Thinking about a big production floor upgrade?
New machines shine on the showroom floor. A sales pitch can sound even sweeter. But a capital equipment decision is one of the biggest wagers for a manufacturer. Choose correctly and output increases for years to come. Choose poorly…
And the shiny new machine sits in the corner collecting dust.
Here’s the problem:
The majority of plants evaluate new equipment based on price. The intelligent ones evaluate it on return.
Nor are they skimping on investments. Deloitte just released a survey showing that 80% of manufacturers intend to invest 20% or more of their continuous improvement budgets into smart manufacturing. That’s serious money pursuing improvements.
This guide shows exactly how to run the numbers before signing the purchase order.
Time to dig in!
Inside this guide:
- Why ROI Should Drive Every Equipment Decision
- The Hidden Costs Sitting On Your Quality Line
- How To Calculate Equipment ROI Step By Step
- Red Flags That Kill Your Return
Why ROI Should Drive Every Equipment Decision
Capital equipment refers to anything a plant purchases to use for an extended period of time. Examples include machines, robots, conveyors and inspection systems. Due to the large expense associated with capital equipment, return on investment (ROI) is the only objective way to compare your choices.
ROI answers one simple question:
Will this equipment pay back more than it costs?
Here’s an example of where pattern matching inspection makes an impact. Visual inspection of parts. Many plants still use humans with eyes to verify parts. It’s tedious, time consuming, and human eyes tend to miss things at 3 o’clock in the afternoon. Pattern matching inspection improves on this process by having a camera compare each part to what a “perfect” part should look like. Any deviation is detected in a fraction of a second. Inspection systems like VisionGauge®️ utilize pattern matching inspection to verify parts for size, shape, and missing features at full production rates. ROI for upgrades like this are easy to calculate. Every defect caught is literally money in the bank.
Pretty simple, right?
The Hidden Costs Sitting On Your Quality Line
You can’t measure a return until you know what you’re losing today.
And for most plants… It’s a lot more than they think.
Studies reported by IISE indicate that poor quality costs manufacturers from 5% to 35% of sales, averaging about 15%. That’s scrap, rework, returns and warranty claims all sneaking up on you.
Think about it:
A company with $20 million in sales can be losing $3 million per year due to poor quality. Cutting that number just slightly can quickly pay for itself in a new system.
Those hidden costs usually show up as:
- Scrapped parts and wasted material
- Labour hours spent on rework
- Customer returns and warranty claims
- Lost orders from unhappy buyers
That’s why pattern matching inspection tends to be one of the first upgrades plants consider. It targets the cost of poor quality at the source.
How To Calculate Equipment ROI Step By Step
Ok, now here’s the good news. You don’t need a finance degree to do this. Honest numbers and a little patience is all you need.
Add Up The Total Cost
Start with the full cost, not just the sticker price. That includes:
- The equipment itself
- Installation and integration
- Operator training
- Yearly maintenance and software
Many purchasers neglect the last three. Don’t. They can comprise a significant portion of the ultimate cost.
Estimate The Yearly Savings
List every method in which the new equipment will save money. Be detailed. In the case of an inspection upgrade, this could translate into fewer defects reaching the customer, less scrap, and fewer man-hours dedicated to manual inspections.
In fact, that same Deloitte report found that smart manufacturing initiatives increased production output by 10% to 20%. Increased output per square foot of factory floor is a cost savings as well…so tally that up too.
Run The Payback Formula
Now for the math. The simplest formula is:
ROI = (Yearly Savings – Yearly Costs) ÷ Total Investment × 100
Next, calculate your payback period. Simply divide your total investment by your net annual savings. A $150,000 system that saves you $75,000 annually pays for itself in two years.
Two years = A very strong business case.
Anything under three years usually gets a green light from most finance teams.
Test Your Assumptions
Here’s where many buyers slip up…
“They use only best-case numbers.” Replace with: Run three versions of the math – best case, expected case and worst case. If the project looks good in the worst case, you’ve got a winner.
Implementing a pilot on one line allows you to test actual outcomes prior to a full floor rollout.
Red Flags That Kill Your Return
Not every upgrade pays off. Watch out for these warning signs before signing anything.
It doesn’t work with your process. Even the most robust machine will fall short of expectations if it’s not compatible with your parts or line speed.
Nobody knows how to use it. You can’t skimp on training. Operators who fear a new system will try to game it.
It won’t communicate with your other systems. If your equipment won’t talk to the rest of your plant, it creates unnecessary manual labor. Labor that directly cuts into your profits.
The supplier forgets you after making the sale. Strong support will minimize downtime. Make sure to ask about service hours and availability of spare parts early on.
“There is a world of difference between numbers on paper and numbers in the real world.” If your savings require absolutely perfect conditions day in and day out, expect your actual return to be significantly less.
Detecting these problems early can prevent an extremely costly error with a plant. Making a quick list to review during vendor meetings will simplify this process.
The Final Word On Smarter Upgrades
Upgrading your production floor is a big decision. It doesn’t have to be a guessing game though.
To quickly recap:
- Find out what poor quality costs you today
- Add up the full cost of the new equipment
- Estimate real yearly savings
- Run the ROI and payback numbers
- Test the plan with worst-case figures
Ideas like adding pattern matching inspection are a great place to start because you can easily measure the savings. Reduced defects. Eliminate scrap. Increase customer satisfaction.
That’s a win-win-win.
Run the numbers first, and the right equipment will pay for itself.
Frequently Asked Questions
What is pattern matching inspection?
Pattern matching inspection consists of having a camera view each part and comparing it to a master image. If the part differs from the master it is rejected. This process is automatic, reliable, and can easily run at 100% line speed.
What is a good payback period for capital equipment?
The general goal for most manufacturers is a three year payback or less. Less is better, but depends on your budget and equipment lifespan.