Three Questions to Ask Before Investing in Industry 4.0
Three Questions You Need to Ask Before Investing in Industry 4.0
Hello, and welcome back. My name is Rick Phelps and today I’m going to discuss the three questions you need to ask before investing in industry 4.0. If you’re investing in Industry 4.0 technologies, you’re looking to make a return on investment. And most companies, in my experience, do the analysis poorly and end up not getting the return on investment they expected when they approve the project, whether it’s technology or capital, or whatever. And so these three questions are the questions that need answering before you invest in any technology.
1. Will this investment increase Throughput?’
Now each of the three questions is related to how your business makes money, all right? And this is by far the biggest lever in any business is throughput dollars. And so the first thing you want to do is make sure if you’re investing in technology, that you are doing it in a way that’s going to increase Throughput. And Throughput is defined as your revenue for the product minus your truly variable expenses. And truly variable expenses typically are your materials and your shipping costs and any other expenses you pay to outside businesses. Another way to look at is the throughput dollars is the money that stays in the business and pays for your value add. So it’s a representation of your value add.
When you have a project, you’re going to implement a cobot or a robot or AI or IoT. Is it going to impact your ability to make Throughput dollars? That is your ability to sell more product and get more revenue, and therefore more throughput dollars? If it’s not If the answer is no, probably don’t have a great project here. However, there are two more levers that your project may hit.
2. Will this investment in technology decrease your Inventory?
Inventory has a very specific definition. It’s the money invested in the things you sell. And so inventory expense, in this case, is defined as the money you spent on your raw materials. The things that you’re going to convert into your products. And so is this technology going to allow you to spend less money on materials so that your inventory costs, the amount of money tied up in things you ultimately intend to sell will go down? If the answer again is no, you probably don’t have a good project. Because the third area of improvement is in operating expense:
3. Will this investment decrease your operating expense?
And operating expenses is the money you spend converting Inventory that is your materials into Throughput, that is products that you sell. Right? Now, please listen carefully. Decreasing operating expenses is the smallest by far of these three levers or three things that you can influence with your technology purchase, if you don’t increase Throughput, or decrease Inventory, that decreasing operating expenses, has a small impact on your business. It’s rather a finite thing. So let me share an example of exactly how this can go wrong when you don’t ask these questions.
We were working as part of a team working in a turbocharger charger factory over in England. And we spent a couple of months and synchronized their flow, their production process had a number of machining lines that fed into an assembly line, and popping out the end of the assembly line were completed turbochargers. And they were having a rash of problems when we got there, not getting product out, they had lots of work in process inventory, and lots of late orders, lots of congestion, and issues at assembly. And so we synchronize the flow. That’s the Theory of Constraints, methodology, and we got things flowing smoothly. And the working process inventories dropped dramatically late orders became a thing of the past. And things were running really smoothly for a couple of months.
And then chaos happened again. And so we got called back to England as, well, you know, hey, this process isn’t working. And interestingly, unbeknownst to us in an area of the plant we didn’t focus on because it was running perfectly fine. They decided to purchase some technology, and they bought a multi-axis machining center to replace part of the manufacturing process of one of the components of a turbocharger.
Before the implementation of technology, they had three machine tools, each nominally taking about 10 minutes to process a part. And they were able to replace these three machines and three operators with one multi-axis machine that could do the whole job in 15 minutes. Now, if you look at that 15 minutes versus three times 10 minutes, that’s a 50% reduction in time. And so this was a cost-saving project. And what actually happened? Let’s think about this… 15 minutes. So in the past, when everything was running smoothly, parts were popping out of this production line, at a rate of one every 10 minutes, they implemented this technology improvement, and it took 15 minutes for a part to come out. And that was a 50% reduction in throughput. And so what happened?
Well, first of all, all of a sudden, they had a lot of late orders. And, any of the turbochargers that required parts from this production center became chronically late. Alright, so throughput question one, will this investment increase throughput dollars? The answer was, no, it actually decreased throughput dollars. They were making 50%, less of one of the components. Plant ran around the clock, there was no making it up. This was a major problem. Second of all, did this investment decrease inventory? The answer is no. Because these parts were slow in getting to the assembly line, work in process for all the turbochargers like 50%, or a third of the turbochargers. They were sitting around all the other components waiting for this one component to come through so they can be assembled. So work in process, inventory, increased. The dollars tied up inventory increased. And will this investment decrease operating expense?
And here’s the real kick in the butt. Right? So they had three operators, now they had one operator. And so what do they do with the operators? The only way for this to actually have reduced costs is for those three operators to have gone away. So did they? NO, they just got reassigned to another area of the plant. Because that’s the way this plant operated. It didn’t like laying people off. So it decreased throughput. It increased inventory and an increased operating expense. All that for just a few $100,000 investment in equipment. And that’s my friends is why, if you don’t ask these questions, the ROI can not only NOT be what you expect it to be on your investment, it can be a freaking disaster. And so to avoid that, learn more, check out our blog series, ‘Understanding Your Economic Engine’ here on this website. Or get in touch with us.
My name is Rick Phelps again, you can get me at PhelpsLTD.com and that’s my email address. And that’s my cell phone number. So if you’re getting ready to invest in technology, and you’re wondering, is that light at the end of the tunnel, really a light at the end of the tunnel? Or is it merely a train coming your way? Find out the answer before you write that check. Have a great and prosperous day.