Calculating ROI is needed to validate any project but often this is not as easy as it appears on the surface.
Often companies start and stop by thinking in terms of ‘how much paid staff time will this project save me?’ E.g. this project may save me 1 salary at £30,000 per year, we want 5 years payback so max project value that is justifiable is £150,000.
Some companies dig a lot further into other tangible payback areas such as:
- What increase in production will this give me due to machinery not stopping during lunch and break times.
- What increase in production will this give me due to extra shifts/production time, etc.
- What increase in production will this give me due to faster production speeds.
- How much downtime will this save me due to less breakdowns, etc.
- How much will this save me in temporary staff costs while full time staff are on holiday or ill.
- What % defects will this project save me, and what is the resulting saving in terms of reduced costs of defects, increased production, handling of recalls etc.
For help with calculating the tangible benefits of your project try using our payback calculator www.granta-automation.co.uk/automation-project-payback-calculator
Rarely do companies put a value to the intangible benefits of projects such as:
- Improved Health and Safety
- Admin of people HR costs savings
- The increased sales due to the ‘wow factor’ for your customers; improving their perception of your company and encouraging them to trust you and want to use you.
- The improved buying prices due to the ‘wow factor’ for your suppliers; improving their perception of your company and helping them to want to do business with you.
- Increased moral of staff due to improved environment and faster production speeds etc.
- Increased motivation of staff due to results being displayed on a scoreboard https://www.granta-automation.co.uk/news/kpis-dashboards-and-scoreboards-are-key-to-a-better-company-culture/
- Less fork truck movements/requirements saving on costs of purchasing and maintaining fork trucks
- Counting/measuring production output is more accurate and less time consuming.
- The extra marketing and sales opportunity to talk about your investment in automation
- Improved quality/reduction in defects for the end client/customer.
- Reduced floor space requirements as a result of the automation project
- Time savings on product inspection
- Increased sales due to reduced product costs
- Better customer service resulting from the above
Then there are the intangible risks of not carrying out the project to consider as well, e.g if I don’t go ahead with the project:
- Might my competition automated ahead of me instead, and what impact could this have on our market?
- Can I meet required production quantities and if not what impact will this have?
- Will I need to pay for extra shifts/staff etc. anyhow to meet market demand?
- Can I keep up with my markets production quality standards and if not what impact will this have?
- What will happen to staff morale? Are staff struggling/getting bored with their job? Is staff turnover going to be an issue?
- Is there any health and safety risk with the current process? Have their been any H&S issues like RSI or staff sickness as a result of the job role.
So how do I calculate the value of these intangible benefits?
Essentially the aim is to somehow make the intangible tangible, and there are several methods that can be used;
1. Process of elimination
This is really a cheat method and not defined or accurate but is simply a process of starting with the balance between required payback and tangible benefits and evaluating if you feel the intangible benefits easily cover the difference? Obviously in many situations the tangible benefits are enough to justify the project without the intangible benefits anyhow or the difference is so small that the intangibles are clearly worth more than the difference.
£200,000 project cost
4 year payback period
Therefore at least £200,000/4 = £50,000 per year of benefits needed to justify the project.
- Labour saving = £30,000 per year
- Extra production = £15,000 per year
By eliminating the tangible benefits the balance needed to justify the project is £5,000 per year of intangible benefits to justify the project
- Less H&S issues and risks
- Improved product quality to better a standard that is better than the competition (currently it is worse than the competition) potentially resulting in increased sales
- The extra marketing and sales opportunity automating the process will bring us
- Improved staff morale; staff morale is currently very low
- The competition may automate at some point
It is clear to management that these intangible benefits are worth more than £5,000 so they go ahead with the project.
2. Weighted estimation
This is the most common method and is very similar to the risk assessment processes used for assessing health and safety risks. Each of the intangible items is listed. An estimated saving/cost in £ is assigned to each of the list items as to what they are estimated to be if they did happen. A percentage likelihood of the intangible happening is assigned to each of the list items. Finally the estimated saving/cost is multiplied by the % likelihood to give a monetary value to the intangible items.
Intangible benefits if we were to automate
|Intangible||£ if it did happen||Likelihood of it happening||Weighted estimated intangible benefits value|
|Less staff sickness due to improved H&S||£1,000||50%||£500|
|Increased sales due to improved product quality||£10,000||70%||£7,000|
|Increased sales due to the extra marketing and sales opportunity automation will bring||£3,000||30%||£900|
|Improved staff output due to improved staff morale||£1,000||50%||£500|
Intangible risks if we didn’t automate
|Intangible||£ if it did happen||Likelihood of it happening||Weighted estimated intangible risks value|
|H&S claims due to RSI||£5,000||30%||£1,500|
|Poor staff morale causing staff turnover and/or poor performance||£3,000||80%||£2,400|
|The competition may automate at some point improving quality and price meaning we are no longer competitive||£20,000||25%||£5,000|
3. Comparative analysis
This is where you compare intangibles with previous scenarios that have put a value to an intangible and then compare them to give them a defined value. This method is commonly used in valuing intangible business assets such as brand names and patents. If other companies have previously sold similar brand names or patents, then the price of these can be used to establish a price for your own brand name or patents. An example of this in relation to automation project intangible benefits could be to compare to another automation project you have completed in your factory, or to compare with case studies from other companies that have automated.
Less staff sickness due to improved health and safety – could be compared with how much staff sickness you have in this non automated process vs another automated process in your factory.
Increased sales due to improved product quality – could be compared with how much sales improved for another similar product when you improved it. Or it could be compared with how much your sales have dropped due to your competition improving the quality of their product.
Find out more…
- The Worldwide Impact Of Automation and Productivity
- Advantages and Disadvantages of Automation
- What Type Of Automation Should I Choose To Increase Factory Staff Motivation?
- FREE Payback Calculator with Finance Lease Options