Return on investment (ROI) is a financial metric that measures the efficiency of an investment. It is used to evaluate the profitability of a business investment by comparing the amount of money invested to the amount of money returned. When considering an automation investment, it is important to carefully analyze the ROI to ensure that the investment will be worthwhile. In this blog post, we will discuss how to analyze return on investment for an automation investment.
Determine the initial investment
The first step in analyzing the ROI of an automation investment is to determine the initial investment. This includes the cost of the automation equipment, as well as any installation, training, and maintenance including when these costs will incur.
Calculate the expected return
The next step is to calculate the expected return on the investment. This includes any cost savings that will result from automation, such as reduced labor costs or increased efficiency. Reduced labor expenses should include hourly operating costs as well as overhead labor rates and indirect hiring costs. For many manufacturers the current labor market has not only impacted their ability to hire but also the equitable salary demands of their existing employment base. It is also important to consider any potential revenue increases that may result from the automation, such as increased production volumes or improved product quality. As important but more challenging to quantify is the reduction in the potential for employee ergonomic concerns that comes with adoption of new automation systems. Even low impact tasks repeated hundreds of times per day can result in significant injuries in time.
Determine the payback period
The payback period is the amount of time it takes for the investment to pay for itself through cost savings and/or increased revenue. To calculate the payback period, divide the initial investment by the net expected annual return. For example, if the initial investment is $100,000 and the expected annual return is $50,000, the payback period would be 2.0 years. Comparing the time to breakeven with the estimated useful life of the automation system clarifies how long the system will operate beyond the point of paying for itself.
Consider the risk
It is important to consider the risk associated with the automation investment. Some potential risks include technological obsolescence, unexpected maintenance costs, and changes in market demand. These risks are often a significant concern in traditional automation that requires bespoke customizations to meet manufacturing requirements. Automation solutions based on new more flexible technologies can reduce these risks.
Compare to other options
It is also important to compare the ROI of the automation investment to other potential options. This could include alternative manufacturing strategies as well as a different approach to procuring automation solutions such as robotics leasing options. By comparing the ROI of these different options or net savings from alternative acquisition models, you can determine which solution best fits your manufacturing needs.
Monitor and review
Once the automation solution is in place, it is important to continuously monitor operational savings and evaluate the accuracy of the assumptions made during the ROI analysis process. This includes tracking the actual cost savings and revenue increases, as well as any changes in market conditions or technological advances that may affect the investment. By regularly reviewing the ROI, you can make adjustments as needed to ensure that the automation investment remains profitable.
In conclusion, analyzing the ROI of an automation investment is essential to ensure that the investment is worthwhile. By considering the initial investment, expected return, payback period, risk, and other options, you can make informed decisions about whether or not to pursue an automation investment. At Launchpad, we regularly work with manufacturers to help them fully evaluate their anticipated ROI and break-even timelines. Make sure to check out our Digitool solution here and reach out for any additional information.
