Blog post by Nick Hobbs, Business Development
When manufacturing facilities are discussing new automation, there is sometimes the perception that upgrading is too expensive. Many facilities tend to look at the investment required – and that indeed can be a large sum of money up front. However, what a lot of manufacturing facilities fail to look at is their return on investment (ROI). Calculating ROI shows the payback period or how long it will take for a company to make up for the initial outlay through other savings. When discussions do not include ROI, those manufacturing facilities fail to improve their manufacturing processes and ultimately fail to grow. Sometimes, engineers will inherently understand the benefit of a project but have trouble communicating that benefit to other team members who are not on the floor every day. ROI calculations can help a manufacturing facility to not only justify automation projects but also show the cost of not completing the project.
A manufacturing ROI is a simple calculation that can be done by almost anyone.
ROI = (Automation Savings – Automation cost)/Operating Output per year
If we dive in further, we can break down how we determine each of these items.
Automation Savings = Output Savings + Labor Savings
- Estimated Process Output: First, we determine the automation savings by calculating the estimated process output. To do so, determine estimated output per hour, multiply this by the number of hours in a day, by the number of days in a year (ex. 35 parts per hour x 24 running hours per day x 250 working days in a year = 210,000). Then we multiply this by the revenue per unit. (ex. 210,000 x $3 per unit = $630,000). This number will give us our new operating output per year.
- Current Process Output: Next, we will determine the current un-automated or old automation output rate. We will do this the same way as we did for the new automated estimated process output. However, this time we will use the current output rate (ex. 30 pph x 24 hpd x 250 working days in a year = 180,000). Then we multiply this by the revenue per unit. (ex. 180,000 x $3 per unit = $540,000).
- Output Savings: When we subtract the new estimated process output from the old output rate, we will get our savings ($630,000 – $540,000 = $90,000). This is the estimated increase in revenue for the facility.
- Labor Savings: Some new automation projects will also need to account for the operators being replaced. Not all will replace operators, but when they do, we need to evaluate the cost of each operator. If we have 3 shifts like in our example (eight 3 hour shifts = 24 hours), we will need to account for the amount of operators for the process multiplied by number of shifts (2 operators x 3 shifts = 6 operators in total). These operators will typically make a similar amount per year in salary or per hour rate. In this example, we will say that the operators each make $40,000 per year (6 x $40,000 per year = $240,000). So, if we eliminate the need for operators, we add this amount to the savings ($90,000 + $240,000 = $330,000 in savings).
- This is typically determined by working with your preferred integrator (Patti Engineering in this case!) Let’s say after working together, the proposed solution is estimated at $250,000.
- Then, we will apply this to our ROI equation
(ROI = Savings – Automation Cost/Estimated Operating Output per year).
- ROI = ($330,000-$250,000)/$630,000
So using our example, let’s say our automation cost was $250,000 for a full turnkey integrated automation project. If we do so, our ROI will look like (ROI = $330,000 – $250,000 divided by $630,000 per year). This example nets us about 0.13 years as a payback period for the automation. (0.13 years x 12 months per year = about 1.5 months).
Most manufacturing facilities require a payback period of 6 months to 2 years. If an automation project does not fit within this payback period, it is deemed that the project typically is not worth taking on. If it does fit in the payback period, it is a no-brainer to move forward with the automation project. Even though this project might cause a bit of sticker shock, the payback is incredibly fast. After just 45 days or so, this facility would be making money by having the new automation system in place.
For help determining how an automation project could benefit your facility, please feel free to contact Patti Engineering. We would love to help you determine a potential automation solution and also help you justify your project.