Big Money Down

Jan. 1, 2005
Winning authorization to spend corporate dollars for new automation projects requires a solid business plan and the right leader.

Spending your own money can be fun. Spending your company's money requires lots of careful work. It calls for sticking to some basic business virtues, such as developing and following a solid business plan with the rewards and risks spelled out, and finding the right project leader. Where do you start to gain authorization to spend corporate dollars for modernization? What are the first steps towards successful capital spending for automation? There are several critical success factors for project authorization, says John Sieg, managing director—corporate operations, DuPont, Wilmington, Del. First, does your project have a compelling business proposition?

"Is the project aligned with the strategic drivers of the business. Is the project essential to business success in the marketplace? If not, is it an enabler for success?" Sieg asks.

Capital spending, unlike personal spending, should never be a matter of buying the latest technology just because it's the latest technology. Those over 50 might remember when one of America's largest manufacturers invested in state-of-the-art robotics only to see the robots start painting themselves instead of the products. New automation and material-handling systems have to fit the corporation's overall planning and goals.

A Business Objectives Letter, Sieg explains, "should clearly outline the business needs, key constraints and deliverables expected from the project." Such a document will allow all appropriate participants in the project to refer to common ground in terms of stages of implementation and goals as it moves forward.

Risks and Rewards
The second critical success factor, Sieg continues, is that "the project must have a favorable reward/risk factor and follow 20/80 principles." The 20/80 rule states 20% of project deliverables usually bring 80% of the benefits. "Cut out the fluff in your proposal. Build in only what is necessary to deliver the value promised while providing optimal total cost of ownership."

The third success factor is to make sure the project's leader is appropriate and his or her integrity and ability to deliver are certain. Such a person, Sieg notes, must be "knowledgeable" in the various fields of manufacturing involved in the project. The leader chosen must be known for his ethics, which will be "never more important than now." Furthermore, the project leader needs to be "results driven." He or she will "do everything humanly possible to deliver the value promised by the project," and "copes well with change and knows when to implement 'Plan B.'"

The project leader selected must have that hard-to-define trait called "leadership." You need someone who "understands project strategy, drivers and translates them into simple direction and objectives everyone understands." You need someone "others naturally follow," Sieg explains.

Work With Suppliers
Other experts in manufacturing say that it pays to work with suppliers when planning capital investments. "We work side-by-side with the customer to help them justify new equipment with a detailed analysis of their needs including the expected return. We gather data for the customer and clearly demonstrate the savings, which will come with the new equipment," says Domenic Niro, national account manager, Toyota Material Handling, U.S.A., Irvine, Calif.

Toyota's line of lift trucks are often part of larger automation projects and the company offers its analysis to customers who are modernizing plants. "We justify the investment by gathering hard data and quantifying the cost savings to the customer. One special area of costs is the dramatically higher cost of American labor compared with say the Chinese. This cost alone can justify the new equipment," Niro points out. Some might wonder, in an economic climate like the current one, why there is not more spending on automation and modern material handling?

"One reason for the snags in the procurement process today, given the low interest rates and low inflation, might be the already existing equipment works well and has for some time." he explains. "Again, our focus must be on keeping the best interests of the customer in mind by working proactively to gather hard costs and quantify the savings that new equipment will represent. A lower interest rate is certainly beneficial when calculating all variables relative to total cost."

"The first thing for a manager to do who is considering new equipment or new systems is to know their current costs. How much does it cost to produce, store and ship your product — in detail? Cost savings is the main way, always, to justify such expenditures. By determining existing costs first, a comparison of the cost associated with equipment replacement becomes outlined in black and white," Niro states.

There's a whole set of reasons for deciding to invest in modern material handling equipment. These include increased production or lower costs of production, says Andy Chatha, president, ARC Advisory Group, Dedham, Mass. Both reasons are different ways of saying "increased productivity," he says. Other factors improving productivity include better quality, shorter-time-to-market, lower energy costs and increased safety, he adds. These reasons for capital investment all add up to " staying competitive."

Unlike personal spending, it pays, as DuPont and other companies point out, to take a systematic approach to financial justification. In a recent ARC survey, over 80% of managers of large manufacturing companies said they have a formal process in place to justify automation projects.

Robots: A Special Case?
Robots and robotics costs have dropped dramatically over the past decade. Costs are down 40% and payback times have been reduced to between 12 and 20 months, says ARC researchers Himanshu Shah and Sal Spada. They believe that steep robot price reductions along with "continued improvements in payload capability, processing speeds, ease of operation and enterprise connectivity will drive a rapid adoption of robots in material handling during the next several years."

"Many distribution centers and warehouses will be able to quantify the economic benefits of robotics to add agility to traditional conveyor lines. For many material handling solutions, robotics will be viewed as a necessity rather than options," Shah and Spada say.

Yet, U.S. industry seems reluctant to invest given the amazing improvements in the technology and the remarkable cost reductions. In a recent survey of its members by the Material Handling Institute of America (MHIA), 40% of respondents said the main reason for not investing in automation was the "availability of capital or inability to justify."

The ARC researchers believe one factor keeping companies from investing in automation and related technologies and systems is automation's perceived lack of flexibility. This reluctance to invest "highlights the difficulty many users have with fixed automation, which is not providing the flexibility to adapt to continuously changing market requirements related to shipping quantities, configurations, or response time."

Tips on analyzing and justifying the investment in new automation.

New Technology Investment Key to Global Competitiveness

Staying competitive and ahead of the technological game in manufacturing means the corporation and its management must be committed to the future. That commitment requires an ongoing investment in new automation and material handling equipment.

Diversified manufacturer Eaton Corp., Cleveland, has increased capital spending in each of the past several years, right through the last recession. "Eaton's increases in capital spending and our overall growth are accomplished through our strategic planning process and an annual profit planning process," Alexander M. Cutler, chairman and CEO tells Material Handling Management.

Capital investment planning is "bottoms-up and includes input from the plant level and divisions, as well as our corporate economists on industrial, national and international trends," Cutler explains. This whole strategic planning process "extends out five years, yet there are technologies that obviously have longer lead times, so we take those factors into account."

Eaton focuses on three areas in manufacturing. "First is employee safety. Second, improving productivity. Third, through what we identify as substantial growth opportunities," Cutler adds.

While manufacturing companies have been trying to automate the entire production process and record keeping, some believe there will be some "automation" of the financial planning and allocation process. Software could standardize the investment planning and decisionmaking process. Presently, however, the work of capital investment is a top management job. "We really have no fancy software; we look at the requirements of each project at set 'hurdle rates' so we can exceed the cost of capital and then achieve a certain amount after that," Cutler says.

If there's one major reason for automating the production process, it's productivity, adds Russ Strobach, vice president for sales and marketing at Parker Hannifin's Automation Group, Cleveland. "This pressure is coming from the global economy and means manufacturing automation is the major way to offset low labor costs" from foreign producers. In effect, automation has become part of the strategy for any company that intends to remain in the global arena.

Another boost for the technologies of modern production systems is their increased flexibility, Strobach adds. "Mass customization, where the customer wants to buy from the catalog, so to speak, but then he wants it tweaked" is more and more possible with today's production systems. "When automation began, there was not much flexibility in the processes. Now you can touch a button and offer customized products" without the significantly higher costs that were required 10 years ago.

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