When we first started a weekly Abel Womack blog a couple of years ago, I offered to write one on the art and science of determining ROI’s. My intention was to take the most common techniques and distill them down to one or two rigorous but simple-to-understand methods. I never got it done because, well, it takes someone smarter than me to make fairly complex math appear simple.
In my research, I came upon an excellent whitepaper on economic justification. It can be found via this link. It not only shows ways to evaluate whether a project is justifiable but how to compare different solutions by estimating the criticality of each factor and calculating a weighted average. Employing one or more of these tools will give you the data you need and the comfort factor that you did your homework. It’s really good stuff.
But is that all there is? Is it all about taking our best guess on the inputs, shaking them all around via powerful mathematical formulae, and squeezing out a yes or no answer or a we’ve decided on you rather than them. Maybe in some cases that’s enough, but in others, I believe there’s more to consider.
We’re in the automation business– developing and implementing mission-critical systems that increase capacity and throughput while reducing direct labor and improving management control. They are almost always highly effective but can be expensive to purchase and, sometimes, somewhat expensive to support. For most companies, it’s a big decision- both whether to go ahead with the investment, and if so, with whom. Therefore, quantitative ROI analysis is a great start but, like most science, needs a certain amount of art for you to see the whole picture.
So, here are some other things to consider:
1. If you build it, will they come? Do you have enough game as a company that you can attract more business if you have the capacity to accommodate it? If yes, investing is not only an option but an obligation. Nature has taught us that we must keep growing or we turn brown and rot. If the business is there for the taking, you owe it to yourself and your stakeholders to go get it.
2. What is the impact on your people and culture when you demonstrate your willingness to invest in their future? Nothing gets team members more jazzed than being part of a company that reinvests earnings to ensure long term viability and a compelling future. That builds team engagement and retention- critical components to success.
3. Machines do repetitive tasks better than people, particularly physically-demanding, repetitive tasks. People should be trained to think and perform variable tasks that machines don’t do well (at least not yet). It’s not about automation replacing people; it’s about valuing people and teaching them skills so they aren’t so easily compromised. Let the machines handle the high speed back breaking work and save your people for better, more rewarding work.
4. How available will people even be in 5 or 10 years, and will they be willing to work like machines? I don’t think so, as the demographics, economics, and societal factors point to a shrinking workforce for manual labor. Automating sooner than later hedges your position to be ahead of the curve as reliable labor becomes scarce.
And here are a few thoughts for evaluating different options, based on the following selection criteria:
Design ingenuity and effectiveness: Most systems should be a Ford 150, not a Ferrari. They need to be reliable to produce work, day in and day out, for years and not break the bank in doing so. Too many systems are overdesigned as those involved become too enamored with the sizzle.
System reliability and serviceability: Spend the money on quality, particularly for the most mission-critical aspects of the system, and save it where it doesn’t really matter. Look for technology that’s not only inherently reliable but can easily be supported. And have a strategy to keep it up and running, whether you chose to build your own ‘highly competent” maintenance team or outsource to a supplier that has the game to support it for you.
Cost: Initial cost is always important so look to purchase pre-owned equipment when available, but only for the less impactful and perfunctory parts of the system. Used rack, shelving, flow rails, and gravity conveyor are all good candidates, if you can find them for a justifiable discount.
The X factor: This is the intangible that relates to whom you will be selecting for your investment. Developing and implementing systems requires a partnership. The client and supplier must trust each other, work hard together, address the inevitable problems together, and, in the end, produce the deliverable that meets or exceeds expectations. Make sure you consider all of this during the decision process. While the first three criteria are digital, the X factor is analog. Talking to references is okay, but they tend to be handpicked. Better to go to the marketplace and do your due diligence to learn what you need to know. Like the song by the band ‘The Who’, keep asking to get the real answer to the operative question about your prospective suppliers: Who are You…?
We hope this has been helpful. The link will provide you with a wealth of quantitative data and the rest is just opinion, but it’s based on many years of doing this. See if there’s a nugget of wisdom anywhere in there for you.