Focus on Payback, Return on Investment When Seeking Welding Equipment Acquisition
May 28, 2014
When business projects compete for the same pool of capital investment dollars, however, it can be a challenge for welding engineers, welding production supervisors or operations managers to make their requests for new welding equipment stand out from other requests. It's helpful to learn the "financial language" of the people responsible for making purchasing decisions. Doing so makes it easier to convey the benefits that welding technology upgrades can provide for the welding operation and the entire manufacturing process.
Continuous improvement efforts, including lean manufacturing, Six Sigma and 5S, are ways for manufacturing and high volume fabrication operations to become (and remain) profitable and competitive. Welding systems featuring digital control technologies can help. Digital control technologies can increase welding throughput and quality, reduce costs for inspection and rework, lower cycle times and even help overcome a shortage of qualified welding personnel.
When business projects compete for the same pool of capital investment dollars, however, it can be a challenge for welding engineers, welding production supervisors or operations managers to make their requests for new welding equipment stand out from other requests. It’s helpful to learn the “financial language” of the people responsible for making purchasing decisions. Doing so makes it easier to convey the benefits that welding technology upgrades can provide for the welding operation and the entire manufacturing process.
A good first step is to establish a baseline to measure improvement before moving to the capital approval process. That baseline helps show the potential performance improvement possible with digital welding technologies.
Consider impacts beyond the welding cell
Improvements to the welding process are often felt beyond the welding cell in upstream or downstream operations such as tooling, forming, weld prep, rework, inspection and post-weld cleaning. Measuring the effects of new welding processes or equipment may require input from other areas of the operation due to the potential wide-reaching impacts on the whole manufacturing process. Some companies form purchasing or project teams that include representatives from various departments and units, including a welding supervisor or manager and someone representing welding operators.
It is important to understand material costs, utilization costs and cost avoidance opportunities (especially if production rates are increasing), in addition to labor costs. Consult with outside sources such as equipment suppliers, integrators and distributors to gain a better perspective on costs and performance. A good vendor or supplier partner will ask questions to discover the needs of the company and help uncover cost-saving opportunities. Good questions to consider include:
- What are the welding problems at hand?
- What are the potential (or actual) implications of these welding problems?
- If X factor was changed, what is the effect on the welding process? Or the organization?
A deep understanding of the manufacturing process will help an outside consultant determine if he or she can offer solutions that will benefit the organization and be economically justifiable.
Understand the time value of money
It is helpful for welding engineering and operations supervisors to understand the time value of money when looking to acquire new equipment. Many companies can receive a 10 percent return at a relatively low risk by investing in mutual funds and stocks. When it comes to investing in capitalized expenditures (those where cost depreciates over time), any equipment that doesn’t produce a greater return than that may actually deplete company resources. That is assuming that the operation can continue to get by with current welding resources and processes. The same principle holds true for equipment that doesn’t pay for itself within 12 to 24 months.
Translating the benefits of a welding equipment purchase into the financial metrics of return on investment (ROI) percentage and payback time can help differentiate the request. It is also helpful for welding supervisors and operations managers to understand their company’s capital expenditure policies. They should learn what other key measurements management might consider in making investment decisions.
Know the financial decision drivers
Payback and return on investment (ROI) are two key concepts that drive financial decisions for most companies. There are two basic ideas behind these concepts:
- To find ways to lower the entire operational costs over time.
- The economic justification that spending a dollar today will save much more than that over a period of time.
ROI is a measure of the savings or benefit of an investment divided by the cost of the investment. That formula typically expresses the result as a percentage. Many manufacturing and fabrication organizations look for a return on investment greater than 20 percent.
Payback measures the length of time required to recover the cost of an investment through the savings or efficiencies that result. This measurement is expressed in time, and most companies look for a payback period of less than 12 to 24 months.
Other measurements that manufacturing or fabrication operations may consider when making financial decisions include:
- Lower warranty costs
- Reduced rework
- Higher customer satisfaction rates
- Faster order fill rates
- Decreased need to invest in safety measures
- Increased efficiencies
- Reduced labor costs
- Help in overcoming the chronic personnel shortage
- Reduced secondary processes, like grinding, scraping, and straightening
Calculate ROI and payback
When communicating with the financial stakeholders of a business about a proposed investment, there is no substitute for understanding their terminology, spending policy and driving forces. Do the math to calculate ROI and payback on what is known or what has been measured about welding process improvements.
Reaching the point where the estimated cost savings are calculated, however, can take several incremental steps. It may involve trials on the shop floor and documenting the improvements offered by new welding equipment and processes.
Among the benefits that available welding technologies can offer are:
- Better arc control for increased travel speeds and deposition rates
- Reduced spatter and rework
- Better gap filling and arc starts
- More flexibility and control, including remote control for changing weld processes
- Reduced downtime.
Here is a real situation that illustrates the ROI and payback benefits one customer realized after investing in new welding technology. The company made a process change to weld their part in one pass while also compensating for gaps, rather than using a multi-pass welding technique. The former technique slowed cycle times and increased spatter and the likelihood of faulty arc starts. The changes the company made allowed welding operators to reduce spatter, improve bead appearance, cut arc start errors in half and reduce consumable use and the need to clean the fixture.
The welding equipment and process solution reduced cycle time from 144 seconds to 84 seconds, which is a throughput improvement of 18 parts per hour and a reduction in labor and part costs of 42 percent. These benefits sound good, but putting the results into financial terms shows an even stronger argument in favor of the project. Due to an annual labor savings of $66,171, this company would receive a 413 percent return on investment and see a payback period of 2.9 months.
Some equipment manufacturers offer economic evaluation worksheets or formulas that can help calculate this key financial information.
The bottom line
Many of the digital features of modern welding systems can help reduce overall welding costs, as well as other manufacturing and labor costs associated with welding operations. Each operation and application is different, yielding different results and costs. The key is to identify the areas of costs most important to the manufacturing operations, and to translate the welding benefits into bottom-line dollars to help sway decision makers.
When proceeding with the purchase of new welding equipment, companies may also want to consider machines capable of producing welding information. These power sources make it easy to gather the data to determine baseline performance information, as well as track the impact of continuous improvement initiatives.