Manufacturing Automation – Stop Playing “Guess the ROI”!
Chris Stergiou
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“We’ve looked at automation for this process and it doesn’t meet our ROI!”
An oft heard refrain from manufacturing clients when approached with a potential automation solution to a particular process or in general conversations when reviewing their operations looking for opportunities to increase productivity and efficiency through automation.?A frustrating refrain to be certain but where does this response come from?
A Common Sequence in Evaluating an Opportunity to Automate a Process
1.??????Someone suggests the idea of automation, (maybe an internal engineer or a potential supplier of automation solutions, a distributor, a systems integrator, a consultant, etc.).
2.??????A system functional specification, a URS or a general description may be generated, either internally or in collaboration with a consultant or prospective supplier.
3.??????A request for quotation is issued to one or several prospective suppliers.
4.??????After some time and effort, which may or may not include some concept development efforts and clarifications of the requirements, proposals for the project start to come in.
5.??????After an initial front-line review by the requestor and the immediate team, (which may include procurement, manufacturing engineering, the operations end user team and perhaps others), the project either gets shelved because it’s deemed “too expensive” or a CapEx request is prepared for management approval.
6.??????That CapEx approval may take quite some time and ultimately involves many factors as the prospective project is competing with other priorities for scarce company investments … but the evaluation always includes an ROI calculation based on the company’s standard formulas.
7.??????At some point a decision to proceed with the project comes back, yea or nay and this phase is completed, as the project proceeds or is denied!
What’s wrong with this Approach?
To begin with it ignores some fundamental principles of automation and these include:
1.??????Generally speaking, anything and everything can be automated!
2.??????Generally speaking, there’s “more than one way to skin a cat”. (There are always alternative technologies and methods to automation – it’s not “Rocket Science”!)
3.??????Manufacturing Automation is an investment, NOT a purchase!
4.??????Unlike many things, the price of automation is not driven by “supply and demand”.? The buyer, sets the price and it’s known upfront …. It’s the ROI calculation!
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What’s the harm with this approach?
The harm is that the all-too-common sequence described above and practiced in many/most manufacturing organizations too often results in a negative response or denial of the CapEx request and the proposed automation project, usually never proceeds.??This has the manifold and serious negative impacts on productivity benefits from automation that are never realized.
1st. ???????The frustrating sequence described is all an exercise to do "price discovery" which depending on which technology and design approach is undertaken, may or may not meet the ROI.?Generally speaking, this is a needless exercise as the ROI is already known upfront and the choice of the technology used as well as the design concept can be tailored to meet that ROI.
2nd.???????The choice of which suppliers to approach for quotation is generally driven by the underlying design and technology itself, whether that be a choice of the platform, (Robot, dedicated machine, semi-automation, combination of worker assists and conveyors, etc.), and the costs of that particular technology and design approach are also known. ???This by definition “hardens” the proposals at the outset since the range of offerings within a particular platform is generally narrow and it’s only the selection of one platform over the other that has any significant impact on the final price.?Thereby shifting “innovation energy” from the solution itself, to negotiation tricks and gimmicks!
3rd.????????The sequence described above is wasteful for both the in-house team as well as the outside suppliers as this process of “guess the ROI number” discourages all from even attempting to automate a process if the results are not engineered upfront to assure success and engineering a “yes” on meeting the ROI, by simply knowing that number upfront.
4th.????????Most important, the pace of productivity improvements to be gained through automation are slowed and perhaps neglected for a particular manufacturing operation once the perception that this process is not able to be economically justifiable for automation sets in … simply because we failed to properly evaluate the possibilities and the iterative ROI calculation process places undue inertia on the entire process.??So why bother?
A Better Way!
By calculating and specifying the ROI upfront for any particular operation or process that is targeted for automation, the entire wasteful sequence described above can be eliminated.?This ROI figure is the actual justified price of that automation and it can be dictated as part of the system specification upfront.?Any competitive suppliers interested and that can meet or beat that price along with a description of how that will be accomplished will yield a “menu” of options that can be used to proceed with the automation.
For the end user / manufacturer, the real value of the automation is not the ROI, as that’s just a discounted cash flow figure of the tangible savings of labor, scrap, quality reworks etc. The real value is the “unknown and unknowable” intangible productivity benefits which flow from that automation and reach into workflows simplification, order to cash cycle time reduction, decreases in WIP and many other benefits which are only fully realized after the automation is deployed.
What this means is that by taking the price “off the table” at the outset, the decision of which supplier, technology or design concept to proceed with is based on reasons other than price, which is an inefficient metric, and will include the merits of the automation solution itself contextualized to the overall automation strategy of the end user.
To summarize:
Manufacturing automation is an economic investment aimed at increasing productivity, not an opportunity to “haggle” over price or play a game of “guess the ROI” for all concerned.
What has your experience been with ROI impeding investments in Manufacturing Automation??
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1 年Great post Chris Stergiou
Takt Times Group
2 年The key issue with standard project economics is that it evaluates new technology only at the horseless carriage level. It asks for what we spend and gain from doing the same things in a different way. Most of the value in new technology, however, is in enabling you to do new things that you don’t know about yet, and you don’t want your competitors finding out first. So you need to keep a technology watch to be aware of what exists. Then you need to experiment with it to learn it and find what it enables you to do. Then, if promising, you can deploy it on a larger scale and justify it as more than a horseless carriage. https://michelbaudin.com/2017/06/20/productivity-and-technology/
Quality automated packaging lines and standalone machine systems. UK sales, spares and 24 / 7 / 365 support. 30 years experience in automated packaging systems and robotics.
2 年Great post Chris! A few years back I was selling robotics in the protein sector. Most new clients demanded a “payback” of 6 months max. Even in a business running 24 / 7 this was impossible. I always asked “why 6 months” but never got an answer!
Exceeding customer expectations through outstanding software development services
2 年(2) Cont. What's the goal of every CEO? It is ultimately maximizing Return on Invested Capital. That means, every factory needs to maximize productivity = output / input. But what is your strategy? Do you want to increase output with given input? -> Enabling profitable growth Or do you want stabilize output at lower input? -> Increasing profit at current revenue level Senior management should set clear performance targets and allocate a budget which the industrial engineering team then needs to maximize by identifying and ranking the tasks after their automation potential. This way, as you also describe it, the price becomes subordinate. The only thing that matters is which impact the solution has on your Lead KPI.
Exceeding customer expectations through outstanding software development services
2 年(1) Very well described Chris Stergiou! (as always) I think the underlying issue you are picturing is a lack of operational strategy. IMHO, if a company has a clear goal towards automation, it is not a question whether a task should be automated but rather how. I have first hand experience with companies which propose improvement measures as they appear, without having an integrated strategy in mind. This way, you will always run into the problem of calculating ROIs under hard amortization requirements (e.g., payback period of 24 months). This means the decision is made based on an isolated financial metric which does not take into account the integrated impact on the factory level. TBC