The benefits of calculating ROI to measure a facility's performance objectives
For automation, return on investment (ROI) is more important than total cost of ownership (TCO). When making a capital investment in automation, companies need to determine value based on the solution’s impact on facility performance and its workforce. Also consider cost of downtime and services.
When it comes to making a capital investment in automation, many companies determine value by looking at the cost to install and operate a system over the course of its lifecycle. However, what isn't considered, and what's arguably even more important, is the solution's impact on the overall facility's performance and workforce.
Operators in the industrial process industry can use any number of metrics and methodologies to determine the viability of their capital investments. In recent years, however, in an effort to optimize overall cost, many have turned to total cost of ownership (TCO) as a means of driving purchasing decisions. While this has allowed stakeholders to quantify (albeit roughly) how much will be spent on an investment over the course of its lifecycle, applying TCO strictly on CAPEX and OPEX (capital expenditures and operating expenditures) fails to capture many of the benefits generated from improving the performance of an asset and/or process.
When it comes to choosing among automation solutions, using TCO as the sole metric for making a decision is contradictory because one of the primary purposes of implementing an integrated solution like a distributed control system (DCS) is to achieve measurable performance improvements in the forms of efficiency, production, safety, and compliance.
Ironically enough, by focusing only on cost when evaluating a capital investment in automation, operators may inadvertently end up doing the exact opposite of what they are trying to accomplish, which is to select the option that offers the most value given the operational life of the facility.
When looking at automation solutions, it is necessary to treat TCO as one piece of the equation used to calculate return on investment (ROI). And keep in mind, when talking about ROI, we are looking at the functional definition—not the accounting definition. In our equation, ROI is a function of combining TCO with the positive impacts that come from performance improvements (see Figure 1).
Understand TCO versus ROI
Generally speaking, TCO consists of two parts. The first is the cost to actually purchase and implement the solution (such as hardware, software, and networking). This is often referred to as total installed cost (TIC). In today's environment, with capital expenditure budgets stretched thin, many operators have placed a particular emphasis on TIC. While it certainly should be considered when making a decision, doing so without taking into account lifecycle costs or operational impact is an approach that often results in missed opportunities.
The second part of TCO is the total cost to manage and maintain the solution throughout its lifecycle (including the cost of decommissioning), which typically ranges anywhere from 30 to 40 years. It is this part of TCO that often distinguishes one option or vendor from another. However, in many instances, it takes a backseat in pre-front-end engineering design evaluations to the cost of acquisition.
As its name indicates, TCO looks at the cost aspect of implementing an automation system, including the cost of doing business, opportunity costs, replacements, or upgrades. But it does not take into account performance improvements, and thus it fails to provide an accurate representation of a solution's true value.
To obtain a more precise and realistic calculation, looking at the entire ROI equation is vital, which takes into consideration the total cost to install, operate, and maintain the system, plus the operational impact and monetary savings generated by performance improvements.
Where TCO falls short
Using TCO or TIC as the primary determinant when choosing an automation solution is not that different from purchasing a stock option without considering what kind of monetary returns it might generate. Although the stock may be cheap and present very little risk, buying it only on price is a strategy that is unlikely to benefit a portfolio.
While operators recognize that the cost associated with implementing new technology can only be justified if it provides a suitable return, many do an inadequate job of assessing what that return entails.
For example, the implementation of even the most rudimentary control optimization strategies may allow for more precise control over a process, leading to increased throughput by being able to operate closer to production limits (control optimization). Throughput gains might also come from shorter batch cycle times, lower grade transition time, less product re-blending, and decreases in scheduled shutdown duration and frequency. All of these improvements can easily be translated into monetary value and by including them in a TCO analysis, the concept of ROI is introduced.
What's more difficult to calculate—and what many operators today applying only TCO—are the improvements that come from other benefits generated by the automation system, such as reduced unscheduled downtime, improved product quality, reduced variability, more effective maintenance, and increased operational visibility. These also can result in significant financial gains throughout the life of a facility, but they are often disregarded on account of the difficulty associated with assigning monetary value.
If you're not leveraging performance improvements, you may be missing big opportunities—especially when the improvements have accumulated over the lifespan of the facility. The same can be said about operational improvement that comes as a result of facility personnel working more effectively, which is another notable benefit associated with the implementation of an automation solution that TCO fails to capture.
Careful design of displays, with the operator tasks and priorities in mind, allows personnel to make better and faster decisions. This has proved to be the most effective way to increase operator efficiency and produce best-in-class operations performance, which leads to reduced unplanned downtime, increased productivity, and improved safety.
A best-in-class automation solution also helps facilitate collaboration among engineers, operators, and maintenance personnel. This is particularly important during shift changes, which typically are the most risk-laden time of the day at a production facility. An electronic logbook is a very simple control platform feature that provides personnel coming into the plant with critical information about what happened during the previous shift. It also provides context for future work activity, which drives efficiency in personnel usage and speed to resolution of abnormal process conditions.
Improved safety and compliance
Eliminating health, safety, and environmental issues is at the top of every plant manager's agenda. Improved automation often plays a key role in reducing these types of events. If a proposed investment will result in safer operations or reduced emissions, it should be included in the justification description.
Operators often fail to attach monetary significance to improvements in safety and/or environmental compliance, which undervalues the automation solution. This has become especially problematic in areas such as continuous carbon or other emissions, which will eventually incur financial penalties.
When calculating performance improvements in safety, companies should consider the cost associated with being noncompliant. When applicable, any losses should be considered that result from an event such as a spill, leak, or worker injury.
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