5 Steps to Prove ROI for Implementing Automation

The message of “If you don’t automate, you’ll fall behind” is ubiquitous in the world of manufacturing. Industrial manufacturers of all sizes today are implementing robotic automation and evolving how they produce products to keep up with consumer demands. With the cost of robots falling  50% since 2005, the cost-benefit equation of automating tedious and repetitive manual tasks with robots has become much more attractive.

However, this messaging alone is often not enough to convince key stakeholders as to why industrial automation is necessary. By carefully assessing the potential returns on investment (ROI) of automation at your specific factory, you’ll be much more likely to convince stakeholders on the quantitative value and net benefit robots can bring to your business compared to the status quo.  Calculating ROI of automation can seem complex initially, but by following the five steps below, your business will be on its way to making a solid data-driven case for why automation will, or will not be, a solid investment.

Industrial automation ROI formula

Before we proceed with the steps of calculating ROI, it’s important to understand the straightforward formula for industrial automation ROI:

With this calculation, ROI will be expressed as a percentage instead of a ratio to make it easier to understand. The higher the percentage, the greater the benefit for your manufacturing business.

An important item to note is that you must determine an appropriate length of time to consider when calculating this formula. This can be anything from 6-month ROI, 1-year ROI, 5-year ROI, or more.

Now that we’ve reviewed the simple ROI formula, here are the five steps towards calculating ROI for robotic automation:

STEP 1:  Determine the cost of industrial automation in your factory

Adding up all the costs associated with implementing industrial automation in your factory is the first step towards determining ROI.  This is a crucial step as there are many specific costs to consider and include in your calculations.

Here are the key costs associated with robotic automation to calculate:

  • Total robot system costs: This is the one-time fee associated with buying and installing industrial robots. This includes the initial purchase price of the specific industrial robot, the cost of shipping, installation, training, and the cost of spare parts. This cost would be multiplied by the number of robots being purchased. Note that today, the fixed costs of industrial robots are lower than they ever been, and new easy robotic software like Forge/OS can significantly reduce the costs associated with robotic installation and training.
  • Maintenance costs: Today’s robots are highly reliable and maintenance costs tend to be minimal. According to the Robotics Industries Association (RIA), the typical maintenance cost is $500 per robot per year for lubrication and battery upkeep.
  • Operating costs: Calculating your operating costs for industrial robots should focus on power consumption per robot and the cost of yearly inflation. The RIA reports that the average medium-sized robot costs $0.50 per hour to operate, noting the average industrial robot uses 5 KW of electricity per hour at a cost of 10 cents per KW.  Robots that are smaller may use ⅕ the energy of large robots, while large robots may use double the amount of energy. It is recommended to estimate 2% annual inflation for the cost of electricity.
  • Training: Complex system components and the introduction of new brands or models of robots and PLCs can result in the need for significant training in the order of weeks.  Many vendor classes are $3-4k a week, and if you factor in lost time at work, travel and other expenses, it can easily cost $10-20k to train just one worker in a new automation solution, and yet they still won’t be able to manage the entire automated workcell.

By making your best estimate on the above costs related to the industrial automation equipment you are interested in buying, you will be able to most accurately analyze your ROI over time.

Step 2:  Forecast savings from industrial automation

Your second step in calculating ROI is to estimate your future savings as a result of implementing specific robotic automation systems. It’s important to keep in mind the following categories of savings:

  • Productivity Savings:  This is a percentage estimate of projected productivity gain  from implementing industrial robots. Note that robots can typically work significantly faster than manual operators and that they can work continuously without any breaks.  Robots also allow for additional shifts. This increase in productivity will depend on the specific robot you have purchased. After determining an estimated robotic output, determine how much manual labor would be needed to accomplish the same amount of robotic output. This labor comparison will give you an idea of your productivity cost savings.
  • Other Savings: There may be other savings that you may want to account for as a result of industrial automation. Note that some manufacturers expect labor savings to be an item in factoring the ROI of robots, but this may not be a significant area of savings. Due to the industrial labor shortage, it’s more likely that your existing factory laborers that are currently tackling repetitive tasks will instead be upskilled to higher-value tasks that robotic automation cannot tackle.

Step 3:  Generate a cash flow analysis for 1 to 5 years of ROI

Now that you have clear estimates of costs and gains of robotic automation at your manufacturing factory, you are ready to complete the formula and ideally create a cash flow analysis that shows year-by-year what the factories’ expected ROI will be over the course of 1 to 5 years.

One way to make a quick cash flow estimation is to use an online ROI Robot System Value Calculator, like the one offered by RIA. However, the downside of online calculators is that the variables are set based on industry averages for robots. It’s best practice to generate your own cash flow analysis that more accurately predicts the estimates associated with your specific robots’ maintenance costs, operating costs, productivity savings and more.

As you complete the year-by-year cash flow analysis, you will not only be able to determine at which year you reach the break-even-point for your investment, but you’ll also be able to graph your ROI overtime, showcasing the cumulative gains of your decision to switch to robotic automation.

Step 4:  Calculate the intangible ROI of industrial automation

Now that you are armed with the quantitative and more tangible ROI of implementing industrial automation, it’s good to also explore the more intangible ROI of robotic automation that can be difficult to summarize in one formula. Though these factors are less tangible, they are nonetheless important in the evaluation of industrial robots and the potential value they can bring to your factory.

Intangible ROI factors to consider include:

  • How much safer will your factory be by using industrial robots? How much can you reduce the risk of workplace injuries?
  • How much peace of mind will you and your stakeholders have knowing that the factory is using robotic precision to minimize errors that could have otherwise lead to customer complaints or compliance risks?
  • How much of your manual labor will be freed up for higher-level tasks that can more directly contribute to the long-term success of the business?
  • How much of your factory space will be saved by utilizing space efficient robots?  What could that free space instead be utilized for?
  • How will employees feel about the implementation of industrial robots? How will upskilling boost retention and aid in hiring?

Thinking about these intangible ROI benefits are often as important as tangible benefits when considering the investment in automation. Especially when it comes to safety, it’s critically important to value a safer workplace, which could be possible as a result of robotic process automation.

Step 5:  Test ROI assumptions and deploy gradually

After you’ve determined your quantitative and intangible ROI estimates, your last step is to begin testing your ROI assumptions and, assuming ROI estimates are positive, begin implementing where possible within your factory.  Manufacturers do not need to take on a large-scale, massive industrial automation installation if they aren’t ready to do so, or can’t afford the cost of mistakes. Don’t forget that most robotic systems can be launched in a phased deployment, and iterated upon with time to determine the most optimal applications for your factory.

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Identify the areas of your manufacturing process where automation can be implemented most easily and with a lower upfront; by pursuing one of these areas as a test case for automation, you’ll be able to review your previous ROI assumptions for accuracy and expand overtime the use of this automation.

Following these steps to evaluating ROI, your manufacturing business can more effectively assess the benefits industrial benefits can potentially bring and how it can impact revenues for years to come.

The fantastic news is that new robots on the market today are more affordable and productive than ever before, making the realization of positive ROIs faster than ever as well.  Automation can certainly offer the opportunity to avoid “falling behind’, but by knowing your ROI, you can determine with more certainty what the real costs are and what the potential return is that you can yield for your manufacturing company.