How to Calculate ROI from Your MES
Digital transformation of factory operations begins with the implementation of a Manufacturing Execution System (MES) solution.
However, decision-makers often lack a clear understanding of the Return on Investment (ROI) for an MES, which leads to perceived business risks outweighing their perception of the value, and results in failures or delays in undertaking an MES implementation.
Operations remain hostage to processes that lack attention to detail and continue to utilize guesswork to handle production complexity, resource allocation, supplier expectations, and customer demands.
Correctly calculating the ROI on an MES implementation is very straightforward and one of the most strategically rewarding exercises you can undertake. The result will be a clear understanding of where your inefficiencies are, what they cost your operations, and what needs to be done to drive the necessary operational improvements.
Let's review what exactly is ROI, how to calculate it for an MES, and how you can use it to achieve real value for your manufacturing business. We first start with some core definitions and guidance on the approach to take, and then we show an example generated for a real customer.
What is ROI and why is it important?
Return on Investment (ROI) is a performance measure used to evaluate an investment's efficacy or compare the effectiveness of several different investments. ROI attempts to directly calculate the amount of return on a particular investment relative to its cost.
Calculating the ROI on a software-based system presents a challenge given that the manufacturing industry is used to calculating this on hard goods, such as machine systems, with an easily computed amortization schedule, depreciation schedule, versus the cost and improved throughput.
By calculating ROI as the gain (or return) from an action (such as implementing an MES) divided by the cost, this only delivers a hard return over some time. This figure does not factor in soft returns, which is a primary benefit of an MES. This calculation will represent just a single point of investment and not the overall benefit. Manufacturers can still utilize the standard ROI formula to evaluate an MES implementation's value. Still, it requires a different approach to best measure the actual value within a factory line accurately, over a defined timeline.
Effectively Calculate the ROI of Your MES
Assess Project Goals
Most MES projects are unsuccessful when a clear scope has not been identified. As you continue to increase functionality above the core goals of the project, the cost will rise. The best tactic is to eliminate non-standard functionality that does not equal an adequate return. Focus solely on the core project goals to stay within your proposed budget. Remember: Additional scope can be added to the project in later phases.
Evaluate Immediate Savings
The decision to implement an MES solution begins by looking to solve a specific production problem. It could be a lack of production data, too much scrap, or scheduling errors, most likely a combination of this and more. A cost is associated with all of these challenges. The MES that immediately addresses these, and improves your ability to execute, will deliver a return equal to the cost in a much shorter period of time.
Potential Soft Savings
Soft savings are critical for determining the true value of an MES. Review the expected traceability and efficiency gained with the MES solution in place. Assess what can be automated that was previously done manually. Manufacturers will see significant gains in reporting accuracy and the removal of non-value tasks.
Consider the Value Over Time
The benefits of an MES grow with your production line, and your ROI should reflect these savings. Let's say in an operational environment, the return on an MES for one-year is $500K, then the ROI for 10 years is simply viewed as $5 million. On the contrary, companies report the savings accelerating as additional efficiencies and benefits are uncovered, leading to rates that can be many multiples of the previous year.
A Practical Example
The following ROI calculation represents a simple and highly conservative approach, using only first order savings information, primarily labor and yield improvement.
The key components of labor are management, engineering and operators. We focus just on engineering and operators here.
Assumptions are based on a $10M business, using 20 operators with 4 engineers, performing and tracking 15 assembly and test operations, with a per unit cost of $10. Assuming the minimum time savings of 5% for operators, 20% for engineers, and a marginal yield recovery of 1%, the break even point is 6 months.
With overall MES installation and license costs totalling $60K for the first year, the ROI is 2X in this first year. And will compound in successive years!
This model should make it clear that most companies do not realize just how expensive lost or unproductive engineering time is.
If you were to add in other benefits of an MES into this model, such as improved machine utilization, lower maintenance costs, lower inventory costs, and faster time to market due to rapid order fulfillment, and lower RMA or field failures, the ROI becomes magnified exponentially.
The Benefits of an Manufacturing Execution System (MES)
We can honestly offer you a dozen reasons why an MES can benefit your production line, however, here are a few key reasons why an MES will significantly improve your current operations.
New Product Introduction - Rapid change management is a requirement for addressing today's advanced manufacturing complexities. To stay current within the industry, corporations must eliminate unnecessary development and administrative steps to reduce costs and product development times. RunCard & DataCard manages both rapid prototyping and high volume production in the same system. Creating knowledge feedback loops between product lines and factories, leads to improved operational synergies across an organization.
Serialized Traceability - Serialized unit traceability provides complete genealogy, including material and component supplier source information, product testing, and QA results. Only Intraratio takes this to the next level, with integrated product yield and performance data.
- Data Automation - Assembly, test, and sensor (IoT) systems are an integral part of production throughput and quality control. Intraratio's solutions communicate directly and indirectly with assembly, test, and sensor systems. Our systems can automate production and inventory transactions to reduce labor costs and improve quality.
- Inventory Control - Our feature-rich API tackles inventory consumption tracking and can be automated to reduce labor costs and errors, resulting in high precision inventory tracking.
- Supplier Integration - Intraratio's solutions have successfully interfaced with data feeds from some of the largest global suppliers, such as TSMC, Amkor, Fabrinet, Delta Electronics, and Freescale. Through this integration, operational performance and inventory tracking are improved while reducing costs due to manual transactions and supply chain errors.
Cloud and On-Premise Manufacturing Execution System - Intraratio's solutions can be deployed on-premise, in the cloud, or a hybrid of both. This provides a highly flexible system to realize cost savings and operational efficiencies with today's computing technologies.
Now that we have reviewed how you can calculate ROI for MES, compare and apply this to your current shop floor operations.
Remember, the best way to assess the ROI of your MES is over a period of time. If you are currently seeking an MES to help solve your production issues, provide full traceability into your factory line and more, contact us, and we will be happy to assist you in finding the best solution for your current operational needs.