Manufacturing is undoubtedly one of the most important sectors in improving a country’s economic prosperity and standard of living. In the United States, manufacturing employs 80% of the nation’s engineers. Its vast talent pool is the driving force behind many technological advancements and innovation achievements. Even in 2020, when the world recalibrated in response to the pandemic, the manufacturing sector still ranked fourth in US GDP output, trailing only behind real estate, professional and business services, and government. Manufacturing in Canada also shows them being the second largest GDP contributor in 2020, ranking only after real estate.
Optimizing Investment Returns in Changing Business Dynamics
As nations worldwide strive for recovery, manufacturing is moving towards technology-aided, high-personalization production and away from standardized goods. An automation plan that increases collaboration between humans and smart systems to achieve agility is the way to pull ahead. Whether the company is considering a greenfield or a brownfield automation project, it must be mindful of the following three trends.
Greenfield vs Brownfield Projects
In industrial automation project management, greenfield projects are projects that are executed from the ground up. They are implemented without having to integrate with any existing infrastructure or solutions. Brownfield projects are the opposite of greenfield projects. Brownfield projects are designed to integrate with a plant’s existing systems or infrastructure.
Brownfield projects generally require advanced integration capabilities as there can be legacy technologies of different generations. However, compared to greenfield projects, they require less capital expenditure (CAPEX) and take less time to complete. Examples of brownfield projects are system upgrades or equipping existing production lines with new palletizers.
An example of greenfield projects includes building a new processing plant in a newly developed industrial park or a new facility in a foreign country. Greenfield projects are less costly to maintain as the equipment is brand new. According to LinkedIn, greenfield manufacturing facilities also tend to attract more job seekers. However, these projects require more capital investment and a longer time to complete.
1: The workplace and the workforce are changing
New OSHA measures such as social distancing and regular sanitization of workstations have become the new standards. The renewed focus on employee safety also sees companies looking for solutions to reduce human contact and increase traceability during production. Employees’ mental and physical health are also becoming the spotlight for many forward-thinking manufacturers. Providing facilities, equipment, or services that look after employees’ well-being not only creates a positive working environment but has become a beacon for attracting the right talents.
Businesses also need to recognize that younger job seekers are inherently different from the Baby Boomers, who are still predominant in today’s manufacturing sector. Moreover, as most of them move towards retirement, 2.1 million jobs will be unfulfilled by 2030. Industrial automation with advanced technologies has become one of the leading career attractions for tech-savvy Millennials. Manufacturers must incorporate their recruitment strategy with their automation plans and recognize that as automation becomes ubiquitous, having the right skilled talents is the only driver for competitiveness.
2: Digitization creates valuable data
While automation has become necessary to face the ongoing labor shortage challenge, digitization is, by and large, still lacking across industries. A survey published in 2020 revealed that 77% of manufacturing organizations still rely on delayed data such as spreadsheets to make critical decisions.
Digitization is the process of transforming real-world processes into information that downstream software algorithms can process. By incorporating advanced sensors such as machine vision scanners, valuable data can be captured and analyzed to optimize production. It also enables plant managers to use real-time data to schedule predictive maintenance.
Many legacy systems or machines were designed to carry out one single task. They were efficient when consumer demands were relatively unified. Contemporary consumers are used to self-expression through personalizable products, which puts manufacturing flexibility to the test. Process digitization that allows for data analysis can help manufacturers become customer-centric and stay on top of the changing business dynamics.
3: Reshoring becomes profitable
Offshoring has long been the primary model for many manufacturers in the West. As consumer behavior and preferences grew increasingly unpredictable, coupled with the rising labor cost in Asia, offshoring has become both inflexible and unprofitable over the years. According to the State of North America Manufacturing 2021 Annual Report, the rising total cost of ownership (TCO) is the number one motivator for companies to reshore.
On top of that, the pandemic has proven the fragility of the global supply chain. In March 2020, consumers saw a sudden shortage of supplies in commodities like pharmaceuticals, electronics, or even food, causing panic-buying all across the nation. Even with the rollout of vaccines in 2021, several shipping ports still experienced a complete shutdown due to outbreaks, causing the Backlog of Orders Index to spike up, yet again, in July of 2021.
Macroeconomically speaking, reshoring also benefits a nation’s growth. The National Association of Manufacturers (NAM) research shows that manufacturing outscores other sectors with the highest multiplier effect to the economy at 2.79x. However, reshoring businesses cannot rely on outdated business models that served them for the past three decades. Greenfield automation that incorporates the right talents is the way to build facilities that are responsive to customer demands.
Okay, I know I have to automate and hire the right talents, but at what cost? What is the ROI?
For many decades, return on investment, or ROI has been the guiding principle when evaluating major automation projects. The ROI formula calculates the gain on investment compared to the initial cost of purchase (capital expenditure). Essentially, it indicates the profit amount a company would make from each dollar it spends in purchasing or installing a piece of equipment or an automation system.
To obtain a higher ROI, traditionally, companies base their purchase decisions on keeping the overall solution cost low. This phenomenon also led many integration companies to submit below the average tenders. Time and time again, low-bid projects proved to incur more costs in the long run because the calculations often overlook expenses such as energy consumption, personnel training, downtime, and the asset’s redeployment. Not to mention the amount of waste it creates as the company goes through another round of replacing the equipment.
How do I convince the decision-makers, who most likely will ask me about the numbers?
As mentioned in this case study, value over price is the all-encompassing mentality modern manufacturers should have. This means taking previously overlooked factors into consideration and evaluating CAPEX projects using the Total Cost of Ownership method instead.
The total cost of ownership is a comprehensive method to evaluate a capital investment. On top of the initial purchase price, it also considers indirect costs such as maintenance or operation. A low initial acquisition cost may mean a higher ROI, but repeated unplanned system downtime can quickly eat away a manufacturer’s profit margin. Automation projects aiming for an overall low TCO value quality over price to avoid unexpected operating costs in the long run.
Finally, contrary to traditional ROI evaluations, the TCO method opens the discussion to stakeholders other than the engineering and finance departments. The maintenance, repair, and operations (MRO) teams will examine the system requirements based on criteria such as the system’s ease of use, access to diagnostic tools, or estimated tool-change time. Not to be overlooked is the Human Resources department who will have to create training programs, conduct change/impact analysis on existing personnel, and fulfill skilled positions due to new technologies.
That sounds complicated. How do you move the project forward?
Taking a TCO approach can seem overwhelming, especially switching from a siloed evaluation system that maximizes the ROI in the shortest time.
But a TCO approach puts an automation project’s future value before the initial cost. It is a business decision rather than simply a financial decision.
Compiled based on conversations with various industry leaders, a checklist of evaluation criteria on TCO will help companies uncover hidden costs and realize hidden savings in the planning stage. Industry veterans agree that when evaluating the TCO of an automation project, the following aspects need to be considered —
- Energy efficiency
- Ease of use
- Data acquisition and analysis
- Personnel training
- Component redeployment and resellability
- Overall downtime
- Project management
The next part of the article will define each of the metrics above and explain the importance of each criterion. The article will also provide practical examples to illustrate the hidden savings companies make in the long run. To receive updates on The Hidden Numbers in Automation Projects, subscribe to our newsletter or follow us on LinkedIn.