Automation has been on the rise in the last decade. Now that we live in a post-pandemic world, many changes need to be made to keep up in today’s market.
One of the most cost-effective ways for companies to stay competitive is by automating their production. Companies that are big, small, and in between are seeing the significant advantages of automation, especially regarding the efficiency of their production processes.
However, the biggest challenge companies face when it comes to automation is justifying the cost of purchasing automation equipment. With automation equipment, costs vary greatly depending on each company's use, efficiency, and specifications; justifying a considerable expense on automation equipment can be difficult. In this article, we will discuss how you can measure your expected ROI (return on investment) before purchasing any automation equipment.
Before purchasing automation equipment, you might wonder how much one piece of equipment can affect your company's profits. One of the most critical metrics you need to consider is how much time each piece of automation equipment will save you? Studies have found that automation equipment can speed up production times by 110%. This time saving allows you to reduce workforce costs and production downtime.
In addition to automation equipment’s ability to operate on a 24-hour clock, you won’t have to pay an hourly wage and instead will only need to pay for maintenance. These machines can also minimize production mistakes resulting in recalls or public outcry. Automation equipment can also be easily updated and modified to comply with new regulations in your industry.
As your company grows, so will your production needs. Automation equipment can easily scale with your business and help you accurately estimate how many products you can produce per hour or operation.
While there are many clear advantages to purchasing automation equipment, the most important advantage comes from how long it will take for your company to earn back the cost of the equipment. To calculate the ROI on each of your automation equipment, you will need to collect the following information.
-This is the total sum cost of all the automation equipment you plan on purchasing plus any one-time fees like installation.
-This is your yearly labor costs for those you plan to replace with automation equipment.
IE: 5 Operators at $40,000 = $200,000 per year
-To calculate this, decide how many humans are needed to maintain operations and subtract 50% from your labor costs without automation equipment. In this example, we assume with automation, there is a 60% reduction in staff required on the line, meaning 5 employees down to 2.
IE: $200,000 – ($200,000 x 60%) = $80,000
-To calculate your annual estimated ROI, simply subtract the automation equipment cost from your anticipated labor costs with automation equipment.
IE: $200,000 - $80,000 = $120,000
Knowing the ROI, you can than easily calculate the Pay Back Period of the capital equipment. To calculate this, you simply calculate the cost of the equipment divided by the ROI (savings), multiplied by 12
Using this example and expected automation cost of $50,000, it would take less than 5 months to pay back the cost automation equipment at an estimated yearly ROI of $120,000. Therefore, for a $50,000, you are making an extra $120,000 on your bottom line!
IE: $50,000 / $120,000 x 12 = 5
However, several variable costs are not included in this formula. These missing costs include maintenance, licensing, materials, and employee training. This also doesn’t calculate potential savings from having fewer recalls, better employee turnover, improved employee safety, and public perception changes due to increased product quality.
This is just one method of calculating your ROI when purchasing automation equipment. Here is another example.
The second method of calculating ROI requires you to know two pieces of information: the automation equipment cost and your expected production speed increase.
The formula you can use to calculate your yearly ROI is your percent estimated production speed increase multiplied by your initial investment cost of the automation equipment added to the initial investment cost. Let’s break that down using the same example as above.
For example, 2 machines total $40,000, and you expect a 60% increase in production.
=60%= X - $40,000 / $40,000*100
=0.6 =X - $40,000 / $40,000
=$24,000= X - $40,000
X=$40,000 + $24,000
With a wide range of automation equipment specifications and prices, it may be challenging to understand which machine will yield the highest possible ROI over an extended period. There are many factors that you can consider when calculating ROI. Still, these two formulas are a great starting point for any company looking to speed up their production capability by investing in automation equipment.
If you’re ready to take your company's production to the next level and begin automating your production and packaging processes, get in touch with ATG Pharma today. If you want to learn more about automation equipment, including our vape-filling machines, cartridge filling machine, capsule fillers, and sorting machines, check out the rest of our website.