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Smart Capital Investment – Lean Thinking First – Chequebook Second!

By Tim McLean, TXM Managing Director

In manufacturing, technology constantly changes. New technology usually offers the opportunity of increased efficiency and lower costs to the machinery we have today. It is often breathtaking to tour trade shows such as the Austech Show about to open in Sydney or the Shanghai Machine Tool show and see the capabilities of the machinery now on offer.

Robots have revolutionised some manufacturing processes such as body welding, however they are complex, capital intensive and can reduce flexibility - approach with care!

However technology is expensive and increasing the fixed asset base of the business means that returns also have to increase. Businesses need to ensure that the cash provided to them by banks and shareholders is used in the most effective ways and generates returns that justify the risks taken by the investors. Unfortunately manufacturing does not have a great track record in achieving outstanding returns meaning that many businesses struggle to attract investment. On the other hand, a failure to invest in new capital has lead to the decline of businesses when the technology used has become too old and uncompetitive and the cost of replacing it too hard to justify. Careful decision making about capital investment is therefore critical to ensure the long-term prosperity of the business.

Don’t Substitute Money for Brains!

Another way of saying this is “don’t substitute money for brains”. Often automation is seen as the easiest and most effective way to reduce costs. However before ordering the robots, consider some detailed analysis of the current process. Use standard work analysis to highlight areas of waste and look for low cost alternatives to expensive automation such as improved layout, jigs and fixtures and eliminating tasks all together. If you still consider automation necessarily consider the level of automation. Enabling machines to automatically eject a completed part is often cheap and will avoid the need for the operator having to wait for the machine cycle to complete. Automatic loading of the next part is usually more complex and expensive (depending on the process), but can then allow the machine to continue one or more cycles while the operator completes other tasks. Automation to transfer the completed part to the next process is usually very complex and expensive and should be the last option considered.

Consider also the risks of automation. No machine is perfectly reliable and you should anticipate that the automated machine would have some downtime. I once observed a pump assembly line where a robot was used for packing at the end of the line. During my visit the robot malfunctioned leading to 10 assembly workers upstream of the robot having to wait while it was repaired. Consider these costs before pursuing automation.

Consider the Whole Value Stream and avoid “Monuments”

In many businesses a simple equation is applied when calculating the cost justification of investment. It goes like this: “if I double the machine speed and halve the number of operators I will make a labour saving of 75%”. That is usually true – for that machine. However the saving only reaches the bottom line if it applies across the whole business. Often the new fast machine becomes what we call in lean manufacturing terms a monument. The fast machine typically produces large quantities of product at high-speed. Efforts are then focused upstream to feed the new machine and then this typically leads to overproduction downstream. Batch sizes are usually increased in the name of “efficiency”. As a result downstream and upstream processes are forced to run less efficiently. High levels of work in progress are generated leading to considerable movement and transportation waste and the “monument” has to frequently stop to allow other processes to catch up. Therefore, when considering new equipment consider the impact on the whole value stream, not just a single process, and make sure that you aim to level the rate of production to customer demand (takt time) rather than focusing on maximising the output of the “monument”.

Make sure that the Equipment you choose Matches your Market – Biggest is not Always Best

Following on from the point about matching output to takt time above, it is important that the equipment you select matches the real current and future needs of your market. Again the typical cost vs. output equation may lead you to select the biggest the fastest and the most automated machine, but this machine is often the least flexible. To achieve the required cost savings may require big batches when the market trend may be towards shorter runs. The result will be greater inventory, reduced efficiency or both. Often two or three smaller, more flexible machines may provide a more agile and flexible result with lower capital cost and perhaps a slight increase in production cost. For example in injection moulding, the temptation is to go for large machines with higher cavitation (more parts per shot), however this greatly increases tooling and machine cost, increases the complexity and unreliability of tools, leads to large batch sizes and increased inventory. A series of smaller machines with smaller dies can often provide a simpler, cheaper, more flexible and more reliable alternative. Cost savings from the bigger machine are also often illusory since the same number of employees continues to be employed or labour savings get offset by increased maintenance and working capital costs.

Remember once you get the big machine you are stuck with it. Usually smaller, simpler machines are much easier and cheaper to adapt to new products or new uses or to move to new locations.

The Case for Maintenance Capital

So far I have argued in in favour of moderating capital investment, however it is important that businesses do invest in new capital. One of the key reasons that European manufacturers have maintained their competitiveness is their willingness to continue to update their technology. This investment should focus first on renewing the assets that create value for the customer rather than on adding labour saving automation to old machines. Investment in new machines that enable you to produce better quality, a better range of products and greater flexibility will support the growth of your business.   In our experience, privately run manufacturers understand the need to renew key technologies, while larger corporates in English speaking markets such as Australia often tend to focus on labour saving automation as this will give the short term profit benefit. A good rule is to maintain capital investment at the rate of asset depreciation. This has the effect of maintaining your fixed asset base at the same level, while ensuring that assets are renewed within their expected life. Businesses that rely on the gradual depreciation of their fixed assets in order to achieve improvements in return on assets will not have a long-term future. Eventually their aging assets will make them uncompetitive and they will either need major reinvestment or (more likely) close.

Finally, the assumption in this final paragraph is that you will replace your old machines with new machines. In the words of the Finance Director of the German chemical company where I started my career, “Second hand equipment is only slightly more expensive than new equipment” [when you consider the whole life cycle]