How to Calculate ROI on Digital Transformation
Simplify and prioritize the digital vision for your smart factory upgrades, and at the same time, consider both hard and soft savings in your return calculations
As smart manufacturing and digital transformation continue to gain mindshare and traction in intralogistics, packaging, process control, assembly and manufacturing, many facilities are still resisting change and coasting along with the same old equipment and processes. The main reason? There is not readily available information about return on investment (ROI) or time to value (TTV) to support investing in it.
Sometimes project champions push to get approval on the merit of the project’s specific technological advantages. However, most engineers and plant managers need to provide more traditional justification. If you need ROI or TTV data to move your Industry 4.0 plans forward, here is some advice and research to help get things moving.
Is there really an ROI on digital transformation?
To begin, keep in mind that for many CFOs, the responsibility of making forward-looking strategy investments is something relatively new. Prior to recent years, their focus was more about financial reporting, stewardship of the company’s assets and ownership of cash management. By coupling this understanding with the CFO’s fiduciary responsibility, it becomes clear why the CFO would like concrete data to justify any technology investment decisions.
Of course, there is no shortage of anecdotal information that promises a slow death to companies that do not quickly transform. And countless graphs forecast the exponential growth Industry 4.0 will provide. But a lot of this information has been in circulation for years. Has it stood the test of time? Is real ROI and TTV data now available?
If we take a step back, growth forecasts from 2017 estimated Industry 4.0 would experience a 37% CAGR from 2017 to 2023 ($47 billion to $310 billion). When compared to a similar report from 2019, which began its study in 2016, the CAGR has been re-forecasted to 14.6% from 2020 to 2027. Just a minor decrease, right?
Although these two data points support the fact that expectations for Industry 4.0 may have been too optimistic, they also illustrate how a lot of misinformation is making the digital transformation much more complicated and difficult than it needs to be. This misinformation often stems from companies that are selling unnecessary hardware and software solutions meant to lock users into a unique solution. The real end goal of these new technologies and concepts – the digital vision, as I like to call it – is something broader, more open and more powerful.
Simplify and prioritize the digital vision
To avoid such complications and inaccurate ROI and TTV calculations, it is important to simplify and prioritize the digital vision into a plan than can be incrementally implemented. Going through this process supports a better understanding of the requirements and makes us better prepared to select the right technology partners for each step.
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To simplify and prioritize the digital vision, first consider how digital transformation for manufacturing brings together three key business components:
SCADA, PLC and control (machine automation)
MES (part traceability, machine monitoring and machine management, i.e., recipes and so on)
ERP (AP/AR, raw materials, purchase orders, inventory, scheduling and tracking)
Achieving large profitability and competitive gains will require seamless integration of all three business components. However, it is important to begin at the machine automation level, then incorporate the MES, and finally add the ERP. The reason for following this path is primarily based on data requirements but also because it is the easiest path for development.
ROI considerations for PLC/control technologies
Because the PLC/control is one of the best-known and understood components in manufacturing, many very good, readily available Industry 4.0 solutions exist that can be economically added to an existing PLC/control platform. A good example of this is Caron Engineering. Founded in 1986, Caron Engineering has been partnering with machine tool users for 36 years to digitize their machines.
With a focus on unattended operation, Caron Engineering provides an off-the-shelf solution called TMAC (Tool Monitoring Adaptive Control). With over 5,000 installations, this technology has proven to be easy to integrate into any type of computer-controlled cutting machine tool for about $10,000 to $20,000 USD. TMAC provides an average ROI of 28% and a TTV that is immediate by using advanced sensors to provide machine health information that allows maintenance departments to predict potential downtime.
This example is relatively typical of how easy it can be to calculate an attractive ROI and TTV for digitally transforming the PLC/control. Whether working to integrate a turnkey solution (e.g. Caron Engineering), working with an integrator or working directly with an automation supplier (e.g. Beckhoff), it is relatively easy to target and quantify the investment required to obtain certain benefits. However, as we travel upstream to integrate the MES and ERP, the ROI and TTV values become much more difficult to quantify.
ROI considerations for MES and ERP upgrades
The reason it becomes more difficult to calculate the ROI for MES and ERP systems is because estimating the ROI requires detailed information about the costs and benefits – and this can be challenging relative to these systems. For each of these, we can be certain that the digital transformation is going to provide benefits, but there is uncertainty about what the actual benefits will be. In addition, there can be many soft returns that an ROI calculation will miss.
Therefore, if the MES and ERP systems are complex, consider an incremental and iterative process that allows better targeting of the benefits. This process will allow us to repeatedly focus on a specific problem we want to address and uncover immediate hard and soft savings.
A typical place to start for the MES hard savings is poor quality, and for the ERP it is inefficient scheduling. These two issues result in excessive cost due to rework, scrap and lost production time. Properly quantifying these costs will provide a well-defined and meaningful investment target for the MES and ERP solutions that will eliminate them.
The next step is to evaluate the potential soft savings. This is where MES and ERP systems truly thrive and it’s the real purpose of the digital transformation. In this phase, it is important to identify and quantify the manual tasks that can be automated. More specifically, it is about eliminating the time, challenges and limitations of human intervention by allowing the MES and ERP systems to immediately make key decisions. The automated decision making will significantly advance a company’s competitiveness. For the ROI calculation, however, you should focus on the time saved and the redundant tasks that can be eliminated.
As you continue down the path of iterative ROI estimates, stay focused on the immediate problems and their solutions. The digital transformation will certainly provide benefits in the long term, so avoid the trap of trying to immediately accommodate every aspect of Industry 4.0. Work to find technology partners that can help you successfully navigate your transformation. These partners may be different for each stage. However, select partners that are focused on unifying the PLC/control, MES and ERP system data into information that will readily address your manufacturing inefficiencies, continue to support employee involvement for innovation and be built on standard industry hardware, software and communication protocols.
Interested in implementing achieving an ROI on your digital transformation? Contact your local Beckhoff sales engineer today.
Paxton Shantz is the Digital Manufacturing Industry Manager for Beckhoff Automation LLC.
A version of this article previously appeared in Control Engineering.