Equipment Justification: Do A 360˚ Review

IN-PLANT MANAGERS sometimes develop a status quo perspective that needs to be refreshed. With some frequency, I’m reminded of the manager who cautioned me on a press justification study the press manufacturer was paying for: “I don’t want you getting my people too excited about a major new press, to then have them disappointed again.”

My response: “Let’s see what the numbers tell us.”

We owe it to our subordinates—as well as to our superiors—to ask our suppliers, our customers and our fellow associates, “What needs to change, and what opportunities have we not addressed?” I humbly (and occasionally) admit that I have a gift for “telling a story with numbers.” That’s what an effective equipment justification study is about.

Issues To Examine

As you begin to create your analysis, you should expect to be confronted with choices on values to assign or assume. My strong recommendation is that you select the conservative path at every juncture.

For instance, you may hear that a certain press may produce 50 percent more impressions per hour than you currently print. In this instance, unless you are committed to different management approaches and training in your press room, cut that 50 percent increase capability by at least 50 percent. (Too many times a new piece of equipment with much higher performance capabilities is installed, but your key personnel don’t receive any different training or supervision.)

With this caution in mind, here are 12 issues every in-plant manager should examine when attempting to justify new equipment:

1| Equipment downtime: Downtime can eat at your organization’s reputation, morale and performance numbers. Additionally, when a piece of equipment frequently goes down, it impacts many other departments. Try to get an accurate, conservative estimate of lost revenues and productivity from equipment going down for repairs.

2| Equipment repairs and maintenance: Repair and maintenance costs are like leeches. They suck at your organization’s performance and performance expectations. Don’t just count the repair bill. How much was also lost in wages that were unproductive and revenues that were never billed? Consider all departments when answering this, not just the department whose equipment required repairs.

3| Equipment productivity: I’ve heard too often, “But that equipment is paid for!” Maybe you want your competitors thinking that way, but you shouldn’t. What you want is the most productive system you can afford—and that is economically prudent. If one new piece of equipment can produce two or three times as much as what you have, and you have enough work to really keep it busy, then how does this affect your overall labor costs? Is there more work available for you to keep that equipment busy?

You’ve accomplished little if you spend precious dollars on work that’s limited in how much is available for your in-plant to produce. However, check with your customers and even potential customers. How much work is available that you’ve not been pursuing for lack of cost-effective equipment and available production time?

4| Spoilage and unnecessary rework: Reliability of equipment and personnel can be critical. Spoilage can cost you far more than rework time and materials. In a worst-case scenario, you can lose a customer, or even a market of customers. That can take years to regain in today’s market conditions.

5| Utilities: Natural gas, electricity and water are increasing in costs in almost all markets. Additionally, many newer models of equipment are designed to be more efficient with fuels and consumables. Don’t overlook what might be saved. What you are ultimately doing in this justification process is telling a story through changes in cash flow—and utilities seem to be a growing part of that story in today’s world.

6| Estimating (historical) hit ratios and potential for additional business: Not all organizations keep good estimating records or estimating logs. Whatever tools you have, review the last year or two of estimates that the piece of equipment you’re considering could help you win. A 2 percent increase in work won might make an exponential contribution—say a 5 to 15 percent increase in your bottom-line profits.

7|Depreciation: Depreciation is a non-cash expense. Importantly, it’s a source of additional cash that was created to allow a company to identify and set aside funds representing the replacement of equipment/technology you are using.

8| Improved workflow—especially for other departments: Production flows tend to operate at the speed of their slowest link. Increase the speed or flow of the slowest link and you can expect to increase the flow or speed of the entire chain. Be sure to examine if the equipment you are considering has the potential to increase the overall speed of workflow through your operation. One question to ask: Is there more work available to produce?

9| Reduced head count: Lowering your shop’s head count can have a profound affect on overall cash flow and speed of payback for equipment or technology you’re considering. Note: Be sure to include out-of-pocket benefits and supervision that might also be saved.

10|Improved employee morale and reduced employee attrition: Most organizations require all personnel to be cross-trained. This increases an organization’s capacity, productivity and consistency of quality. Similarly, your skilled personnel represent a form of organizational capital or investment that does not show up on your balance sheet. New technology or equipment tends to improve morale, as new skills are required to be learned and demonstrated. Improved morale tends to reduce employee attrition. Rule of thumb on reducing employee attrition: for each employee not lost, the organization probably saves at least the yearly wages of that employee—generally recognized as the overall cost incurred to replace a valued employee.

11| Education and training: Sometimes (too often) new equipment is bought but fails to live up to the supplier’s stated performance. I strongly recommend that before any purchase occurs you: (a) check references of recent purchasers for their experiences of performance improvement; and (b) not “go the cheap route” of not investing in recommended education and training—for both front-line employees, and supervision—that requires follow-up by the supplier.

12|Improved customer revenues: Customers prefer to use as few suppliers as possible. So your investment can lead to, not just the anticipated type of business, but a broader stream of work from a new customer, or a new customer market. Look at this issue and consider, conservatively, what might develop with a committed self-promotion effort.

Summary

In conducting an equipment justification study, you’re creating an approximate and representative picture, through numbers, of how your in-plant’s performance is expected to change if certain equipment or technologies are installed. Certainly, organizations are systems, and sometimes an investment requires multiple purchases—that is, more than one piece of equipment or technology.

Examining the different angles of the potential investment, and then converting those examinations or potential flows to numbers that represent cash flow, is what a great manager should be about on an ongoing basis—in order to improve the value of your organization to your customers, your investors and your fellow employees.

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Sid Chadwick, of Chadwick Consulting, works exclusively with graphic arts organizations, and particularly in-plant operations throughout the United States. He is experienced in conducting equipment justification studies, from a strategic perspective, for major equipment and technology investments. He can be reached at (336) 945-0645. Find out more at:

www.chadwickconsulting.com