Expecting one-year ROI on automation systems is short sighted

Summary

Bill Lydon’s Automation Perspective

By Bill Lydon, Editor

Many users, systems integrators, and manufacturing managers expect one year to eighteen month Return on Investment (ROI) when replacing or adding new automation systems. I believe this is short sighted thinking. ROI is also known as the payback period calculation based on how long it will take to earn back the cost of an investment from the savings it generates. In many companies automation investments are not considered as seriously as other capital investments, which are based on a sound lifecycle analysis. This has been an issue for years - automation controls and systems have not been treated like other production assets. The ARC Advisory Group (ARC) estimates the installed base of automation systems that are reaching the end of useful life is approximately $65 billion. The majority of automation systems in plants are 20 years old or more. The typical reasons companies upgrade or replace automation systems include lack of support, high repair parts cost, and obsolescence. When companies keep existing automation systems for too long, they ignore the importance of automation as a strategic business investment. On the other hand, short term ROI justification requirements almost guarantee mediocre results rather than striving for excellence.

Automation is now fundamental for manufacturers to improve productivity and efficiency. To remain competitive, manufacturers need to change their thinking. ROI is certainly an important metric for managers, but it falls far short of understanding how automation systems contribute to business goals and strategies. Automation professionals should educate management about the value of automation investments. The knowledge will assist them in budget planning and also elevate the understanding of automation’s value contribution.

Business Lifecycle Process

Automation improvements should be framed in terms of being an active part of the business planning and lifecycle process. It is good practice for automation professionals to develop a life cycle management plan for automation systems as is done for other capital equipment, such as machine tools and process equipment. Manufacturers are continuously faced with new challenges and opportunities that can be met with automation investments. Automation will help manufacturers keep pace with changing requirements and deliver high value continuous performance.

A decision to invest in new automation components or systems should be based on fact and provide satisfactory answers to fundamentals, including production cost savings, throughput increases, increased productivity, higher availability, and maintenance cost savings. These improvements all equate to more profits. Risk analysis should include loss of efficiency and poor quality that can increase as automation systems age and should be estimated as part of the investment analysis. Keeping old systems running rather than replacing them can be expensive over time and may impact production quality, throughput, and efficiency. The elements of a plan include estimating time and cost for software version changes, system upgrades, major retrofits, and ultimately total replacement. Refining the plan each year is important since requirements and information change.

The skills gap is a growing problem. It’s difficult to find knowledgeable people. In many cases new technology investments simplify operations, application configuration, and programming changes. These benefits should be estimated and included in investment analysis, along with downtime for production reconfiguration. Lack of skilled personnel to maintain old, difficult-to-use automation systems typically increases mean time to repair (MTTR) resulting in production losses. These losses should be part of the analysis. The investment analysis should also consider the tradeoff of investing time and money to train new people on outdated automation as opposed to replacing it.

Because industrial automation systems must run in difficult environments they can have a long lifespan but that should not be the deciding factor when making retrofit and upgrade decisions. Due to fast paced technological advancements, even though automation systems may not have reached the end of their actual useful life, it may be advantageous to upgrade. New technology can improve productivity and quality while reducing operations and maintenance costs.

Investments in technological advances should be given serious consideration with the high level strategic goal to keep your manufacturing competitive in the marketplace. Focusing too much on short term incremental investments can cause manufacturers to miss out on major technological turns that transform industry. The automotive industry is a case in point. Automobile makers have been investing in controls and automation to be more competitive and achieve flexible manufacturing. For example, Michael Bastian, Global Controls Manager at Ford Motor Company (Powertrain Division), described how automation investments allowed them to reduce new production launch times from 6-9 months to 45 days.

Suggestions to Automation Professionals

It is important to focus on business and operating value or the financial decision makers will view you as those technology people that just want to play with new toys. Management does not like surprises so develop a long term (5-8 years) overall automation evolution plan with benefits and estimated costs. Update your plan every year and you will create awareness of automation system issues. As a result, automation investments can be included in the budgeting process. The capital budgeting process enables management to set aside money each year for large investments to replace old, inefficient and add new automation systems based on business strategy. Planning should be done by collaborating with other stakeholders so they can support and be in step with planned changes in manufacturing and business processes. Automation needs to be a core part of the business and it is up to automation professionals to make it happen.

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