Specifying Custom Automation – Part II

We began this series with a note on the process-critical nature of custom automation.   We underlined the need for comprehensive system standards as a first step in developing an acquisition specification.   The move towards new equipment will not have occurred without at least a notional sense of gain in process efficiency, quality or output.  The next requirement in the acquisition process is, therefore, to model this gain in a more formal way.   The initial model will be refined throughout the acquisition cycle.

Financial Justification

Return on Investment (ROI) is a simple measure to evaluate the efficiency of an investment.  An alternative metric is Internal Rate of Return (IRR) which, unlike ROI, accounts for the timing of cash flows. Both factor in investment benefit and cost.  Complexity arises in capturing all of the benefits of an investment over its lifecycle, and all of its costs.

Life Cycle Costing (LCC) – also called Total Cost of Ownership (TCO) - is one method commonly used to capture elements of benefit and cost.   LCC is the discounted dollar cost of acquiring, operating, maintaining and disposing of a piece of capital over a period of time.   It can be calculated as follows; LCC = acquisition cost + other capital costs associated with the acquisition + recurring and non-recurring operating costs + direct and indirect support costs + disposal costs.   LCC analysis ends up in an ROI or IRR measure, but drives the purchaser to recognize that the equipment purchase price in a manufacturing environment represents only a small fraction of its overall life cycle cost – perhaps as little as 15% - 25% of total cost.   Further, equipment options with the same purchase price can result in radically different LCC.

Acquiring automation purely on price can commit the purchaser to a higher LCC without much scope of change once the capital has been expended.  LCC enables the purchaser to;

• Evaluate competing options (status quo vs. new purchase; purchase option 1 versus purchase option 2)
• Deconstruct and evaluate the factors contributing to a purchase over its lifecycle
• Evaluate equipment performance trade-off against life cycle cost
• Undertake sensitivity or “what if” analyses over a range of production scenarios

LCC is used in the semiconductor manufacturing arena, and is endorsed by SEMI - the industry’s trade association - to compare the cost of competing equipment technologies, without bias.

At Systematix we also recommend calculating the value of a proposed acquisition in economic terms – an Economic Value Analysis (EVA).  An EVA analysis re-casts a life cycle cost analysis in terms of business drivers, thus speaking to value as validated by the purchasers client – which, in most cases, is upper management.

These drivers fall into three categories;

• Cost reduction potential (improved efficiency, increased capacity, space reduction etc.)
• Cost avoidance potential (repair cost, avoidance of overtime, cost of quality, etc.)
• Increased revenue (decreased labour cost, growing market share, time to market etc.)

An EVA approach forces innovative thinking about the cost of “intangibles” such as quality.   Cost of quality, and thus EVA, will be higher in a regulated environment or for a safety-critical component than elsewhere.  It will also be company-specific.

A typical EVA spreadsheet is shown below;

Both TCO and EVA are most effective when developed in collaboration between process and product experts, and an expert automator.   For more information on how Systematic can support you in your LCC or EVA analysis, please contact Joseph Fox.

Specifying Custom Automation – Part I