases, business loans. That kind of risk needs to be justified.
The least effective Return on Investment (ROI) discussions begin with a request for a quote. No one can quote a worthwhile capital investment while left in the dark about the impact, goals, and financial situation. Request an NDA as soon as possible, because calculating the Return on Investment is critical (a responsible integrator will have a mutual NDA prepared ahead of time).
An ideal Return on Investment calculation clarifies the investment in the following ways:
- It reflects the financial details of your specific business.
- Figures capture a plausible comparison between the current cost of your production, versus the estimated costs of your production with an automated solution.
- It gives a reasonable time frame for the savings allotted from the machine to outpace the upfront costs associated with the machine.
Most integrators will have a demo, a web form, or a downloadable calculator to start customers with some research on how attainable a large project can be based on an estimated budget. We have our own ROI calculator here, feel free to try it out. Try out the reverse function to calculate an automation budget.
Understand the difference between cost justification and a business plan. ROI calculations do cover financial figures, plausible estimates, and cost projections. But the only role of an ROI calculation is to justify the project and show that return on investment is attainable for your business. No one should ever treat the ROI calculations the way you would treat gated stage expectations in a Statement of Work Contract. Here’s why treating ROI like a business plan undermines the value of your custom automated machine:
ROI Only Covers Today
Even the most in-depth ROI calculations are a comparison between what it would be like to have the machine today versus your current production. Here is how much you spend, this is how much more cost effective your production will be, and this is theoretically how long it would take for the more cost-effective production to make back that money. ROI can’t predict what you do with your business now that you have a more cost-effective production.
- If your new machine achieves the production capacity of two or three manual lines, doesn’t that mean your production floor has more space to work with? Couldn’t you use that space for more production opportunities? Won’t that generate revenue?
- If your new machine improves the work environment by taking on those dirty, dangerous, ergonomically challenging, high turnover positions, won’t that mean you’ll have less turnover? Won’t there be less costs associated with headhunting, interviewing, and training? Isn’t that time and effort you can redirect toward new revenue or R&D?
- If you can make more products for less cost without sacrificing quality, won’t the new sales opportunities you need to find, larger order filling capacity, and quicker order lead times have an impact on the amount of customer revenue you take in?
These three factors represent the best values of a custom automated machine but are invisible to ROI calculators. These values depend on a vision to use the machine to grow the business. These three factors are also advantages that go into effect the second the integration is over instead of waiting for an ROI that could be years away. Accepting the ROI as the justification and then dedicating your energy to exploiting these value opportunities is the key to getting those dollars on your bottom line.
Will your costs be the same two years from now? Will you need to redirect your displaced workforce to handle the increased capacity for customers? Will you need to start thinking about the next automation improvement or process enhancement? These are the things an obsession with ROI unrealistically locks in place. ROI needs to be a realistic estimate that accounts for market flexibility and changes in financial security. A lot of customers kick themselves when they realize the automation integration price tag was a bargain after two years of inflation. Treating ROI as more than an estimate is fiscally irresponsible.
Effective ROI Needs to be High Level
There’s nothing wrong with an overly intricate ROI, but there’s nothing right with them either. Your integrator can spend hours drilling down to per minute power requirements, the per diem cost of latex gloves, cardboard costs, and any number of contributing factors that could impact the cost of your manufacturing. But obsessing over those details is a distraction from the opportunities and the attainability goal of ROI. We like to keep it simple:
- Project estimate: This is a rough estimate of the final cost of the integration, including any payment for the engineering hours required to finish the project. An experienced integrator can consider the requested cycle times, SKUs, and timeline to give an estimated cost of the full automation integration.
- Shifts: A comparison of the number of shifts on the manual line versus the number of shifts the automated machine will run.
- Employees on a shift: The number of employees that are needed per shift to do the manual process versus the number of people needed to attend the machine per shift. Often, an automated machine does not need a full shift employee to tend the machine.
- Total Employee Compensation: The yearly salary of an employee as well as the costs associated with benefits, insurance, etc.
- Significant Cost Savings: We are not talking about latex gloves. An experienced automation integrator can examine an automated process and find additional production savings in rework, scrap, tooling, etc. and collect those opportunities into a savings calculation.
ROI as a Tool, not a Business Plan
ROI should be treated as a useful tool at the beginning of the project. ROI calculation is necessary, simple, and important to justifying the adoption of the project. But once you abandon the notion that ROI is a business plan or that ROI is the actual invoice amount of the project, practical application of quick professional ROI calculations allows you to consider multiple machines.
At DEVELOP LLC, we take the information we gather during an automation assessment and refine the opportunities for automation in your entire production into an ROI scatterplot. High level figures for your ROI calculation allows us to scope multiple projects, multiple ROI’s, and multiple levels of risk. We present these options with breakdowns of why the projects cost more or less, which take more or less time, and which projects mitigate the most risk.
- Be agnostic to the machine but dedicated to the solution. A solution-based outlook arms you with the options you need to pick the most profitable, best-case outcome.
- Consider that a quicker ROI is more important than the capital expenditure of the machine. We’ve come into projects scoped by other integrators that had a 10-year ROI, and with a marginal increase to the upfront costs, cut that ROI timeline down to two years.
- Recognize risk. Even the simplest automated machines need custom engineering for your production needs. The more functions, tweaks, and precision tasks you add to the design, the more the design might face costly hurdles, timeline extensions, and scoping optimization challenges. Be wary of an integrator agreeing to build the machine with the exact functions you want before exploring if the solution is viable.
ROI Needs to be an Open Discussion
Let us help you translate budget, goals, and functions into a reliable design for your custom automated machine or robotic solution. Our project managers and specialists leverage ROI practice into ROI reality. We understand how to get to an affordable solution that supports growth, profit, and the improvement of your overall work environment with the fastest ROI possible. Tell us more about your project, schedule a virtual meeting, or call (262)-622-6104 to learn more about how we can help you with a free automation discussion.
Authors:
Sean McKittrick and Matt Moseman