Automation project justification – just about the math?
Project justification is critical to driving corporate competitiveness
By Dick Hill
Clearly, any new automation project requires economic justification. Although this often involves hard “dollars and cents” quantification of cost savings from increased production, reduced raw material costs, or increased uptime, it is also about “soft” benefits, such as reducing risks and improving agility. All contribute to making your company more competitive. This article will focus on the latter, while also highlighting considerations for the former. It will also share some best practices that ARC Advisory Group has identified.
When considering a change of any kind and researching the alternatives, it is very important to understand that your business is likely to be flooded with opportunities to invest capital and that change needs to be justified for the benefit of the company. Personal or department goals need to be subordinated to corporate goals. In the automation domain, a number of factors should be evaluated for their economic contributions to a justification. But it does not end there. Justification must take into account the broader opportunity to better position your company for future competition, likely involving greater agility, additional products, or improved quality.
Example items to consider in a justification
Maintenance and service costs: These costs will increase for older equipment. Spare parts may be difficult to find. Direct replacements for a component disappear. Those familiar with the technologies may become a rare commodity. In addition to increased costs of repair, older systems are likely to have a longer mean time to repair. If repair requires production shutdown, this downtime will clearly affect production throughput, and it will be important to know your cost of downtime.
Energy costs: Older systems typically use more energy. For example, fixed-speed motors are giving way to variable-speed drives for energy savings. Loose process control may cause cycling that can waste energy or affect product quality. Process control designs can be improved while also improving energy efficiency.
Recycling and sustainability: These factors may also be relevant in corporate culture or product costing. Recycling costs or construction materials may figure into the value of a system or its replacement.
Improved control dynamics: These will also lead to shorter start-ups, improved product quality, quicker product changeovers, and quicker shutdowns. These all have associated cost savings.
Removal of physical constraints: Modern control systems, for example, may improve space utilization even with expanded operations.
Improved data analytics: Today’s advanced analytics can help streamline operations through system modeling. Perhaps a new solution can rely on data analytics—process modeling to remove the need for physical product sampling. An example of this is predictive emissions monitoring systems replacing continuous emissions monitoring systems in some applications.
Added flexibility: Existing systems may have been designed and implemented for a specific product and purpose, but are difficult to change and adapt to new product or business requirements. These requirements can include product variations or changes to batch or lot sizes. A new system can provide a great deal of flexibility, which could be a significant benefit for your business.
Now, for a couple of items that may not be as intuitive:
Upgrades to complex systems, such as a control system, often allow companies to make continuous improvements over time, plan for graceful degradation of an automation system, and perform future expansions in a well-managed, modular fashion. For example, redundancy is typically a requirement in medium-to-large automation applications. But for smaller applications, the loss of a display console may be compensated for by a backup Web-based human-machine interface direct to a controller. This level of backup can come at a drastically reduced price, while also delivering added flexibility and functionality on a day-to-day basis.
A concentration on modularity for a new system can deliver a great many new features that can be surprisingly easy to implement. Perhaps you will want a text message while you troubleshoot a challenging issue. Perhaps you will want a special report while you are making some control enhancements to generate “before-and-after” analytics. Or, perhaps you will want to plan ahead for integrating additional sensors that you know will be coming with a new enhancement down the line. Relying on standards and leaving the door open to third-party products and interfaces and ad-hoc and short-term enhancements outside the core functionality of a system could help your company adapt to changing needs. Selecting the right technologies and data infrastructures and focusing on integrating best-in-class components can address your current needs well, while also significantly improving your ability to respond to future and transient requirements.
What makes projects successful?
ARC’s vice president of consulting, Dave Woll, did a study on this very topic. Although some aspects of the results were to be expected, some were enlightening. Surveyed manufacturers, with a healthy sampling of industry “leaders” and “followers” and a middle category of “competitors,” enabled ARC to uncover some important best practices.
Project success best practices:
The degree to which projects are considered to be successful varies widely between the three groupings of industrial companies: leaders, competitors, and followers. Understanding the value of automation also varies widely between the three, and so does the degree to which projects are funded. However, at the leader level, there is a correlation across success, understanding, and funding.
Leaders are more satisfied with their projects. In fact, leading companies generally do not have failed projects. They have systems in place to evaluate the merits of a project up front and then typically employ a stage gate process to reassess and adjust project parameters over time. While overall in the survey 70 percent of projects are considered disappointing or not meeting project justifications, the majority of projects among industry leaders are considered successful. This tells us that with the right processes, the outcome can be guaranteed.
Leaders clearly have a better understanding of the value of automation. When asked to rate their understanding, leaders responded with an equal and high measure of both excellent and good responses. The competitors and followers in the field were nowhere near as confident in their value propositions.
Leaders get more projects funded. Over 80 percent of leader respondents highlighted that more than 60 percent of projects considered are funded. Compare this to the approximately 25 percent of projects successfully funded from other respondents.
In a surprising result, leaders include nonquantifiable benefits, indirect benefits, and life-cycle considerations in their analysis; a significant number of respondents in the competitor and follower category indicated that they did not. Almost all companies include an analysis of total life-cycle cost in their project justification process.
Another surprising result was that leaders spend 50 percent less time performing risk analysis for a project than both competitors and followers. The takeaway here is that they focus on upfront design and then on project management, to assure a quality outcome. Leaders also leverage commercial tools or purchased tools for project evaluation and management, rather than ad-hoc solutions or systems on a case-by-case basis.
All respondents recognized the importance of keeping the same project team for the duration of a project. More than 75 percent responded in the affirmative.
When asked how they apportion the benefits of consultants, financial balance, and rules of thumb, leaders showed an equal respect for each. Other respondents gave a much higher weighting (two to one) to rules of thumb. This likely speaks to the lack of rigor, or goes back to the poor understanding of the automation project benefits when justifying projects. Consultants play a major role in helping leaders justify projects. In fact, according to the survey results, leaders weighed the importance of engaging consultants at over two to one with respect to both best operator advice and rules of thumb.
When reviewing the calculations for economic return, return on investment (ROI) was the most predominant method used. Other methods included economic value added, return on invested capital, and return on capital employed. ROI exceeded all other methods combined.
Finally, when surveyed about the involvement of upper management in project justifications, leaders indicated that projects were more successful when management took an active role in the entire process, from project justification to implementation. This likely drives transparency and improved communications to arrive at the desired outcome.
Many factors will affect the success of automation or related information technology projects. But first considerations should be based on overall company directives with respect to its competitive stance. What will make the company more competitive in the future, and how can this project influence that?
Then, it is important for everyone to be involved with the process. Communicate widely throughout your organization. Consider all alternatives and reevaluate and tune the process to drive toward your desired outcome. If your staff is new or inexperienced in making this type of strategic decision, involve industry experts to assist with selection criteria development, architecture development, vendor selection, or cost justification. However, do not delegate the responsibility completely. Make it a team effort.
ABOUT THE AUTHOR
Dick Hill (DHill@arcweb.com) is vice president and general manager of ARC’s manufacturing advisory services. Hill is responsible for developing the strategic direction for ARC products, services, and geographical expansion. He is also responsible for covering advanced software business worldwide. In addition, he provides leadership for support of ARC’s manufacturing advisory service team and clients.