Digitizing the production floor is a major investment in the efficiency and success of a manufacturing business. However, manufacturers want to know beforehand what costs are involved, how disruptive the implementation of a digital manufacturing execution system might become and particularly, what return on investment they can expect from digitizing the production floor.
Difficulties with determining the exact return on investment (ROI) of implementing a manufacturing execution system might lead to the assumption that business risks outweigh the potential value, resulting in delays or even refusal of implementing such a system. So, how do you determine the ROI for a smart manufacturing software solution and how can you use this method to add real value to your manufacturing business?
Let’s start with some basic definitions before we have a closer look at how to develop a business case and calculate the ROI for a manufacturing execution system.
Manufacturing execution systems (MES), or manufacturing software, make production and compliance processes more efficient and reduce costs. An MES saves a manufacturing business time as operations can run smoother and more effectively due to the digitalization of the production floor. Digital production and compliance checks replace pen and paper processes, creating full and real-time visibility.
One central, usually cloud-based system, streamlines processes and data flow along the production line and between departments. The manufacturing software, usually integrated with IoT-enabled monitoring devices, collects, manages and analyses the production, planning, traceability and maintenance data and handles all tasks and processes involved in making a product. Based on this real-time actionable data, manufacturers can make fast and accurate business decisions, eventually accelerating the time to market of their products.
MES commonly also enhances the manufacturer's quality management as it stores and manages all quality data in one central place. Quality control checks are actively managed, e.g. by alerting operators of upcoming or due tasks. The MES alerts manufacturers in real-time when issues occur, enabling them to initiate corrective actions immediately, increasing overall quality and reducing risks,
In general, the primary benefits of using a manufacturing execution system come from streamlined production as well as a reduction in labor, operational and warehousing costs. But when evaluating the return of investment of a manufacturing execution system, manufacturers need to consider tangible benefits as well as intangible benefits.
Tangible benefits are those that can be easily identified and calculated whereas intangible benefits are more difficult to measure. But both types of benefits influence the ROI of the manufacturing software. Figure 1shows some examples of tangible and intangible benefits of a manufacturing execution system.
Manufacturers can easily quantify and measure the tangible benefits of a manufacturing software solution. Tangible benefits might differ between manufacturing businesses, but some examples are:
- Enhanced data management in one central location to streamline processes and avoid duplicate data
- Digitization/automation of tasks to eliminate manual errors
- Improved allocation of resources, enhanced production planning
- Improved uptime of equipment due to improved preventative maintenance
- Real-time analytics to uncover bottlenecks, process improvements
- Comprehensive digital traceability
- Increased quality due to enhanced quality management
- Reduced product release times
In addition to the tangible benefits you are expecting, you need to think of the intangible benefits as well and give them a numerical value to calculate the exact return on investment. Intangible benefits often result from tangible benefits. For instance, the digitization of tasks in a user-friendly app can streamline processes but can also lead to higher staff retention.
Example of intangible benefits:
- Improved operator satisfaction
- Standardized procedures
- Single source of truth with a cloud-based system
- Enhanced reporting
- Quick and accurate decision-making
- Better customer service
- Reduced carbon footprint due to use of less resources (e.g. paper, less distance travelled) and alignment with sustainability goals
The ROI is a calculation to evaluate the efficacy of an investment. While there are several factors to consider when evaluating the ROI of a manufacturing software project, it basically compares the estimated or actual cost of the investment with the value that the investment will generate. Subtracting the costs from the income calculates the profit generated by the project. The result is divided by the costs to calculate the ROI (1). The ROI calculation is as follows:
To calculate the ROI for a planned project, the calculation is as follows:
It is important to note that the ROI focuses only on the return of the initial investment. However, investing in smart manufacturing software delivers recurring value that is not covered by the traditional ROI calculation.
Manufacturing businesses can still use the traditional ROI calculation to evaluate the value of the initial investment. However, recurring value needs to be considered when manufacturers want to define the long-term benefit of investing in an MES. It is, therefore, advised to assess the exact benefit of a manufacturing software solution over a longer time period.
Moreover, additional costs that have not been anticipated can occur during implementation so that the previously estimated ROI might not be able to be met.
You can check out our ROI calculator to easily evaluate the ROI plus the monthly savings of investing in smart manufacturing software.
Developing a business case and calculating the expected ROI of investing in a manufacturing execution system help you make data-driven decisions to see if the investment is worth it.
The MES should ideally be able to be adapted to the established well-running processes that are already in place, not the other way round. However, the implementation of a manufacturing software solution offers you the opportunity to get a clear picture of where your operations are inefficient, what these inefficiencies cost your manufacturing business and what measures you can undertake to improve your operations. A smart manufacturing software offers sustainable value in form of productivity and efficiency gains due to process improvements based on the actionable data that the software generates.
Clearly define the objectives that the manufacturing execution system needs to achieve. These objectives may vary from business to business but are essential to prove the benefits of implementing any software.
By mapping all your processes, including the different steps, operators and forms involved, you can identify all steps that do not add value to the process and/or create waste. You can use our 4 tips on how to digitize your processes for this task.
You can apply lean management practices to see which production and compliance tasks and processes produce waste or do not add value.
A good exercise to do so is listing all major issues and errors that have happened in the last one or two years. Examples are:
- Manual recording or calculation errors
- Data inconsistency
- Duplicate data entries
- Expensive recalls
- Delays due to slow data flow
- Oher costly errors
These issues can also guide you later in finding the right manufacturing execution system that can help you solve these problems.
Measure process and batch running times, overall equipment effectiveness and the number of occurring defects before implementing the manufacturing execution software helps you to better evaluate the changes that you make with the implementation of the MES.
Create optimized processes where all steps that lead to waste and that do not add value to the process are eliminated. Analyze what features or process changes are needed to solve the non-value adding tasks identified in point 3.
You also need to evaluate which pre-conditions need to be adjusted to implement these optimized processes. For example, you may want to invest in a smart manufacturing software system that is capable of creating and printing barcodes for tracking and tracing purposes if you want to enhance traceability throughout your factory. Another example would be the necessity to integrate your manufacturing solution with IoT enabled monitoring devices if you want to automate your temperature monitoring in your factory.
Each manufacturing business has different pressing needs that need to be solved. So, compare and evaluate the different manufacturing software solutions on offer and choose the software that offers solutions to your most important problems. Additional points to consider are the software’s capability to streamline your operations as well as its easy integration with monitoring solutions and other existing systems.
Stick to the features/functionality that help you achieve your goals. Evaluate what immediate savings the manufacturing system can offer. In addition, analyze what soft benefits the solution can provide.
The implementation of the MES software should occur without disruptions on the production floor. Moreover, maintenance requirements of the software should be reduced to a minimum. A cloud-based system outsources maintenance so that you can focus on your core business, for instance. Furthermore, is the system easy to use and of benefit for your stakeholders?
Choosing a manufacturing software that is optimized for your industry and business will certainly have the biggest impact on your business. Focussing on the individual requirements of your business when considering different systems and their features will help you to make an informed decision and get the highest ROI possible.
On a side note, successful change management is a key factor for the long-term success of the MES. So, consider the buy-in of all stakeholders to avoid low adoption rates among operators that may hinder process improvements.
Before using the ROI formula mentioned above to calculate the return on investment of the MES, list all the expected costs and benefits involved. Examples of potential benefits could be higher batch throughputs, cost reductions due to streamlined processes or reduction of staff needed to perform the tasks.
Other investment costs apart from the software subscription may involve staff training, implementation costs, additional features, consulting and maintenance fees or the costs for purchasing monitoring devices if needed.
You can then calculate the expected ROI or simply use our ROI calculator.
The following practical example of an ROI calculation (see figure 2) is based on a medium-sized New Zealand food manufacturer with 50staff and three production lines.
The ROI calculation represents a simple approach, using only the following metrics:
- Number of batches produced
- Number of paper sheets used per batch
- Number of operators in the production area
- Average hourly pay of operators
- Average time per week taken for reviews/getting audit-ready
- Average hourly pay for Quality Assurance staff
- Percentage of food loss
This example makes clear how expensive it is for manufacturers to stick with manual recordings and pen and paper processes and how much cost savings lie in digitizing those processes. A medium-sized food manufacturer could save up to $22,646 per month simply by digitizing their paper-based checks and processes.
Investing in a smart manufacturing software system would mean a spectacular 2276% return on investment for this manufacturer. If you add other benefits, such as improved scheduling, lower maintenance costs and a faster time to market, the ROI is likely to increase exponentially.
In general, there are three main metrics manufacturers can work on to increase performance: Cost, number of defects, and production time. Reducing costs allows businesses to maintain profits. Decreasing the number of defects or errors means fewer resources needed to produce final products, leading to higher productivity. And reduced production time reduces costs and increases profit due to higher efficiency.
Smart manufacturing software can help manufacturers to work on these different metrics to increase the effectiveness and efficiency of operations. However, the long-term success of implementing a manufacturing platform is based on the manufacturer’s willingness to eliminate bottlenecks or inefficient operational processes that may be uncovered by the MES’ operational data.
If you are interested in how smart manufacturing software can help you with reducing costs, the number of defects, enhancing quality management and accelerating product release times contact us today.
Harvard Business School. (2020). How to calculate ROI to justify a project. https://online.hbs.edu/blog/post/how-to-calculate-roi-for-a-project#:~:text=Return%20on%20Investment%20Formula,then%20divided%20by%20the%20costs
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