Capacity Decisions in the ROI Equation

Aug. 15, 2013
Cost savings are where the majority of return on investment (ROI) is calculated. But with a little extra work and innovative thinking, a case can be made to also consider revenue gains.

Most companies scrutinize the benefits projected in the return on investment (ROI) equations for production. Cost savings are where the majority of the return is calculated. Finding savings in labor, materials and process is not difficult, since financial management often tracks expenses to an almost painful level. Revenue gains, on the other hand, are usually eliminated from the business case. This is because they are less likely candidates for benefit realization, and are the most difficult to defend.

But with a little extra work and innovative thinking, the case becomes more realistic when you realize that manufacturing execution systems (MES) and manufacturing operations management (MOM) have made significant progress in freeing up excess capacity—a point that is often forgotten. The question is how to represent this excess capacity in the business case.

Capacity exists in two primary forms within production facilities: labor and equipment. We recognize the capacity to deliver energy, but exclude it from this discussion. Secondary levels of capacity exist in the ability to execute other processes such as prototyping, new product introduction or return, or exception processing. This list varies by industry, but use of all capacity demands innovative thinking and an operational culture seeking strategic results of market leadership, customer satisfaction and human resource development.

Labor and equipment capacity is planned, purchased and accounted for within the annual budgeting cycle and justification process. Companies justify capital projects and expenses large and small against projected revenue demands and cost savings. Any resource has a rated capacity to produce and is expected to deliver the plan against the forecast. The question is what to do when an existing asset has a portion of that capacity freed up. There are many reasons capacity is freed up, including downturns in the business, improved business processes, technology or process automation. What should a company do with it?

This is a question MESA touches on in a new cross-industry practitioner’s guidebook for manufacturers, ROI and Justification for MES. This soon-to-be released guidebook focuses on the challenges, issues and best practices surrounding ROI and justification of MES/MOM programs. It details the many cost savings that can occur, comprising the majority of the return part of the ROI equation. However, freed up excess capacity frequently occurs in both labor and equipment situations, and several possible outcomes must be considered in that same equation.

Effectively applied technology frees up production capacity, and numerous use cases prove that. The real question: How do you represent it within the business case and then again subsequently when the technology is deployed? The financial perspective suggests allocating the excess back to the department or cost center that originated the capacity in the form of a cost savings. However, in our ROI equation, capacity serves a dual role in that it can be both a cost reduction AND a revenue generator. This double hit can be recognized, but quantification becomes a tricky and culturally challenging topic.

For labor, the excess capacity can be either eliminated or repurposed. One need look no further than the recent recession and downturn in manufacturing to observe the many cases of the tactical impact of labor elimination. Too often, this is the result. Leveraging the labor capacity by applying education, cross-training and other development programs builds the foundation for increased revenue, albeit more strategically.

For asset capacity, the challenge becomes one for product development teams, maintenance and the business management to effectively use the capacity freed up. It is not so simple to assume that the capacity comes in easily repurposed slots. Typically, the equipment capacity excess is fragmented across the production schedule and additional allocation and thought is required to effectively utilize this benefit.

There is no simple answer or plan of action to determine where excess capacity lands in the ROI equation. Regardless, it takes an additional round of critical thinking by all of the functional departments and teams impacted by MES/MOM systems to truly build an organization seeking to be an industry leader.

>> Darren Riley ([email protected]) is a Solution Consultant in the Delmia brand within Dassault Systems, and heads up the MESA ROI and Cost Justification working group. Riley has also contributed to research on MESA Metrics Guidebook Research, Metric Maturity Models and strategic positioning of MES/MOM within discrete, hybrid and continuous processes.