Talk The Language of Executives

Calculating return on doing something appears, on the surface, to be a straightforward financial calculation.

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First-year accounting students are taught ways to calculate “return on investment,” or ROI. Then they are introduced to increasingly complex formulae for including the future cost of money (as in discounted cash flow calculations), among other things.

In fact, the term ROI has taken on a life of its own in which sales people in many fields have morphed the phrase into meanings for their particular product offerings, sometimes straying far from the original concept of “how much additional profit (money) did we earn on the additional money we invested in that project.” Many people without financial rigor simply use the phrase ROI to mean “benefits you receive from investing in our product.”

A useful metric for managers is return on net assets (RONA)—a measure of how much profit (money) is earned per dollar invested in net assets. Automation World covers the implementation of automation into manufacturing and production processes, so our preferred term is “return on automation”—how much additional money is earned by the plant through an investment in automation solutions. But sometimes the variables involved in calculating everything involved in the resulting plant profitability are so complex that a simple financial justification number is all but impossible to obtain.

Angel Sustaeta, manager of predictive intelligence solutions at controls vendor Rockwell Automation Inc. (www.rockwellautomation.com), in Austin, Texas, says, “When you’re looking at the lifecycle of an asset or total cost of ownership (TCO), we’ve had enough rounds around the block to have historical performance information on platforms. An engineer or manager putting justification together can pull records now to see cost or hours of service. The contract is easier to quantify when looking at historical performance of the system. If you are evaluating a competing vendor, then that’s more difficult.”

Sustaeta points out that sometimes you analyze capital invested vs. benefits. But some investments actually reduce fixed capital. Looking at the profitability side return, he adds that the ability of the solution to accomplish process improvements, such as increasing yield or efficiency, has a direct impact. Another consideration when justifying automation is its ability to reduce variability. “This reduction impacts consumption and amount of raw feedstock required, and it lowers maintenance, makes better use of inventory and has the opportunity to have at least a soft value to it,” says Sustaeta.

Easily quantified

Rockwell Automation, along with several other automation technology suppliers, offers model-based analysis. “In my world,” says Sustaeta, “we find it’s easier to quantify if we can baseline current performance. Even if we haven’t worked with that company before, we can model how they have been operating and then systematically make changes in the model and simulate future performance.”

There is another potentially useful analysis tool—relating automation investment to support of corporate strategic initiatives. Senior corporate executives are loath to discuss improving performance of an individual process, but their interest increases when programs support corporate programs.

Doug Weaver, an officer with MESA International (www.mesa.org), discussed this analysis with Automation World in a recorded interview which can be found at www.automationworld.com/podcast-7241. Weaver is also a practitioner in a manufacturing organization. He discovered that when pitching an idea, if he could identify the particular strategic initiative that an executive was charged with, then he could couch the project in terms that mattered. Some of these initiatives are found in the MESA Strategic Model and include Lean Manufacturing, Quality and Regulatory Compliance, Product Lifecycle Management, Real-time Enterprise and Asset Performance Management.

There are many tools available to managers and engineers who seek to improve operations through automation investments. Talking in the language of decision makers carries much weight. This language includes both dollars and alignment with corporate strategic direction.

Gary Mintchell, gmintchell@automationworld.com, is Editor in Chief of Automation World.

Rockwell Automation Inc.
www.rockwellautomation.com

MESA International
www.mesa.org

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