The Truth about ROI IMTS 2016 - Map Your Show · 2016-10-10 · In order to compete with the more pro ductive machine, the cost for the lower priced machine cost w ould have to reduced

Investment Justification

The Truth about ROIIMTS 2016

September 12th, 2016

Jeffrey L. ReinertPresident & CEO

INDEX CORPORATION


Overview of Justification Process

Traditional View

Production Cost

Return on Investment

ROI

Investment Decision


Modern View

Production Cost


ROI

Investment Decision

ProductQualitySPC

Equipment Flexibility /CorporateStrategy

Single Step Process

Tooling,Operating,

Changeover

Overview of Justification Process


This presentation will show the need to take a comprehensive look

at all factors that influence the success of an investment

• What the different factors are

• How important they are

• How to use them

1. From a perspective of factors that cannot be calculated

2. From a return of investment perspective

3. From a detailed production cost-analysis perspective

Investment Factors



Production Rate

On Time Delivery

Returned Parts

Scrap Rate

Product Quality

Customer Satisfaction

Flexibility Now

Flexibility In the Future For Retooling

Market Considerations

Strategic Impact: Where does the Company want to be in The Future

Impact on Competitiveness

Environmental Issues

Operating Convenience Reputation

Single vs MultiStep Process

Zero Defects

Financial and Technical Solidity of the Company

Price

Investment FactorsInternal vs. External View

Internal Factors External/ Customer related Factors


To compare different types of equipment for the same investment, it is essential to consider capability differences as well as factors that can not be converted into time or cost savings such as:

•Quality/ Accuracy/ SPC capability•Advantages of a Single Step Process •Flexibility & Retooling Costs•Tooling / Setup / Changeover Benefits•Strategic Considerations and Advantages

These benefits are crucial and necessary and must be considered in the decision process to assure the success of the investment!

Cost FactorsComprehensive View


Calculable Factors

• Productivity• Cycle Time• Set Up and Tool Change Time• Uptime and Efficiency • Single Step, Complete Process• Throughput• Scrap Rate• Tooling Cost • Maintenance Cost• Preparation Cost• Depreciation Cost

Non- Calculable Factors & Benefits

• Quality, Accuracy, SPC• Surface Finish• Flexible verses Dedicated• Lower Retooling Cost• Preset Quick Change Tooling • Standardized Insert Tooling verses

Custom Tooling• Single Point Turning vs. Form Tools • Single Step Drop off - Complete

Processes• Simpler Operating (on CNC Equipment) • Quality that does not depend on

operator skill (conventional vs. CNC)• Environmental issues• Technological Status and Competitiveness

of the Company in the Future

Cost FactorsCalculable vs. Non Calculable


Non- Calculable Factors/ Benefits

• Quality , i.e. dependability, scrap rate, deburring cost,

• Accuracy, i.e.: SPC capability/ Cpk, thermal stability,roundness, runout

• Surface Finish, i.e.: single point CNCturning vs. forming with form-tools,machine rigidity

• Flexible vs. Dedicated i.e. easy to retool for new part,easy to change over,capable to run wide range of parts,easy to add or remove features,easy to re-task equipment

Cost FactorsNon Calculable



• Single Step Drop off Complete Processes: main benefits:eliminating secondary operations, closer location tolerances and alignment of part features,eliminating fixturing cost,less set-ups, less work in process,faster throughput

• Lower Retooling Cost i.e.: simple standard (insert tools),no special tool holders or attachments

• Standard Preset Quick Change Tool Holders, i.e. VDI. Capto

• Quick tool change for tool replacement or retooling




• Simplicity of operation i.e. CNC equipment vs. conventional

• Quality that does not depend on operator skill but on the equipment

• Environmental benefits ie. Oil coolant vs. water soluble?is your machine choice “green”?Does it move heat in or out of the plant?

• Market considerations; Will one part run forever? Lifecycles are getting shorter and shorter.

• Reputation based on equipment, will impact future business

• Technological Status and Competitiveness of the Company in the Future



How to chose the right tools to win the battle

I cant be bothered

by any crazy new technology

I have a battle to

fight

Investment Justification Tools

Without properly evaluating the investment factors you will lose the battle

NEW TECHNOLOGY


Financial Justification

Internal Rate of ReturnIRR determines ROI(Return on Investment)

Financial Justification Methods

Discounted Cashflow Analysis

Custom financial Software

Similar to ROI calculationIt just looks at the cashflows from a different perspective than ROI caculation

This is currently the most widely used financial tool and will be explained below


Calculable Factors:

ROI calculation using IRR / rate of return formula in the

Microsoft Excel program

IRR- Internal Rate of Return


The rate of return, “r”, is calculated is based on the sum of cash flows for a defined number of years, and the total of the sum (the net present value) to be zero, NPV=0

IRR- Internal Rate of Return

N=number of years

t= year number (0,1,2,3…..)

C= Cash flow (inflow - outflow) for year number (1,2,3,4…..)

r= return rate, or discount rate, or depreciation acceleration rate

NPV= Net Present Value


RETURN ON INVESTMENT ANALYSIS FOR A PROJECT A MACHINE PURCHASED TO RUN 1 PART FOR 3/ 5 YEARS

Example CNC Single Spindle Purch Price Resale Value Value DifferenceMACHINE COST LESS VALUE AT END OF PROJECT: $400,000.00 $100,000.00 $300,000.00PARTS PER HOUR PRODUCED NET 50LABOR COST PER HOUR $40.00HOURS PER YEAR 3,500OVERHEAD ALLOCATED BASED ON LABOR HOURS $210,000.00INFLATION FACTOR 1.02PERISHABLE TOOLING PER PART $0.30NUMBER OF PARTS TO BE MADE/YEAR 175,000SELLING PRICE/PART (LESS RAW MATERIAL) $3.60CASH INFLOW: YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5REVENUE $0 $630,000 $630,000 $630,000 $630,000 $630,000CASH OUTFLOWS:INITIAL CAPITAL EXPENDITURE $300,000PERISHABLE TOOLING COST $52,500 $53,550 $54,621 $55,713 $56,828LABOR COST $140,000 $142,800 $145,656 $148,569 $151,541OVERHEAD COSTS $210,000 $214,200 $218,484 $222,854 $227,311NET CASH FLOW PER YEAR -$300,000 $227,500 $219,450 $211,239 $202,864 $194,321CUMULATIVE CASH FLOW -$300,000 -$72,500 $146,950 $358,189 $561,053 $755,374

PROJECT RETURN ON INVESTMENT AT END OF YR. -24.17% 31.47% 53.42% 62.91% 67.36%IRR Formula calculations:Cash Flows $ini -300,000yr1 227,500yr2 219,450yr3 211,239yr4 202,864yr5 194,321

IRR- Internal Rate of ReturnSpreadsheet Example

Investment Justification IRR- Internal Rate of Return

Based on NPV to be 0 after 3 years,(already knowing “r=53.42%” from excel sheet)The formula would look like this:

NPV= -300,000 + 227,500 + 219,450 + 211,239 = 0(1+ .5342) (1+ .5342) (1+ .5342)1 2 3

NPV= -300,000 + 148,285 + 93,233 + 58,490 = 0

or

The rate of return “r” calculated as shown above is an indicator as to: • How fast the investment is depreciated, • How long the payback period is, and • How high the rate of return is.

This calculation emphasizes the importance of productivity, because productivity is the key factor influencing the return rate. The detailed piece cost analysis shown below will demonstrate this point.


Calculation Method ExcelSpreadsheet

The detailed piece cost calculation method using an Excel spreadsheet is helpful in comparing different types of equipment for the same project and understanding the importance of productivity.

In the following we will show you the blank spreadsheet consisting of two sections:

1.The input data, and 2.The calculated data which is automatically

calculated by excel



Excel Piece Cost Calculation Spreadsheet Template Part 1 Input DataItem # Input Data Unit Remark Machine A1 Lot size pcs/lot

INP

UT

DAT

A O

NLY

2 Number of lots lots/yr3 Cycle time sec/pc4 Set-up time (on the machine) min/lot5 Set-up time (outside the machine) min/lot6 Presetter time min/lot7 Programming time min8 Computer time min9 Cost of replacement or purchase price of machine $10 Power consumption KVA11 Space required sq. ft.12 Depreciation years yr13 Number of operating hours per year hr/yr14 Efficiency %15 Interest Rate %16 Maintenance cost / percentage of price %17 Common cost / percentage of wage cost %18 Space cost $/sq.ft.19 Energy cost $/kWh20 Programmers wage cost $/h21 Computer cost $/h22 Tool presetter cost $/h23 Tooling cost $/h24 Wage cost $/h25 Job planning cost $26 Number of setup pieces27 Number of machine operators



Excel Piece Cost Calculation Spreadsheet Template: Part 2 Calculated Data

Item # Cost type Unit Calculation formula A28 Depreciation cost / hr $/h 9/(12x13) #DIV/0!

Cal

cula

ted

DAT

A

29 Interest cost / hr $/h 0.5*x(9x15)/(100*x13) #DIV/0!

30 Maintenance cost / hr $/h (9x16)/(100x13) #DIV/0!31 Space cost / hr $/h (11x18)/13 #DIV/0!32 Energy cost / hr $/h (10x19)/2* 0.0033 Tooling cost / hr $/h 23 0.00

34 Machine cost / hr $/h 28+29+30+31+32+33 #DIV/0!35 Wage cost / hr $/h 24 0.0036 Common cost / hr $/h (35x17)/100* 0.0037 Personnel cost per hour $/h (35+36)x27 0.0038 Machine rate per hour $/pc 34+37 #DIV/0!

39 Individual part cost $/pc (3x38x100*)/(3600*x14) #DIV/0!40 Job planning cost $ 25 0.0041 Programming cost $ (7x20)/60* 0.0042 Computer cost $ (8x21)/60* 0.0043 Trial run cost $ 39x26 #DIV/0!44 Total preparation cost $ 40+41+42+43 #DIV/0!45 Preparation cost per piece $/pc 44/(1x2) #DIV/0!

46 Set-up cost (on the machine) $ (4x38x100*)/(60*x14) #DIV/0!47 Set-up cost (outside the machine) $ (5*37)/60* 0.0048 Tool presetter cost $ (6*22)/60* 0.0049 Repeat set-up cost $ 46+47+48 #DIV/0!50 Repeat set-up cost per piece $/pc 49/1 #DIV/0!

51 Total production cost per piece excl. material $/pc 39+45+50 #DIV/0!



In the following we will show the influence of investment cost as well as the influence of productivity on the piece cost, by looking at an actual case study of two machines

1. Decreasing the cost of the lower priced machine

2. Increasing the price of the higher cost machine

3. Increasing the productivity

and see the impact it has on the piece cost


Influence of lower Investment Cost on Piece Cost

In order to compete with the more productive machine, the cost for the lower priced machine cost would have to reduced by 40% !!

Productivity vs. Investment CostKey Factor Influences Example

Investment Cost machine A vs. B-20% -40%

Item # Input Data Unit A B B B1 Lot size pcs/lot 50,000.00 50,000.00 50,000.00 50,000.00

2 Number of lots lots/yr 5.00 5.00 5.00 5.00

3 Cycle time sec/pc 72.00 90.00 90.00 90.00

4 Set-up time (on the machine) min/lot 55.00 55.00 55.00 55.00

5 Set-up time (outside the machine) min/lot 0.00 0.00 0.00 0.00

6 Presetter time min/lot 30.00 30.00 30.00 30.00

7 Programming time min 360.00 360.00 360.00 360.00

8 Computer time min 0.00 0.00 0.00 0.00

9 Cost of replacement or purchase price of machine

$ 585,000.00 390,000.00 312,000.00 234,000.00

10 Power consumption KVA 45.00 45.00 45.00 45.00

11 Space required sq. ft. 200.00 200.00 200.00 200.00

12 Depreciation years yr 5.00 5.00 5.00 5.00

13 Number of operating hours per year hr/yr 5,000.00 5,000.00 5,000.00 5,000.00

14 Efficiency % 84.00 84.00 84.00 84.00

51 Total production cost per piece $/pc 2.40 2.62 2.51 2.39


Even if the more productive machine’s price would be raised by 30% it would still be competitive

Productivity vs. Investment CostKey Factor Influence Example

Influence of higher Investment Cost on Piece Cost

Influence of increased Investment Cost on Piece Cost Machine A vs. Machine B 20% 30%

Item # Input Data Unit Remark A B A A1 Lot size pcs/lot 50,000.00 50,000.00 50,000.00 50,000.002 Number of lots lots/yr 5.00 5.00 5.00 5.003 Cycle time sec/pc 72.00 90.00 72.00 72.004 Set-up time (on the machine) min/lot 55.00 55.00 55.00 55.005 Set-up time (outside the machine) min/lot 0.00 0.00 0.00 0.006 Presetter time min/lot 30.00 30.00 30.00 30.007 Programming time min 360.00 360.00 360.00 360.008 Computer time min 0.00 0.00 0.00 0.009 Cost of replacement or purchase price of

machine$ 585,000.00 390,000.00 702,000.00 760,500.00

10 Power consumption KVA 45.00 45.00 45.00 45.0011 Space required sq. ft. 200.00 200.00 200.00 200.0012 Depreciation years yr 5.00 5.00 5.00 5.0013 Number of operating hours per year hr/yr 5,000.00 5,000.00 5,000.00 5,000.0014 Efficiency % 84.00 84.00 84.00 84.00

51Total production cost per piece excl. material $/pc 39+45+50 2.40 2.62 2.53 2.61


Productivity vs. Investment CostKey Factor Influences Example

If the productivity of machine A is increased, the piece cost decreases by about the same percentage!!

Influence of Increased Productivity on piece cost Influence of increased productivity on piece cost Productivity

+5%Productivity

+10%Productivity

+15%

Item #Input Data Unit A B A A A1 Lot size pcs/lot 50,000.00 50,000.00 50,000.00 50,000.00 50,000.002 Number of lots lots/yr 5.00 5.00 5.00 5.00 5.003 Cycle time sec/pc 72.00 90.00 68.40 64.80 61.204 Set-up time (on the machine) min/lot 55.00 55.00 55.00 55.00 55.005 Set-up time (outside the machine) min/lot 0.00 0.00 0.00 0.00 0.006 Presetter time min/lot 30.00 30.00 30.00 30.00 30.007 Programming time min 360.00 360.00 360.00 360.00 360.008 Computer time min 0.00 0.00 0.00 0.00 0.009 Cost of replacement or purchase price of

machine$ 585,000.00 390,000.00 585,000.00 585,000.00 585,000.00

10 Power consumption KVA 45.00 45.00 45.00 45.00 45.0011 Space required sq. ft. 200.00 200.00 200.00 200.00 200.0012 Depreciation years yr 5.00 5.00 5.00 5.00 5.0013 Number of operating hours per year hr/yr 5,000.00 5,000.00 5,000.00 5,000.00 5,000.0014 Efficiency % 84.00 84.00 84.00 84.00 84.00

51 Total production cost per piece $/pc 2.40 2.62 2.30 2.20 2.09

Piece Cost


Graphic Depiction of Cost Factor Influence

Preparation Cost/Hour

+

Investment/ Depreciation Cost/Hour

+

Interest Cost/Hour

+

Space and Power Cost/Hour

+

Maintenance Cost/Hour

+

Tooling Cost/Hour

+

Wages and Overhead Cost/Hour

= Total Hourly Costs X Productivity = =(Cycle Time + Efficiency)

Cost per Piece

Productivity is the only factor that has a Multiplying effect on the piece costAll other factors only have an Additive effect on the piece cost

Depreciation cost depends on hrs/yr runtime and number of depreciation years

Add

itive

Fac

tors


ComprehensiveJustification Focus

Detailed Standardized Production and Piece

Cost Analysis

Importance ofComprehensive Justification

Focus

Impact on Labor Content

Degree of Automated Processes

Equipment Quality and Longevity

Impact on Long Term Competitiveness

Strategic Impact Company’s Position in

the Market

Comprehensive Justification Methods Lead to Long Term Success

Importance of Quality of product

Benefits of single step processes Benefits of Flexibility


Overview of Justification Tools

Key Steps in the Justification Process: 1. Research Your Customers Needs, Problems

and Problem Consequences2. Understand the IRR Calculation3. Show and Calculate Benefits of Productivity by

using Excel Piece Cost Template Include Set-Up, Tool Change Time, Uptime and Efficiency

4. Consider the Importance of non - calculable Benefits regarding Quality, Flexibility to assure the future competitiveness of the company

5. Consider Benefits of Single Step Drop off Complete Process regarding Throughput Scrap Rate and increased Overall Equipment Efficiency and Quality


The Truth about ROI is, that:

It is important to take a comprehensive look at all aspects of an investment. This includes:

1. Factors that are crucial to the success, but cannot be calculated

2. Having a good understanding of the financial impact of the investment, as calculated in the IRR/ ROI formula

3. Looking at a detailed piece cost analysis to compare competing equipment, and understand the overwhelming importance of Productivity.

Summary


Thank You

Questions?

Documents

The Truth about ROI IMTS 2016 - Map Your Show · 2016-10-10 · In order to compete with the more pro ductive machine, the cost for the lower priced machine cost w ould have to reduced