Should cost be One of your key purchasing decisions for Digital Solutions?
Over the past several weeks I have been asked repeatedly if cost was a key decision point to digital applications we purchased and implemented in our manufacturing and distribution sites.
My answer has always been the same. Cost was NOT part of the decision. ROI (Return on investment) was a key decision point once proof of value was completed. Why would we not invest in something that pays for itself plus some? If could invest $1000 today and achieve a $7000 dollar return 12 months, would you make the investment?
Proof of value was always completed with an actual pilot process of 90 days at an actual site. This allowed us fail fast and minimize investment risk. We expected a 30% failure rate. It also allowed us and the vendor to better understand one another's capabilities. We began testing many technologies that were operable and could deliver the stated technical objective, but the vendor capabilities were not for ready for prime time.
The next criteria was speed to value (Think Big, start small, Scale Quickly). How fast could we and the vendor implement the solution across multiple sites? Part of the ROI is the cost you will incur to implement. If every operator requires 40 hours of training, and you do all the physical installation work and testing; cost go up and ROI goes down. Vendors that could support and even do these activities at speed reduce the cost and up the ROI.
Highly intuitive UX design was the next criteria. Meaning we could provide a mobile device and application to an operator with little to no training and they would begin to drive value and productivity improvements.
There were many other criteria such as systems security, interoperability, etc. But anything that did not pass the first three of ROI, Speed to Value and intuitive UX design died in the innovation funnel.
So if you are struggling in the justification space because of cost of the solution, go back to your ROI. Its the best way to bring on stakeholders. Proof of value and running a 90 test will create a lot confidence when you have data to back up the ROI. Stakeholder move past cost and focus on ROI with you.
Looking for anyone struggling in the justification space to provide comments of questions to above.
Best Regards,
Terry
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Hi, @Terry LeDoux
Fully agree with you on the decision for ROI to be your driving factor among the speed to value and intuitive UX design. My question for you (and feel free to only get as specific/detailed as you would like), is how are you calculating the ROI? How are you capturing the value that Augury brings to the table?
This is something that I have frequently struggled with, particularly because there is so much ambiguity around the true value of preemptive/predictive maintenance. How do you determine the true downtime hours saved/avoided when the severity of the potential failure is indeterminable? How do you capture the value of extending the lifecycle of a piece of equipment? How do you put a value on being able to plan a maintenance repair during a planned outage vs taking unplanned downtime? How do you capture the value of getting a part ordered that was not on hand so that it can be replaced during the next available maintenance timeslot? I see value in all of the above, but find it difficult to assign an actual value with any degree of confidence.
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Great questions @Alexander Pastor I know Terry will provide some context as related to Purina.
At GAF, we had assigned value per machine hour for OEE purposes. There also exists accounting by facility of direct/indirect costs allocated to the various production lines (if so configured). There were also established time keeping rules for operations that defined "planned" vs "unplanned" and pulling outages forward. Mike Drake, Steve Buzza, Pat Durning and/or Geoffrey Jackson should be able to provide you what was established for GAF, especially where GAF utilizes IRR for capital justifications.
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Dear @Alexander Pastor,
Sorry for the late reply as I have been out, but awesome questions! Do not feel alone as we have all struggled with these exact same questions. Please understand all companies, lines, equipment are different so these are suggestions as I am sure there are many others.
Similar to GAF we started with cost per hour of good production. Starting with what is budgeted for a given time period (annual). The budget process of most companies includes the expected efficiency of the line, direct/indirect cost per line, product mix etc. The cost of production per hour and expected efficiency are important for ROI calculations.
- How do you determine the true downtime hours saved/avoided when the severity of the potential failure is indeterminable? If attempting to perform this for every predictive alert that has been addressed, the administrative effort can be significant. We did perform this exercise on major events prevented. Utilizing historical maintenance data, modeling and the above mentioned cost of production and expected efficiency we were able to estimate the potential hours of downtime and cost avoided. Additonally, calculate the impact to your production metrics (OEE, etc.)
- How do you capture the value of extending the lifecycle of a piece of equipment? Almost all equipment and production lines have an expected lifecycle. Any production hours we gain beyond this stated time is gravy. Several items in this space to look to. First is cost of replacement which is simple in the sense of no depreciation expense (assuming the equipment is fully depreciated at end of lifecycle) vs. depreciation expense. Second is the production time lost. The planned time required to perform the replacement is all time that could have been used to produce. Thus the planned hours to replace times the value of the product that could have been produced. Not to mention the mention the quality and safety cost.
- How do you put a value on being able to plan a maintenance repair during a planned outage vs taking unplanned downtime? Here I have always relied on industry studies which show unplanned maintenance and run to failure strategies running 3-4 more times more than a planned maintenance strategy. The cost run deep and across an organization when upset conditions occur. The Forbes article does a great job of identifying how deep the unplanned cost run . Its not an exact science here but the logic is hard to argue.
- How do you capture the value of getting a part ordered that was not on hand so that it can be replaced during the next available maintenance timeslot? This for me a is a question of time and similar to not having the production materials available (right time, right amount, right place). First is understanding the financial cost of holding inventory which should be available from your financial team. Second is the value of the part you wish to hold in inventory and its average inventory turn. Lastly is the lead time for the part. What are you doing while waiting for the part to arrive (changing schedules, not running)? What is the cost of expediting the part ordered vs non-expedited shipping. Bottom line is how much cost are you incurring by not having the part available at the exact time you need it. If the answer is purely downtime, once again what is the value of the product you could have been running. If the answer is run a different product that you may not need, then there are inventory cost to consider and possible customer shorts.
Great questions to tackle and all of the above suggestions may not fit your case, but the point is to look at the full scope of cost impact and work with your financial team members to develop a consistent method of measurement and reporting. Lastly, does the digital investment return more than its cost your organization.
Thanks so much and let me know if you have more questions
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