Justify Your Automation

How to convince your company’s brass that it’s time to invest in more automation technology.

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When Dick Hill was working at an oil refinery, he discovered some fuel inefficiency due to excess oxygen. He did the math on the loss of fuel and converted the loss into a financial calculation that could justify the use of automation to control the oxygen flow. He took the calculation—in which he converted fuel loss to dollars lost—to the plant manager, and received instant support for an automation investment to end the inefficiency. The trick behind that success was converting the engineering discovery into business dollars.

Hill is now a vice president and general manager of manufacturing systems at ARC Advisory Group Inc., in Dedham, Mass. He advises plant operators on the art of turning engineering stories into business stories so that those holding the purse strings will see the need to invest in plant technology and automation. “The problem with a lot of automation investment proposals is they are not put in financial terms. They are put in flow or parts per hours,” says Hill. “They need to be in terms business people can relate to. What is the difference between 1,000 parts per minute versus 1,500 parts per minute? Turn it into dollars per minute.”

Cutting staff

In the early days of plant technology investment, the costs were supported by staff reductions. In the ‘70s and ‘80s, plant operators lost their jobs to automation. In the ‘90s, it was engineers who took the dive to justify new technology. Now, headcount is rarely the justification. These days, it comes down to saving 1 percent or 2 percent on plant operation costs, and that savings can be more difficult to argue than staff-reduction.

Some executives understand the value of automation investments. “There are management believers who believe in spending money on automation,” says Hill. “A lot of forward-thinking executives are doing a baseline on things like inventory turns, efficiency and overall equipment
effectiveness, the key indicators.”

Other managers, however have to be convinced by specific and measurable gains for the investment. Automation supplier Invensys interviewed chief executive officers and chief financial officers about automation investments and found they’re generally not convinced they’re getting anything out of an investment in automation, especially in an age when easily measurable personnel cuts are not part of the justification. “This is one of the reasons engineering has been downsized so much,” says Peter Martin, vice president of strategic ventures at Invensys Systems Inc., in Foxboro, Mass. “The finance people don’t see automation delivering value and they don’t see engineering delivering value.”

Talk the language

In order for engineers to justify technology investment, the story has to be told in language that upper management understands. Don’t bother presenting an argument that touts KPIs. As Martin explains, “I heard one CEO say, ‘If one more engineer comes into my office to say what the KPI is saving us, I’m going to fire him on the spot.’ ” Martin insists that engineers using engineering language won’t get through to executives.

When plant managers and engineers get ready to sell top management on new investments, they should realize there is competition for that corporate dollar from other departments. “You’re trying to sell the need to replace the control systems, and the guy next to you is from marketing and wants to do more with promotion, and HR (human resources) wants the dollar for employee
recognition—we’re all fighting for the same dollar,” says Yves Dufort, director of strategic programming at Wonderware, an Invensys company and automation supplier based in Lake Forest, Calif.

In making the financial case for automation, engineers need to ditch their analytical approach. “Engineers tend to think that people should believe them just because they’re engineers,” says Keith Campbell, retired director of automation for Hershey Foods Corp., in Hershey, Pa. “Engineers put forward an idea and it’s very well thought out in their minds. Meanwhile, marketing may be tossing out disposable ideas. The idea that wins will be the idea that is communicated in a way that is meaningful to business.”

In order for top management to understand the engineer’s idea, the engineer needs to speak in business terms. That’s where the marketing person can dance circles around the plant engineer. The thinking on the part of the engineers may be sound, but if it’s not converted to business language, it won’t get through. “The engineer has to make the business case first by converting the language of engineering into the language of business,” says Campbell. “Lead with the business language and let people draw out of you the technology.”

One of the problems cited by plant operators is that their efficiencies are not always recognized by company executives. The value of the technology investment has to be communicated in concrete arguments that executives understand. “We have to take soft value and project it into hard values,” says Invensys’ Martin. “You can put an automation system in for $1 million and save $2 million, but if the CEO doesn’t see it, you’ve made nothing.”

One device that is catching on with some plant operators is tracking the costs of running a plant by using real-time accounting. This methodology works by converting plant operation costs and efficiencies directly into accounting terms. This approach is designed to give executives absolute visibility into the way their plants waste or save dollars.

To measure automation gains accurately, Martin advocates using real-time accounting to turn plant measurements into dollar equivalents. “Most accounting systems only account for profitability on a monthly basis,” explains Martin. “But plants do things in real time. You can have a petrochemical plant reduce energy consumption and save the company half a million dollars, but if other things screw up, you don’t see the money.”

With real-time accounting, plant efficiencies can be measured “to the smallest minutia,” according to Martin. “We use a database to build cost accounting so the engineers can translate sensor information into accounting numbers,” says Martin. “Once you break that down, you are accounting in real time. Then you can train your operators to see whether they’re making money or losing money on a second-by-second basis and you’ll get your true return.”

Dick Hill at ARC has seen Martin’s real-time accounting up close and has become a believer. “If you pick a plant and try the real-time accounting, you can see if you’re making money on a particular process unit because you know the product value and the costs—such as labor—so you can track it in real time and see what improvements are made by adding more automation or process equipment.”

Hill notes that when you can measure by real-time accounting, management will take a different view of automation investments. “Once you start to be able to display this to the people with the purse strings, they can make the connection to the bottom line.”

Martin says that once the executives see the real-time results, they also see the value of hiring back some of the engineers they let go. “All of a sudden, the value of their own engineering becomes apparent, and instead of laying off their engineers, they realize the engineering group is one of their most valuable assets.”

Competition as justification

Not all financial justifications are tied to the company’s bottom line. In some industries, such as consumer electronics, which depends on a fast time-to-market for new products, the ability to switch from one product to another may be all the justification needed to prompt executive approval.

“One of the factors driving technology investment is the need to focus on competition,” says Fenella Sirkisoon, research director at AMR Research Inc., in Boston. “Competition is one of the more important factors driving investment.”

The ability to run an agile plant that can produce product quickly and change over quickly to a different product has become justification for automation in discrete manufacturing. “Say you’re introducing a new product like the Apple iPod. You want to get 17 million units on the market and you don’t care about costs because you want to flood the market so the runner-up can’t catch up,” says Dufort from Wonderware. “You justify the automation investment on its impact on top-line revenue.”

Engineers need to learn the language of business in order to successfully sell their automation projects to upper management. The rule isn’t always efficiency or savings. Showing improvements in agility or top-line revenue performance will work just fine in many industries. The important thing is the willingness and ability to translate engineering logic into hard-dollar business sense. 

 

To an increasing degree, investments in automation technology depend on the engineer’s ability to convince upper management that the dollars will be wisely spent. Engineers need to translate their engineering analysis into meaningful business language. Instead of talking about key performance indicators (KPIs), or savings and efficiency percentages, engineers need to discuss bottom-line cuts or top-line growth. While there are some justifications that don’t require proven return on investment—such as compliance, safety and security—most automation spending requires clearly spelled out financial gain.

 

To see the accompanying sidebar to this story  - "Non-Financial Investment Justifications" - please visit www.automationworld.com/view-2785  

 

For more information, search keywords “accounting” and “automation investment” at www.automationworld.com.

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