By Paul J. Galeski, PE, CAP
As every business executive knows all too well, high-return, low-risk investments are hard, if not impossible, to find these days. The economy continues to look uncertain at best, with the stock market having reached its lowest level in many years, and numerous companies declaring bankruptcy, including American icons like General Motors and Chrysler.
The implications for manufacturing capital expenditures are clear. In a 2008 Bank of America Business Capital survey, 40% of manufacturing company CFOs reported that they planned to decrease or postpone their capital expenditures in 2009. (To read 2009 CFO Outlook: A Survey of Manufacturing Company CFOs in 2008, by Bank of America Corp., July '09, visit www.bofasecurities.com/publicpdf/landing/cfooutlook/Final_PDF.pdf.)
Capital expenditures (Capex) may seem like discretionary costs that could be eliminated during these lean times. However, if you have a cash surplus in your business and/or borrowing power, now is the perfect time to invest. And your best opportunity—with lower risk and higher returns—is to invest in your own interests in the fields of automation and enterprise integration.
Recent events and scandals show that you can't control investments in outside firms and markets. With trust and transparency at an all-time low, the traditional risk/reward profile is just too unbalanced. However, you can control an investment in yourself (Figure 1). You determine the type of investment and the rewards you'll reap. Pick your own return (Figure 2).
Make your move now, before the economy heats up, and while interest rates are still low. Take advantage of the slowdown, and use your time to research the best investments and deploy capital in the best way possible. If you do it right, you'll outmaneuver any competitors, and emerge from this economic recession in a much stronger strategic position.
The State of Manufacturing Automation
Generally speaking, manufacturing technology was restricted to plant operations for most of the past 25 years. Manufacturers stayed focused on their production lines and whatever they needed to do to fulfill the day's work orders. But today's technologies, including manufacturing execution and enterprise resource planning systems, are much more easily integrated, making it possible for manufacturing organizations to think about their operations holistically. When information flows across the boundaries of functional business silos, business processes become streamlined, eliminating waste of many kinds, reducing costs and driving efficiency throughout the enterprise. To achieve maximum business results, organizations must integrate their operations horizontally—across the entire enterprise, and also do it vertically—from the plant floor to the board room.
Another benefit of enterprise integration and automation is knowledge management. A company should (and must) own the intellectual property of the business. That intellectual property includes the "tribal knowledge" that is required and used daily to operate a manufacturing facility effectively, efficiently and safely. In many cases, this tribal knowledge lies in the hands and heads of the workforce. Unless robust and comprehensive systems are in place to capture and maintain that knowledge, the business is at risk.
This is not a risk that you can buy insurance for. Your "premium" for mitigating this very real risk is the investment required to put in place and maintain the necessary business processes and technology for ongoing knowledge management. Arguably, the loss of intellectual property through a "knowledge disturbance" is at least as likely and potentially will have more impact than that of traditional business interruptions such as weather. In essence, your intellectual property goes home every evening, and may not come back for many reasons, including retirement, resignation or health problems. As many manufacturing businesses face an aging workforce, the timing of addressing the knowledge management issue becomes even more critical.
Business transformation and integration projects are always challenging, but are particularly difficult when you're busy expanding and growing, so consider moving forward now. Bridge the gap between today's low productivity and tomorrow's high demand by integrating and improving the entire manufacturing enterprise.
Factors That Impact Manufacturing Efficiency
As if the slow economy weren't enough of a challenge, manufacturers must also contend with a range of other factors that limit profitability. Production requires much more than the push of a button, and each variable has the potential to affect efficiency. Many of these variables relate to customer demands and rising complexity in the marketplace.
The most common factors that affect manufacturing efficiency include:
- Product customization—Increased demand for custom products requires custom and flexible manufacturing and supply chain processes.
- Real-time decision-making—Customers and suppliers expect manufacturers to respond to marketplace changes with ever-increasing speed and agility.
- Global supply chains—Worldwide sourcing, global distribution and localized production add complexity to supply chains and threaten product flow efficiency.
- Regulatory compliance—Environmental controls and other regulations may restrict outputs and yields or require more production time.
- Product genealogy and traceability—For safety, compliance and quality reasons, manufacturers must track raw materials all the way through production and delivery to the end user.
- Supply and demand rationalization—Link your orders in real time and new business pipeline directly to your production plan and operations.
What It Means to "Invest in Yourself "
Look within for high-value, high-return, competitively differentiating strategic investments, and consider the following improvements:
- Reduce utility usage.
- Increase capacity.
- Enable faster changeovers.
- Develop operating dashboards that enable plant workers to make on-the-spot decisions.
- Speed time to market for new products or packages.
- Improve agility so the plant can respond on the fly to changing economic conditions and customer demands.
- Rationalize the supplier base.
- Transform, integrate and optimize business and manufacturing processes.
- Perform system upgrades.
- Reduce total cost of ownership.
- Develop business models and explore what-if scenarios.
Consider All the Benefits
Investments in your plant deliver a range of benefits that impact your bottom line, including:
- Improved quality
- Less rework
- Increased yield
- Reduced raw material consumption
- Fewer unplanned interruptions
- Lower inventory
- Shorter time to market for new products
- Customer relationships
- Internal collaboration
- Competitiveness within the marketplace
- Better business overall
Of course, if you make your investment too hastily, you may be disappointed with the results. Carefully evaluate all of your technology and service options to avoid the pitfalls that may slow your capital deployment and consequently your ROI. Never invest in technology for the sake of technology. To make a truly strategic investment, an organization must address a holistic combination of people, processes and technologies.
Factors that impact your return on investment include:
- Inadvertently suboptimizing parts of your business. You must focus on the enterprise holistically, particularly at the outset. Don't get drawn into the trap of piecemeal solutions that don't integrate vertically or horizontally. To maximize ROI, the capital investment must be designed to be leveraged as much as is practical. An appropriate technology reuse strategy is a must.
- "Regret capital." A well-orchestrated and planned Capex program will prevent you from making investments that must be later undone or replaced.
- Technologies that require special skills or maintenance. If your investment requires hiring specialized personnel or paying exorbitant maintenance fees, these costs may outweigh the efficiency benefits. Look for technologies with a large installation base—preferably in the company's region—to ensure that available resources will know how to work with them.
- The financial strength and experience of the solutions provider. Select a solutions provider who is forward-thinking and disciplined. Make sure this provider will survive the poor economy and any following marketplace shifts. Ideally, you will partner with this provider for at least 10 years. This partner should also have years of experience doing similar work for other companies, and references should be available to you. Be careful to select a partner who is flexible, one who can grow and change with your ever-evolving business needs. Choose a partner who will not only help you develop your strategy, but will also manage implementation and perform much of the program. Many times the handoff between strategic technology planning and tactical implementation leaves a gap that can reduce the overall ROI. Furthermore, dealing with multiple providers creates additional expense and duplication of effort.
How to Invest in Yourself: A Step-by-Step Guide
Investing in yourself is easy to do and highly rewarding.
- Conduct an audit of your manufacturing operations to determine efficiency. This may require a flash diagnostic, which is a quick, broad look at the business. It is designed to be a cost-effective way to identify at a high level high-ROI opportunities, and enable a more in-depth study of the business operations.
- Get the cooperation of your entire organization. Your success requires buy-in from everyone involved. A good solutions partner will help you with organizational planning and work to prepare your team.
- Deploy the right solution. Investing in yourself starts with you and your basic business requirements. Only you can ultimately decide which approach is best.
- Choose a partner to help you select and implement the right investments, one that will be able to recommend the right level of technology, at the right cost and in the right time frame to meet your unique business needs.
- Reap the ongoing rewards. A proper investment is not a one-shot wonder; it should deliver an annuity-type return. Design your Capex program around solutions that deliver ongoing returns year after year.
You have the power to benefit directly and handsomely from an investment in the field of automation—even in today's poor economy. Now is the time to seize the moment to invest in your own business.
By taking simple steps to choose the right investments and the right partner to help you implement them, you will experience rewards that will position you as a stronger leader in tomorrow's marketplace.
Paul Galeski, PE, CAP, is CEO at Maverick Technologies LLC.