ROI is Tragically Under Valued by Small and Medium Manufacturing Companies

If you ask leadership at the average American manufacturing company, “How are automation investment decisions made?”. You will inevitably hear “We calculate the ROI and if there is a return in under X months we make the investment. “. This is not bad business thinking. However, most manufactures are incorrectly calculating their ROI. This is because they are only considering the most basic values of automation investment.

Astute executives quickly weigh an investment decision with a narrative that parallels the Story of John Henry, the Steal Driving Man. The decision is boiled down to man vs. machine – Labor and benefits vs. Machine cost and maintenance comparison. Again, this is not bad thinking. However, it’s a limited binary model that overlooks a significant portion of the value proposition automation investments can offer a company. It is also a terribly cold and politically charged view of automation. A model that moves the conversation away from Man vs. Machine and helps decision makes better conceptualize the value proposition of automation investment is badly needed.

In addition to helping manufacturing decision makers, a value model will also help machine builders, system integrators, device manufacturers and software suppliers better craft their value proposition sales pitches. The automation industry is plagued by technology selling. Even worse is when we aim to sell value ideas, we do so with abstract concepts that doesn’t make it any better. “Is your factory or device industry 4.0 ready?” is a prime example. A simple model that both illustrates value and presents a path to additional value in the future can help quantify return and build meaningful conversation between suppliers and customers of automation systems and components.

Level 1: Labor Augmentation

Labor Augmentation is the pyramids foundation and likely the most leveraged consideration when making an automation investment decision. Labor requires wage, benefits, facility overhead and management. Machines must be purchased or leased, supplied with power to operate and be maintained throughout their useful life. The math is simple but gathering the inputs is often a chore choir for small and mid-tier manufacturers. Variable benefits, tiered time off, attendance and average tenure of employment are all variables that impact the cost of labor and send many intelligent companies down complex rabbit holes.

Leverage the below equation to keep the calculations simple, this calculation is now only 1/7th of the value proposition. Close enough is ok.

Labor x Y = Automation (Y is number of years to balance the equation)

Labor Calculation: (Wage + Benefits) / (average tenure in years/5)
Average tenure becomes a driving variable that simulates a wide variety of inputs. If your average tenure is over 5 years simply use Wage + Benefits as your full equation. You will note that low tenure leads to significantly higher comparison costs. This accounts for recruitment, training and gaps in role coverage.

Automation Calculation: (Machine cost + Fuel + Annual maintenance)
This is a simpler equation; it does not account for important variables like asset depreciation and useful life. It does, however, work well for this simple comparison to labor.

Level 2: Employee Quality of Life

Quality of Life is broken into three distinct parts all related to improving the labor experience of your workforce to increase ROI and eliminate human error. The three quality of labor life categories are Health and Safety, Accident Avoidance and Training.

Health and Safety: Automation can remove humans from tasks that pose risk to their wellbeing via anatomy and physiology. Machine systems can take over tasks that are inherently hazardous for human workers, such as working with chemicals, high temperatures or in confined spaces. These systems can also lift and move heavy loads, reducing the risk of injuries related to manual lifting. They can also handle repetitive work at high speeds eliminating ergonomic challenges related to repetitive motion injuries.

According to the National Safety Council, the total cost of work injuries in 2021 was $167.0 billion. This figure includes wage and productivity losses of $47.4 billion, medical expenses of $36.6 billion, and administrative expenses of $57.5 billion.

Accident Avoidance: Automation can add two key benefits to avoid accidents. First it can be implemented in systems to remove the possibility of human error. And second, tied to health and safety it can remove humans from habitats they don’t belong in. Tasks are shifted from mind-numbing physical repetition to active monitoring and management.

Training: Automated systems today can supply training in amazing ways. At the highest-level VR and digital twins can be leveraged to hone operating skills in a simulation. These simulations provide a visual and tactile experience far beyond what a text or lecture could accomplish. On more typical systems user interfaces and HMI’s can offer help screens and suggested actions to support less experienced workers. This automated training can make onboarding more efficient; workers feel more empowered and reduce workforce errors.

Layer 3: Capacity Scaling

Capacity scaling is defined by two broad categories, volume and ability. Volume is the amount of goods that can be processed. Ability is added capability automation may add to a manufacturing process.

Volume – Automation systems are faster, more accurate and more consistent than standard labor. There are no laws governing working hours per day or week for a machine. No biologic components to fatigue and far fewer staffing challenges. 24x7x365 is a far more realistic goal with automated systems. This part of the capacity scaling value is well understood and accounted for.

The value often overlooked is how much more scalable automation is than any other manufacturing process. The ability to double or triple processing capacity is greatly simplified. Yes, additional equipment will cost capital, need space and will need to be installed by specialists or integrators. This is still less complex than scaling a manufacturing process that relies on labor. You can grow and scale your options much more easily.

Automation for many small and mid-sized manufactures is now solved by off the shelf automation modules. The market is littered with companies that offer off-the-shelf machine cells or automation skids that can be installed on your factory floor to deliver value. Some light integration is needed but a fully custom automation system or machine is no longer a requirement for the vast majority of processes being automated.

You can now leverage module solution to enhance existing lines or quickly replicate an existing line for additional capacity.

Ability – Automated systems can greatly improve the ability to execute highly precise work. They can run value add processes not possible for humans to do. They can also execute tasks faster than humans which may be required in applications where time synchronization of tasks or curing times of a substance are critical.

In addition, the precision of automated processes in additive or subtractive manufacturing can eliminate entire stages of a traditional manufacturing process. Less precise manufacturing processes often include finishing stages. A raw good is produced and is later refined to a higher quality or precision. These finishing steps can be eliminated because the automated process allows the raw goods to be produced at finished good quality levels.

This additional precision and determinism of process can enhance the quality of your products and potentially open new market opportunities. With these capabilities you may be able to offer a higher quality product or product that meets additional standards opening new revenue opportunities.
Automation will add value by increasing the amount of goods you can manufacture and open new opportunities by allowing you to manufacture high quality goods.

Level 4: Quality Enhancement

Quality enhancements offered by automation at Level 4 consist of elements from lower levels in the value pyramid and also includes new value considerations.

Properly run automated systems operate more reliably and eliminate human error of a process. This will reduce scrap, tighten quality tolerances, and produce a more consistent product. The additional precision of automation systems will allow you to produce higher quality components with much tighter tolerances.

The significant additions at Level 4 are related to monitoring and product tracking.

The vast array of sensors, meters and monitors that can be used in automation systems give you the ability to monitor quality inline, at multiple stages of a manufacturing process. This is a significant concept. Traditionally, as goods move through a manufacturing process they are manually measured in some way upon completion. Good product is packaged, bad product is scrapped or reworked. In multistep processes this is highly inefficient. With additional monitoring in-line and at multiple gates of the manufacturing process you can avoid wasted manufacturing on reject parts that are “complete”. If you monitor quality at multiple steps, you gain the ability to remove non conformance parts at earlier stages of manufacturing. They are removed before wasteful manufacturing steps are taken on them. This saves capacity and cost.

Product tracking is also simplified and improved with automated systems. Vision systems, barcode scanners and RFID, among other technologies, give the ability to track goods through a manufacturing process. Many software tools today are available to automate the tracking of goods through a manufacturing process and also prompt labor to Identify manual options performed on the part. It is very reasonable to have a history of all aspects of a products production. In addition, environmental data can be tracked through manufacturing and the supply chain. Think about a data log that proves your prepackaged food was never exposed to unsafe temperatures during production.

Think of the benefits your quality team could offer if they had better data delivered autonomously from each stage of the manufacturing process.

This tracking is mandated in many verticals like pharma, military, food and some telecom. But even in unregulated markets this logging and measuring will enhance your products’ quality and allow you to quickly react to failures. This can dramatically enhance your ability to deliver better quality goods more efficiently.

Level 5: Operational Efficiency

Operational efficiency is gained by reducing unskilled labor and focusing on skilled labor. A reduction of low skill labor significantly changes the management challenges traditional manufacturing face. We covered the cost of labor and benefits at Level 1. This level differs because it defines operational costs that can be avoided or reduced by automation. The reduction of lower skilled labor has a cascading impact on many operational considerations.

Before we dig into the tangible impacts of reducing reliance on low skill labor, we all have to embrace an uncomfortable truth. At most manufacturing companies labor involved in manufacturing is the lowest paid labor group. Most of the labor pool is from a lower socioeconomic segment of the population.

In contrast with the office side of the business, most labor is hourly not salary. Many of the perks of office workers like work life balance considerations are nearly non-existent. If order volume is down, or parts are delayed staff may be sent home. Similar moves would never be seen on the office side of a business. Someone in marketing or admin is not losing 40% of their weekly pay because parts didn’t come in on time. These unique challenges need to be uniquely managed. Most businesses are not entirely comfortable with this dichotomy.

This contrast is justified because of an accounting principle far from the purview of most workers. Most manufacturing classify labor as cost of goods sold (COGS). COGS are relatively easy to track. Many layers of management are incentivized to keep COGS low. These variables are also much easier to impact than the relative risk and abstraction of most overhead staffing in other parts of the business.

Reduction in labor, particularly low skill labor means many companies can better normalize their processes and staff expectations. Less labor means less team leads and less managers will be needed. Less labor reduces the burden on HR, working to fulfill manufacturing roles that are traditionally high in turnover. COGS can also be managed better because the impact of human labor is reduced.

Factories that were once reliant on armies of workers can now move to less costly and less populated areas. A modern factory can now focus on positioning themselves to recruit high tech talent, being close to their supply chain or their customers. They no longer need to focus on manufacturing labor populations.

Automation offers a reduction in COGS and a reduction of business overhead related to low-cost labor. It can help businesses focus on more strategic decisions that were once ignored in the quest to attract labor.

Level 6: Automation as an Intellectual Property (IP) Asset

Few companies view their automation IP as a resaleable asset. These machines, systems, software tools, processes and practices can become assets that are monetized. Often for value far beyond the efficiency and quality the system offered your manufacturing process. Your investment in automation can scale beyond your manufacturing when you sell it to others.

This is a tricky topic for two core reasons. First, the idea of selling a process or design is not the core business of any manufacturing company. While the concept would be understood the context is not. The value of the asset, the challenges to sell the asset and the available market for the asset are all unknown risks. This means there are significant hurdles to overcome selling this concept to executives.

Secondly, many executives will view these processes and systems as closely guarded trade secrets. Colonel Sanders licensing his secret recipe of 11 herbs and spices amounts to blasphemy for many. I am not saying these concerns should be overlooked. Proprietary automation practices that create a unique value to your customers should be considered/guarded with the greatest care. However, for most small to mid-tier manufacturers licensing such technology often can generate growth far beyond what the core manufacture could accomplish organically.

To properly explore ideas with decision makers, ask the following questions:

• If this IP was made public tomorrow how would the business be impacted?
• Could non-competitive companies in other markets use this IP?
• Are there geographic regions not reached today where this IP could be licensed without creating competition?
• What internal value do we put on this IP?
• Who could you partner with to market this IP? Is there someone you should be partnering with?
• Make a list of all automation IP the company owns. Process, design, software, machines, patents, etc.

It’s a good idea to brainstorm the many ways IP could be brought to market. Licensing of software, patents or technology that could be sold. You could offer consulting services. Establish joint ventures or partners to sell your IP. Sell subscriptions to your IP, think SAAS model. Sell the data from your systems. And of course, you could sell your automation product or offer custom solutions based on its core designs.

Monetizing IP in automation requires a strategic approach, market awareness and a solid understanding of your IP’s value proposition. Tailor your monetization strategy to your specific IP, target market, and business goals to maximize its potential for success.

Licensing automation IP is a practice typically leveraged by large manufacturers. It is also a practice that could be much better leveraged by small and mid-tier players. You are making significant investment in automation systems and processes. Those automation assets may have revenue generating opportunities your company has never considered.

Level 7: Autonomous Improvement

Autonomous improvement is no longer science fiction. Advances in machine learning and the application of AI is delivering benefits today and is reshaping the future of our industry. Machine learning and AI coupled with the simulation of improving digital twin models is turning mountains of theory into practical results. These tools hold the promise of a compounding return on your initial investment.

While exciting, this is likely not an area small and mid-tier manufacturers should aspire to in the near future. Today these systems and the automation infrastructure to support them are simply too costly. In addition, while these systems are impressive, many manufacturing operations would not get a benefit from their awesome power.

The ROI from autonomous improvement of Level 7 is not likely one you want to focus on too aggressively up front. This layer is the promise of additional value when you have achieved your automation and digitalization goals. Great promise to dream about. Let’s not pretend decisions are not impacted by visionary thinking.

Climb the Pyramid

The average American manufacturing line is still a line primarily driven by human labor. The coming decades are unlikely to significantly add domestic labor participants or change the attitude about labor towards manufacturing. Investments in automation will soon no longer be a choice. Leveraging the Automation Value Pyramid can help you better justify the automation investment needed to stay ahead of the curve.

Most automation investments decisions are made by considering Level 1. Build a persuasive argument that leverages values modeled in the additional layers of the pyramid. They will help you build an automation plan that moves beyond ala carte cell automation. Aim for systems and tools that will allow you to grow into a fully digital system that allows you maximize your manufacturing operation and your business goals. Happy Automating.

How We Can Help

The beauty of the Automation Value Pyramid is that it can be applied to any automation investment decision. However, it purposely avoids discussing the technology or solutions needed to get the most out of your automation systems. Most astute readers will note that to get the value at the higher levels of the Automation Value Pyramid you need to be investing in technology that gives business systems access to process information from your automated lines. This connectivity needs to be an overarching theme your company owns. It should impact the purchasing decisions and technical requirements of all automation equipment installed.

The foundation of modern manufacturing, Industry 4.0 or the digitization movements are all about removing the silo automation has been to most businesses. Connecting OT (operations technology) with IT (Information Technology – Business systems). While this is not a holistic solution most companies will take great strides towards a connected manufacturing target by creating a mechanism to extract information from the factory floor.

This means that your controls teams will likely need to aggregate data from machines that communicate on different protocols. The controls team also needs to model these various data streams into simple, time stamped information models that have the context needed for modern analysis.

This is where Real Time Automation® can help. We are a company focused on being your industrial automation protocol partner. We supply gateways that help connect legacy devices and translate data across multiple protocols. We supply device manufacturers with the OT and IT protocols they need to serve the market via software and daughter cards. We also offer a suite of appliances that help you aggregate your data and security allowing you to present it to business systems. We are plumbers of data on the factory floor and offer a suite of solutions that help extend that data “plumbing” to business systems.