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Article Getting optimal ROI from assets & equipment

Feb 1, 2016

It’s important to carefully weigh ROI as it determines the payback period for your assets and equipment. The feature discusses various aspects associated with equipment’s true ROI calculation for getting the optimal value from your machine.

In order to be competitive in today’s changing landscape, it is necessary for manufacturers to consider long-term reliability, accuracy and performance of any capital equipment before purchasing it. But, justifying a capital equipment purchase by calculating its return on investment (ROI) can be challenging for many shops. Sharing their views on analysing the total life cycle cost to evaluate the anticipated performance of the equipment are Ramadas P, Managing Director, Ace Manufacturing Systems; B P Poddar, Vice President—Sales and Marketing, Fatty Tuna India (FEMCO India); Suresh M K, General Manager – Production Machinery, Makino India; Santanoo Medhi, Managing Director & CEO, Premium Transmission and Tushar Mehendale, Managing Director, ElectroMech.

Planning & management of asset maintenance

In the competitive world we live in, there is a strong push to maximise the asset utilisation through improving the overall manufacturing process. Highlighting the same, Ramadas avers, “The right kind of investment on products & processes will provide long-term returns to manufacturers. There has been a shift in focus from product to overall process in recent times to enhance productivity. Every aspect of the process starting from identification of assets, their procurement, utilisation, maintenance and their disposal would need meticulous planning and management to obtain best productivity levels.” On the other hand, Mehendale believes that success of any process is dependent on the complex interplay of three main aspects – men, material and machines. He further adds, “If the plant manager is able to take care of the ‘machine’ aspect through proper equipment selection and maintenance, then there is one less variable in the equation to contend with. This enables a fine control on the process, which in turn enables the plant to perform at peak productivity levels.”

On similar lines, Poddar points out that maintenance is inevitable and surely adds to profitability as it brings back equipment to normal working condition. Though, he feels, no one likes to spend for maintenance activities. “Even when successfully completed, no one notices or appreciate the value of maintenance. The attitude needs to be changed from repairing to keeping running,” he asserts. Speaking on the benefits of maintenance, Suresh ideates, “A well maintained asset gives a consistent output, both in terms of quality and productivity. This asset has the advantage of ensuring on-time delivery of parts to their customer.” He believes that reliability of the asset being key factor warranties due to poor maintenance is not an insurance against downtime. “Once production starts, unscheduled downtime can be highly detrimental in terms of productivity and more so, with regard to delivery commitment to customer,” he adds.

Further highlighting on life cycle of assets, Medhi says, “It’s not just the increased life cycle of assets that is important, but efficient utilisation of these assets have also become vital. To have efficient and effective utilisation of assets, organisation must invest in an efficient planning system which reduces ‘non value-added time’ of the assets. A properly maintained asset does not depreciate, but actually appreciates its value.”

Total costs of ownership

For measuring the cost involved over the life cycle of asset, an analysis of Total Cost of Ownership (TCO) is a critical tool in decision-making. Adding its significance, Poddar says, “TCO is utmost important to make adequately balanced procurement decision. Good procurement is achieved with right price, but best value for money is achieved with lowest/least life cycle cost of asset. It becomes imperative to consider TCO in ROI calculations i.e. price, quality, availability and functionality.” Adding further, Medhi opines, “Generally, traditional ROI calculation includes only the purchase price. This does not give the true picture of ROI. In fact, a life time cost of the asset including purchasing price, cost of finance, installation, operating, maintenance, write off/disposal and replacement cost at the end of useful life should be used for calculating ROI.”

In determining ROI for new machines, Suresh shares that the manufacturer carefully examines the purchase price. However, the costs for operating, maintaining and de-commissioning these new machines may dwarf the original purchase price. “Factors that impact machine tool ROI extend throughout the life cycle of a machine. Although these factors may not demonstrate immediate ROI, it is important for manufacturers to realise that a bottomline impact will be felt,” he adds. Adding his thoughts on the same, Ramadas says, “Manufacturers purchase new equipment to enhance their capacity with the shortest possible ROI. On this, typically they consider only the acquisition costs of the equipment. However, they tend to ignore the possibly high operating costs or maintenance costs, which may skew the ROI calculations in reality.”

Highlighting the effects, Mehendale says, “An inefficient equipment having a lower upfront cost, might end up having an extremely high running cost on account of heavy requirement of consumables or spares or repair services. Similarly, end users should also consider the consequences of the downtime of equipment. A longer life leads to a lower actual depreciation in the equipment value. Thus, typically if one were to consider the ROI, then the ‘I’ should be arrived at as the net present value of the equipment upfront cost, the future cash outflows related to the maintenance and breakdowns, the future cash outflows on account of possible consequential losses and the terminal value of the equipment. Savant decision makers typically arrive at their buying decisions in such a manner.”

Hidden cost

Many a time, purchasing decision while acquiring an asset is driven only by the asset price at the time of acquisition without considering the hidden costs. This can alter ROI drastically. Speaking on this, Suresh says, “An asset’s purchase price is only a tip of iceberg. What we miss is a multitude of hidden costs, which are not blatantly seen at the time of acquiring the asset and ROI calculation.” On similar lines, Poddar signifies that upfront price paid for purchasing equipment is just tip of iceberg. Invisible are the series of hidden costs of ownership. He further avers, “Analysing ROI is not always as simple as it sounds or as straight forward as it looks. The major aspect often neglected is confusing cash & profit. If profit is misunderstood for cash in ROI calculations, one is likely to get/show better returns than reality.”

Analysing the factors for hidden cost, he adds, “Hidden costs are mainly related with operational cost component of TCO. Repair costs, unplanned downtimes, maintenance, consumables, energy, utilities are hidden aspects of ROI.” On similar lines, Ramadas adds, “Tangible hidden cost includes installation cost, repair and maintenance cost. Intangible hidden cost includes poor productivity due to the human factor, production loss due to unplanned downtime, waste disposal, de-commissioning costs, re-deployment costs, and tooling selection.” Medhi signifies that the hidden costs are generally cost of finance, write off/disposal and replacement costs. “Most organisations use only purchase price & installation costs, while some use additional cost of operating and maintenance. Very few organisations use all these costs mentioned,” he shares.

Automation as a part of ROI calculations

In the current highly-competitive world, it is inevitable to find answer to ‘how to produce cheaper, better & faster for sustainable profitability’. Answering this, Poddar says, “Automation costs are coming down and automation is becoming smarter with capabilities. However, integration/implementation of automation is more strategic based on long-term and not short-term goal of survival, rather long term goal of growth.” Discussing the aspect of including automation in ROI calculation, Ramadas says, “Automation should be a part of ROI calculations. It may add to the asset value and enhance productivity significantly, thus, improving the machine ROI. The major advantages of implementing automation include reduction of labour costs, improvement in productivity, consistency in output quality, and uninterrupted working during breaks.” Moving ahead, Suresh believes that automation can improve machine utilisation by over 95% because machines are kept in cycle. “The moment one part completes, next part goes into production, sometimes running 24/7. Faster parts turn around results from eliminating direct setups on the machine. This can result in businesses purchasing fewer machines to achieve desired production volumes.”

The other side of the coin says that organisation makes the mistake of selecting the machine first and then selecting automation. On this, Medhi opines, “In doing this, one may end up with a sub-optimal solution, which will lead less effective and efficient utilisation of the asset and ROI. If the machine and related automation is considered as one and decided at one go, it may lead to less-priced machine requiring less CapEx, which again leads to better ROI. While considering adding automation to existing machines for ROI calculation, one considers life time cost of automation and adds the remaining life time cost of the machine. It would be a useful exercise to check the ROI of a new machine with intended automation as one optimal machine with ROI of adding automation to an existing machine.” Mehendale also believes that automation, wherever it is implemented, automatically becomes an integral part of the process. He further opinies, “Effective automation will enhance the returns, while ineffective automation will lead to only increase in the cost without commensurate returns.”

Leasing vs buying in ROI

Making the right purchasing decision, which will give the best value for money depends on various factors contributing in decision making. Emplacing this, Poddar says, “Every financial option will have some advantages & disadvantages. This makes the job more complicated and careful evaluation is absolutely necessary.” Speaking on financing options, Ramadas shares, “Leasing of equipment can be a good choice for manufacturers where the products would need to be upgraded in few years or for users with limited finances. On the contrary, buying the equipment can be a better choice for established manufacturers with sufficient financial strength or for equipment that stay usable for a longer period of time. From an ROI point of view, there may not be a significant difference between leasing of equipment or buying it from lent money.”

Also, when buying an asset, it is critical to consider the long term costs of ownership, such as maintenance and downtime that can mount when a company holds on to an asset over time. “Through leasing, a company can improve its cash flow, while obtaining better equipment and ROI. Leasing gives flexibility in capacity and financing as company can add machines based on customer/market needs. It can either return at the end of the lease term or purchase,” opines Suresh.

On similar lines, Medhi believes that ROI will vary depending on the interest rate (cost of finance). “Many times, lease option is explored not because of ROI, but because of cash flow conditions of the organisation. However, leasing provides an easier way to upgrade machines at a more frequent interval than outright buying” he adds. According to Mehendale, “To make a lease vs. buy decision, ROI should not be the only metric to be taken into consideration. One should also consider other aspects like business variability and future technology trends.”

Run-to-failure strategy

Under run-to-failure strategy, machines/equipment are deliberately allowed to operate till they breakdown. At this point, it becomes reactive maintenance. On this, Poddar says, “Here, it is utmost important to have spare parts and skilled manpower immediately available to bring back machines into operations.” Furthermore, Ramadas emplaces that ‘run-to-failure’ is old school thinking with SMEs, which is fast changing with the informed user segment. “With this old strategy, customers spend significantly on maintenance, servicing and productivity losses. Upgrading to newer equipment with better technology will allow enhanced utilisation of resources and may prove to be more productive in nature,” he adds.

Adding his thoughts, Medhi believes that run-to-failure is prevalent not only with the SMEs, but with many other bigger organisation. Whether this strategy yields a better ROI depends on few factors such as changes in operating cost with aging and cost of repair/maintenance v/s replacement cost. Further, he suggests that this is not a very effective policy to enhance ROI. “Organisation should weigh the ROI using the total life cycle cost and compare the cost of replacement, while deciding on this matter. Now-a-days, there are equipment designed to last a fixed period with zero maintenance and needs to be replaced after this fixed period,” he adds.

As a recommendation, Suresh concludes, “End users have to be careful in understanding the equipment’s functioning and the maintenance needs. A poorly maintained asset can become a huge liability for the business with low productivity levels and huge costs over run to bring back the asset on track. Hence, they need to weigh ROI calculation more carefully looking at the hidden costs, the product mix they need to make and flexibility of the asset to take care of market needs.”

Image Gallery

  • “The right kind of investment on products and processes will provide long-term returns to manufacturers”
    Ramadas P, Managing Director, Ace Manufacturing Systems

  • “A properly maintained asset does not depreciate, but actually appreciates its value”
    Santanoo Medhi, Managing Director & CEO, Premium Transmission

  • “To make a lease vs. buy decision, ROI should not be the only metric to be taken into consideration”
    Tushar Mehendale, Managing Director, ElectroMech

  • “Reliability of the asset being a key factor warranties due to poor maintenance are not an insurance against downtime”
    Suresh M K, General Manager— Production Machinery, Makino India

  • “Good procurement is achieved with right price, but best value for money is achieved with lowest/least life cycle cost of asset”
    B P Poddar, Vice President—Sales & Marketing, Fatty Tuna India (FEMCO India)

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