How to calculate digital transformation ROI
Simplify and prioritize the digital vision for smart factory upgrades and consider hard and soft savings in the return calculations.
- Digital transformation growth is not being realized by many companies because they don’t see the return on investment (ROI) returns.
- Prioritizing the digital vision requires focusing on control system and asset management systems.
- Manufacturing execution system (MES) and enterprise resource planning (ERP) upgrades can help companies realize ROI returns.
While smart manufacturing and digital transformation continue to gain traction in intralogistics, packaging, process control, assembly and manufacturing, many facilities are still resisting change and using 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 technological advantages. Most engineers and plant managers need to provide more traditional justification. If ROI or TTV data is needed to move Industry 4.0 plans forward, here is some advice and research to help get things moving.
Is there really an ROI on digital transformation?
Keep in mind that for many chief financial officers (CFOs), the responsibility of making forward-looking strategy investments is relatively new. Prior to recent years, their focus was more about financial reporting, stewarding 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 wants 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 transform quickly enough. 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 available?
If we take a step back, growth forecasts from 2017 estimated Industry 4.0 would experience a 37% compound annual growth rate (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.
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 more complicated and difficult than it needs to be. This misinformation often stems from companies 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 – is something broader, more open and more powerful.
Simplify and prioritize the digital vision: Three components
To avoid such complications and inaccurate ROI and TTV calculations, it is important to simplify and prioritize the digital vision into a plan that can be incrementally implemented. Going through this process supports a better understanding of the requirements and makes companies better prepared to select the right technology partners for each step.
To simplify and prioritize the digital vision, first consider how digital transformation for manufacturing integrates three key business components:
- Supervisory control and data acquisition (SCADA), programmable logic controller (PLC) and control (machine automation)
- Manufacturing execution system (MES), which includes: (part traceability, machine monitoring and machine management, i.e., recipes and so on)
- Enterprise resource planning (ERP), which includes: (AP/AR, raw materials, purchase orders, inventory, scheduling and tracking).
Achieving large profitability and competitive gains requires seamless integration of three business components. However, it is important to begin at the machine automation level, then incorporate the MES and finally the ERP. The reason for following this path is 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 Industry 4.0 solutions exist that can be added to an existing PLC/control platform. A good example is Caron Engineering. Founded in 1986, Caron Engineering has partnered with machine tool users for 36 years to digitize their machines.
With a focus on unattended operation, Caron Engineering provides an off-the-shelf offering called tool monitoring adaptive control (TMAC). With more than 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. 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, working with an integrator or working with an automation supplier, it is easy to target and quantify the investment required to obtain certain benefits. However, moving 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
ROI is more difficult to calculate for MES and ERP systems because estimating the ROI requires detailed information about the costs and benefits – and this can be challenging for these systems. For each of these, users can be certain 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 an ROI calculation will miss.
If the MES and ERP systems are complex, consider an incremental and iterative process that allows better benefit targeting. This process allows users to focus on a specific problem 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 MES and ERP.
The next step is to evaluate the potential soft savings. This is where MES and ERP systems thrive and realize the real purpose of digital transformation. In this phase, it is important to identify and quantify manual tasks that can be automated. 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 advance a company’s competitiveness. For the ROI calculation, however, companies should focus on the time saved and redundant tasks that can be eliminated.
Industry 4.0 ROI: Focus on immediate problems, solutions
While going 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 accommodate every aspect of Industry 4.0. Work to find technology partners that can help navigate the company’s transformation. Partners may differ for each stage.
Select partners focused on unifying the PLC/control, MES and ERP system data into information that will address manufacturing inefficiencies, continue to support employee involvement for innovation and be built on standard industry hardware, software and communication protocols.
KEYWORDS: digital transformation, Industry 4.0
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