Anticipated Returns Drive Automation Investments

Nov. 8, 2006
Considering automation investments? Then have a consistent approach from your company’s portfolio-management standpoint, advises Bob Shepherd, consultant for North American chemical, oil and gas sectors for Invensys’ ( Houston-based Technical Industrial and Proposal Group. In the risk-management process to settle cost estimates and benefits, each step “is like sticking your toe in to hot water. The idea is: ‘By the time I get to my final investment, I won’t be surprised by the cost.’ ”
Avoiding surprises and justifying investments compels calculating anticipated returns. The equation to do so includes incremental benefits and costs, says Doug White, vice president of advanced process control services for Emerson Process Management (, Austin, Texas. “We have to estimate where the incremental benefits are going to come from—and in automation, there are only two places: increased revenues or decreased costs.” Whatever its projected cost, the investment could increase the production capacity of the equipment to get more revenue, White explains. “Make equipment more reliable, run it more efficiently, run it at its limits.” On the reduced-cost side, trim energy and maintenance costs, if possible, he advises. “You also want to reduce off-spec products—and also miscellaneous costs regarding chemicals such as catalysts and additives at refineries, for example.” Reduce delays in product delivery, too. But all of this is just half the equation. For investment costs, there are hardware plus engineering and installation expenses of the automation, White explains. “You’ve got to design it, buy it, configure it, install it and then make it operate. These are capital costs.” Having estimated costs and benefits, typically, the end-user projects the cost forward several years. With information technology, for example, projections are usually made for three to five years, Dufort notes. “[Then] what you need to do is bring the cash flow and the cost to the same basis, or net present value (NPV),” White states.Forecast funds To do that, forecast savings and discounted cash flows, Dufort says. Discounted cash flow is the calculated cash flow projected out into the future, which you then bring back to NPV, Shepherd explains. “If you’re looking at a discounted payback period, it’s the point at which the value changes from negative to positive.” The test of whether to proceed or not comes by comparing NPV to the investment to make sure it’s a worthwhile venture. “If the NPV of future cash flow is greater than the NPV of the investment, that’s a positive return,” White notes. And that means the investment shows promise and return. Examining the discounted cash flow and resulting NPV represents the compelling value proposition in justifying automation investments, Dufort believes. But Shepherd prefers the return-on-investment metric over NPV. “I can get my arms about the best estimate of what my costs and investments are going to be,” he says.Taking a completely different tack in justifying automation investments, however, is Justin Roe, chief operating officer of flexible-manufacturing-solutions provider Automation Engineering Inc. (, Wilmington, Mass. He suggests looking at the three basic types of “real options” in investing: abandon the project, make further investments or wait. But, then, aren’t those always the choices for any investment—all driven by anticipated returns that companies forecast? C. Kenna Amos, [email protected],
is an Automation World Contributing Editor.To find them, Yves Dufort, Invensys’ Montreal-based director of strategic programs for production performance management, advises end-users to use sensitivity analyses. For example, end-users may find they can shave $X off direct materials. “That gives an idea of the value of the automation technology,” he notes. Dufort also suggests looking at the potential project’s cost structure, such as hardware, networking, instrumentation, software, system implementation and operator training.

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