Calculating ROI in Real Time

Dec. 1, 2004
Most people in business have at least heard of ROI. One hopes that they know that the term stands for return on investment, and that it is a financial measure of how management is performing relative to the money invested in the company.

Sometimes a company is so large and complex that a better measure for individual plants may be return on net assets (RONA). Automation World is interested in measures of return on automation (ROA). Are companies getting a return on their investment in automation, or do they even have a way of figuring that out?

If manufacturing management is to perform better and react more quickly to changing conditions, it needs a way to track return on investment on automation in real time. Doing this requires links to machine and process information, combined with appropriate metrics that can be measured from this information.

Vendors respond

At least two companies are developing just such metrics—partly for altruistic motives of helping their customers, and partly for commercial advantage. Since customers are putting greater pressure on suppliers to show returns on new automation investments, GE Fanuc Automation (, the automation manufacturing unit of GE Infrastructure, in Charlottesville, Va., and Rockwell Automation (, Milwaukee, are hard at work developing ROI calculators to help customers determine their current and projected returns.

Given General Electric Co.’s vaunted use of Six Sigma methodologies, with its mantra of measure and analyze, it should not come as a surprise that GE Fanuc has taken a systematic approach to measuring and analyzing ROI metrics. Kevin Bernier, director of plant intelligence solutions at GE Fanuc, says, “We have structured a way to track ROI in terms that address interests of all three groups within manufacturing—operations, information technology and business. We actually went out and documented how 250 end users are measuring returns. We came back with a progression of what we call stages of maturity in production management systems and the specific metrics that correlate to them. We then discovered that optimum metrics vary by vertical industry, so we are classifying the model by those.”

These stages start with a manual, paper-based process as stage 1 and migrate to a mix of manual and automated systems, then to automated systems, and finally to a digitized, intelligent real-time system as stage 4. “We have found that companies that migrate to higher stages of maturity show a quantifiable improvement in their operating and financial metrics—which directly results in higher levels of profitability and competitiveness,” adds Bernier.

Operating metrics found most relevant across the various production management systems include inventory levels, order delivery performance, downtime rates, scrap/waste rates and overall equipment effectiveness. Bernier notes, “We have found that companies that have installed a real-time, intelligent production management system (stage 4) have substantially better operating metrics than companies that handle production management through manual, paper-based processes (stage 1).”

Rick DiGioia, regional commercial manager in the Automation, Control and Information Group at Rockwell Automation, in Cleveland, says, “We have developed a tool called ROI Estimator that takes the value propositions and calculates savings and return on investment for the project.” This spreadsheet tool provides the model for the customer to determine current costs in engineering hours, labor hours, productivity and the like; estimate the costs and increased production, decreased expense and the like on the new system; and finally perform financial calculations such as payback period, internal rate of return and ROI.”

These may be useful tools to help automation suppliers target their sales, but there are numerous benefits to manufacturing management. Bernier of GE Fanuc states that there is a plan to launch a Web-based value calculator for customers, with the goal of helping companies better justify and track operational improvements. It will also provide target performance benchmarking metrics to help companies attain “world-class” performance.

Gary Mintchell, [email protected]