ROI for Warehouse and Manufacturing Automation: A Panel Discussion
How can you establish ROI for automated projects?
Above: James Murphy moderates a panel discussion on automation return-on-investmentÂ
Cisco-Eagle’s Bryan Gauger joined Mitch Smith of Hytrol and Nils Hart of Muratec for a Warehousing Education and Research Council panel on automation projects return-on-investment. The discussion revolved around ROI factors ranging from labor to safety. Because labor and money are both tight, justifying capital expenditures is more important than ever. Here are the panel’s thoughts on critical ROI issues:
ROI definitions and meanings: it’s different for industrial applications
The financial definition of ROI is fairly simple. As Hart said during the panel: “In a simplistic form, it’s just looking at the profitability of an investment.” The problem for automation is that ROI evaluation must include several factors that are more difficult to define in a purely financial sense.
What to consider when defining ROI for your project:
- Complex applications: Larger integrated systems that completely redesign an entire work process can be difficult to evaluate because all preconceptions and points of comparison are being removed. This means you’re working in theoretical assumptions.
- What to consider at a high level: Despite the complexity, you must still trust the data and look at total cost of ownership plus the total value of benefits.
“A simple way of looking at ROI is your net gain as your return on investment,” said Smith. “That’s the easy way. Unfortunately that’s not good enough for what we do in material handling. There are also things we need to do: compare multiple opportunities and design. We need to know the internal rate of return. You start with the simple way to define it – and move forward from there.”Â
The total cost of ownership
The total cost of ownership rests on two fundamental questions: (1) what is the total cost of ownership, and (2) how do we define that? The panel discussed methods for defining the total cost, because, as Smith said, “accounting wants numbers.” To be valid, your numbers should include the total costs evaluated as thoroughly as possible. “Many times, accounting will only accept head count adjustments.” Trying to define other factors, like efficiency, drifts into theoretical gains that are harder to slot into a formula.
What is the total cost of ownership?
- Cost of initial investments: the cost of equipment and implementation, such as installing a conveyor system or an AS/RS system. You must also include installation and implementation costs relating to software and hardware.
- Maintenance costs include repairs, redundancy, replacements and ongoing mechanical support.
- Operating costs. While most automation reduces labor and headcount, it usually doesn’t eliminate it. You must factor the costs of people, energy, time and space into operating costs.
Read more: Considerations When Adding a Conveyor System and How to Calculate Automation ROI
Automation, labor and ongoing demographic challenges
“Everyone in this room has faced the challenge of labor the last couple of years,” said Gauger. Labor is one of our biggest challenges, as here in the state of Texas we have 89 workers for every hundred job openings. We can’t draw much labor from surrounding states because the surrounding states are even worse off.” Gauger went on to mention Texas’s ongoing growth, with many new warehouses and factories being built in the state as labor tightens.
“I meet customers who have people hand palletizing – who can’t hire any more than they have. They’re going to have to automate and put in things like robotic palletizers or AGVs.”
“You can go to HR and find the burden cost of any individual or group,” said Hart. “You can add the costs of whatever the automation is replacing a forklift and its leasing costs.” Hart added that good ROI calculations must include the maintenance costs or savings of either the existing manual model, or any proposed automated replacement. “Throw those metrics together and you sometimes find your ROI can be just a matter of a few years.”
A focus on demographics
Smith focused on demographics during the discussion. “You hear a lot about demographics,” he said. “The baby boomers are leaving the marketplace—those people born from 1946 to 1964 who are aging out of the workforce. That’s 132 million total people. The United States has only 330 million people, so who’s going to backfill those positions? Automation and operations people have to find ways to supplement that shortfall.”
More on ROI and justifying your project
- New Rules for Industrial Automation ROI
- How Material Handling and Automation Increases Labor Flexibility
- Are AGVs Right for You?
Scott Stone is Cisco-Eagle's Vice President of Marketing with 35 years of experience in material handling, warehousing and industrial operations. His work is published in multiple industry journals an websites on a variety of warehousing topics. He writes about automation, warehousing, safety, manufacturing and other areas of concern for industrial operations and those who operate them.