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Making the Case for Total Cost of Operations (TCO)

POSTED 09/17/2015  | By: Kristin Lewotsky, Contributing Editor

Convincing purchasing managers and management focused on the bottom line to spend more for high functionality equipment requires reaching out with the right messaging.

TCA vs.TCOToday’s automation technology can enhance productivity, decrease energy consumption and improve performance for assets across the factory floor. It enables the production of machines capable of manufacturing more product with less effort, time and cost. Although the benefits seem obvious, upgrading or buying equipment with this increased functionality requires an investment. This forces organizations to make a trade-off between total cost of acquisition (TCA) and total cost of operations (TCO). This would be a nuanced decision to make under any conditions. It gets significantly harder for organizations in which the people who hold responsibility for specifying, running and managing the assets are different than the ones who make the buying decisions. Fortunately, there are some techniques and tools available to ensure that the optimal decision gets made.

Let’s start by considering some of the factors that go into TCA and TCO. Cost of acquisition starts with the engineering hours devoted to specifying, along with any individual proprietary hardware, controls and software elements. It also takes into account the total cost of the equipment, including not just the physical hardware and software but shipping, assembling, commissioning and integration with existing assets, as well as testing and certification to any relevant standards. Cost of operations is similarly broad and includes the cost of utilities, cleaning and sanitization, maintenance and labor, as well as continuing education.

Clearly, capital expenditures (CAPEX) and operating expenses (OPEX) are two very different beasts, right down to how they’re treated by the US tax code. CAPEX gets depreciated, or written off, over the course of multiple years while OPEX gets charged as an expense as soon as accrued. There was a time when this caused organizations to put less effort into reducing OPEX. All that changed with the recession. Suddenly, manufacturers focused intensely on cutting costs through lean manufacturing. Coupled with increasing concern around climate change and its implications for corporate citizenship, this significantly increased the emphasis placed on reducing energy consumption and cost of ownership.

The motion control community has developed products and services designed to help manufacturers get as much productivity from their equipment as possible. A certain percentage of end-users have been quick to take advantage but others stay on the sidelines. All too often, that is not so much an informed choice as one that is inadvertently driven by the decision-making structure of the organization itself.

Manufacturing job roles
Details of the structure vary from company to company, but let’s run through key job roles affected by automation choices. Each of these positions has a different mandate driven by a different set of concerns and priorities:

  • The plant or factory manager assumes overall responsibility for the performance of the facility. This person cares about factors like maximizing profitability, minimizing resource use, maintaining a safe working environment, and getting the most out of the equipment.
  • The operations manager holds responsibility for running the equipment and making product. Key concerns for this job role include maximizing throughput, minimizing downtime and optimizing quality. Operations managers can gain an objective measure of some of these factors using operational equipment effectiveness (OEE), which is essentially a measure of the percent of theoretical performance the actual equipment/operation accomplished in a specified timeframe.
  • The facilities manager keeps the facility up and running. He or she cares about aspects like utility costs, facility maintenance and environmental factors like climate control and use of space.
  • The concerns of the automation engineering team are more granular still. They are responsible for fine-tuning the equipment to deliver optimum performance and peak product quality. This includes designing and specifying new equipment and upgrades to existing equipment. They care about factors like functionality, intelligence, networkability, speed and ease of integration.
  • The maintenance staff is responsible for keeping the equipment in top form. They need to maintain the machine, diagnose faults and make repairs as quickly as possible. They care about onboard diagnostics, ease of integration, anything that will help reduce downtime and ensure optimal performance over the lifetime of the machine.
  • The purchasing manager or director is charged with being a good custodian of the company’s funds. Obviously, cost is a major consideration, but also the logistics of sourcing equipment and materials, inventory control, the availability of spares and the cost involved, scheduling, etc.

A quick glance at this list reveals the potential for conflicts among stakeholders. The plant and operations managers want to produce quality product at the lowest cost. Maintenance can support those objectives by keeping the line running to maximize OEE, but their ability to do so depends on the equipment. Facilities managers want to minimize the cost of operating the facility, which also depends on the equipment. Engineering can design, specify and build equipment that can address all of those objectives using the latest technology offerings, although the cost may be higher than less functional equipment.

Unfortunately, higher capital expenditures conflict with the primary goal of the purchasing director, which is to control cost. This can lead to “penny wise and pound foolish” decisions that minimize short-term capital outlay but incur far greater cost long-term through inefficient operation, frequent repairs, greater utility bills and substandard product. This situation is guaranteed to please no one, frustrate everyone and ultimately fail the organization. There are ways to address the problem, however.

The motion value proposition
Today’s motion control technology provides a number of solutions that help control TCO. Those include:

  • Sensors and smart components: Controllers, drives, motors, encoders and standalone sensors capture environmental and operational data from the equipment.
  • Communications networks and protocols: Networks capture data from the components on the shop floor and transmit it to the top floor for analysis in real time.
  • Analytic software: Energy and performance auditing tools provide feedback at a glance on performance and consumption. This enables management to monitor factors like OEE and energy usage, making changes to address costs – for example moving energy-intensive operations to the night shift to take advantage of lower utility rates.
  • Autotuning drives: These devices simplify installation and commissioning, then continue to make adjustments over the lifetime of the equipment to address wear to other components and changes in load. They also send automatic alerts, warning of the potential need for maintenance, which helps prevent unscheduled downtime.
  • Networked safety and safety-enabled components: Commands like Safe Direction, Safe Speed and Safe Torque protect operators while allowing them to clear jams, for example, or safely clean equipment while the machine is running.
  • Common DC buses: Decelerating axes can share power with accelerating axes, not only reducing consumption but limiting peak power demand. This value typically controls the energy rates for the following quarter, so it’s an approach that can provide big savings.

The type of technology listed above provides the visibility that the factory manager and operations managers need to better perform their jobs. It reduces utility bills, which addresses the concerns of the facilities manager. The components and systems deliver top performance to satisfy engineering teams and they speed and simplify maintenance, decreasing downtime and enhancing performance while minimizing staff hours.

All of these factors combine to cut total cost of operations, which supports the mission of the purchasing manager. It’s important to consider this in proper context. Factory automation is a long-term investment. Machines are designed to last for multiple decades. The electronics can last for 10 or 20 years. That means that a system designed to minimize cost of ownership will deliver savings year after year.

The value of remote monitoring and audits, for example, can’t be overstated. Mark Ruberg, Vice President, business process at Pro Mach Inc. (Loveland, Ohio) talked with a customer who was running at capacity with their 1000 unit per minute machine and considering buying a new one. “We did the machine audit and found out it was running at only 700 units per minute,” he says. “We told the plant manager that we could get it back up to 1000 units a minute. You want to buy another machine, and you may eventually need to, but maybe you can put that purchase off for a while." Words guaranteed to warm the heart of any purchasing director.

Individuals up and down the food chain derive value from today’s motion technology. The problem is that the very technology that brings such value can be difficult to explain to CXOs and managers who come out of finance or business classes. Discussions of Safe Torque and Safe Speed will not necessarily be enough, says John Kowal, director of business development for the automation program at B&R Industrial Automation Corp. (Roswell, Georgia). "I personally believe that what we need is a CAO, a Chief Automation Officer who's not the VP of engineering, or manufacturing." That person would have the technical savvy to understand the argument for these types of technologies. In the meantime, however, your best bet is to focus on emphasizing solutions.

Make the case
The key thing is for individuals in the organization to communicate. In a dysfunctional organization, people fall back on the clichés – the engineers always want the very best quality parts, the purchasing managers order substandard components to save a few dollars. Having the purchasing and engineering departments at one another’s throats is the surest recipe for getting nothing done. The goal is for engineering groups to work with purchasing.

“We’ve seen engineers who have educated the purchasing group and other engineering teams,” says Bryan Griffen, engineer at a top global food and beverage company and chairman of OMAC. “They have worked with corporate groups and with upper management and factory management to present these advanced technologies and sell the concept to the rest of the company. Basically, rather than trying to ram the buy down the throat of the purchasing department, they are seeking their assistance in ways to reduce costs.”

In the case of end-users, the first step is to find an internal champion. We’ve already discussed ways advanced technology can further the goals of upper management. Educate them in the many ways the technology can solve their problems. It may also be necessary to have conversations with members of engineering who do not specialize in automation. Packaging engineers, for example, may be more focused on materials and machine throughput than the nuances of motion components. Before trying to evangelize elsewhere in the organization, make sure the whole department understands the value proposition.

Quantify the benefits
Purchasing managers want to make the best financial decision for the company. From their standpoint, in the absence of any additional information, that means defaulting to the lowest TCA. They need to understand the bigger picture – that a slightly higher capital expenditure will improve the overall operation and productivity of the factory while reducing TCO over the course of a decade or more.

Networked safety, for example, can significantly decrease downtime compared to the hardwired versions. Kowal points to a beverage customer that added networked safety on one line. The first year, they achieved productivity improvements amounting to almost $1 million. Contrast that with a different customer still committed to lockout, tag out hardwired safety for which the entire line shuts down every time somebody hits an e-stop button.

When the individuals at the company using hardwired safety heard about the savings accrued in example above, they listened. "Being told about the benefits of networked safety in the abstract is one thing, but the reality of almost seven digits worth of savings is enough to get the attention of both management and purchasing,” he says.

Focus on the value propositions
This one holds especially for the motion providers. It’s easy to become enamored of technology. After all, that’s where the true value of these components lies. That may not be the best way to get the attention of the end users however, not even the engineers.

At a packaging show, for example, every other booth may be showing drives in a demo. After a while, they all begin to blur together, especially when you consider that the people walking the aisles are equally likely to be purchasing directors or operations managers as automation engineers or machine builders. Focus on what they really care about – how will these products solve their problems. Save the specifications for later.

“Technology providers are very good at explaining the capabilities of a new device but they are not really good at saying, ‘If you’re an automation guy, here is the benefit you can sell. If you’re a machine builder, these are the things that it is going to do to make your machine better and if you’re a purchasing person or a factory manager here is what the cost model would look like for you,’” says Griffen. Technology providers are more focused on showing what the technology does and leaving the end-user to determine the value proposition. That can be a mistake. “Don’t leave it to the poor guy in the factory to come up with the justification,” he adds. “Give it to him.”

Tailor the message
Finally, focus the message for your audience. For a small- to medium-sized company packaging items on a few tabletop machines, for example, a one percent savings in TCO might not attract a lot of attention. That changes with scale. “For a big organization like automotive manufacturing, saving one percent is huge," says Atef Massoud, motion and drives engineer at Omron Automation and Safety (Hoffman Estates, Illinois). "The key question is how we make the argument to the decision makers. Accounting and purchasing departments usually [evaluate numbers] over three or five years. So if you say you will save five percent, they will not have a good feel for what that means. Better to extrapolate, letting them know how much they would save over their typical planning period--in this case, five percent times five years. I think it would be more convincing for the decision makers in purchasing to say ‘Oh yeah, this is significant, a high savings of 25 percent. We should use this one.’"

Ultimately, success depends more on people skills than technology. Focus on solving problems, quantify benefits, show stakeholders that embracing the technology makes it easier for them to meet their goals. “At the end of the day, the purchasing people just want to do something that will help the company financially,” says Thomas Doney, engineer at a tier one food and beverage company and chairman of the PackSpec working group at OMAC. “Get them to understand that when we evaluate a supplier, we are not just looking at the price we are looking at the total cost of ownership.” Frame the discussion in the context of benefiting the company as a whole, and with the support of management, your argument will carry the day.