A Guide on how to calculate ROI of your Conveyor Equipment?
Updated: Jun 5, 2020
Excel Conveyors manufacturer conveyors for small business owners to large corporations. While large corporates have their teams and departments for calculating ROI - return on investments, small business owners are often confused about the term Return on Investment.
Why is the word Return on investment so important?
When you are running a business, your cash flow is defined. You bring the raw material, you convert them in finished goods, you sell them, you get the money, and you pay back supplier payments and salary. But when you have to purchase an asset or capital equipment, straightway that much of funds from your cash flow are locked. They are moved out of the cash flow, which is going to affect your daily working capital and so your capacity.
In simple layman terms, ROI is how you are going to recover your investment. There is no ROI accounting formula that will directly give you the ROI of the equipment. This is because every business is different and every business owner has own mindset to run and analyze his business. A small business owner has to make a simple accounting of what are the differences before and after the purchase of Conveyor Equipment? One has to analyze how the conveyor is going to add the difference to his/her life. When you understand this, a large amount of picture is clear for your ROI analysis.
How do you make the decision to buy the conveyors or capital equipment for your factory automation?
Will it be the right decision?
What will be the cost?
How to justify this cost financially?
Will it be the right decision in terms of finance?
What if the decision goes wrong?
All the above questions have one thing to answer The ROI - Return on Investment helps you to make the right decisions about buying. The payback period tells you how much time it will take to recover the investment?
Let's take an example
If you are looking for a packing conveyor, where you want to sort the raw material. You find a direct reduction in manpower, there will be an increment in the quantity of sorting and grading. There will be improvement in the quality of the raw material sorted. For this, you will have to maintain a record of things, e.g. how much time is required to sort for a defined quantity. How many other supporting labor are required to main sorting teams. What is the quality of sorting? How many times, the packing team have complaints about the sorting team? You can maintain such records.
Above is the actual scenario. You have to mark the proposed new scenario. Number of labor required. New increased speeds of sorting. You also have to consider the increased speed of packing. Now the difference in this amount is your actual saving -- it is your profit after purchasing the conveyor.
This process will also help you to generate the requirements and specifications for the conveyor.
When you evaluate in deep, you will understand that whether a powered conveyor is required or a gravity roller conveyor will work?
What will be the length of the conveyor needed?
I may have to do trial and error so variable speed for the conveyor is needed.
These specifications will help your RFQ process faster and accurate. The conveyor manufacturer can add more value, when complete information is received.
Factors for calculating ROI of Conveyor Equipment
1)Cost of the conveyor.
The cost which you are paying to the supplier
Installation & Commissioning Cost
The buyer should inform all the possible information with the conveyor equipment supplier. Buyers should try to find out hidden costs, such as some variant or changeover parts, electrical costs, etc. If you are planning expansions in the near future the same also needs to be considered and evaluated to suit in the same equipment or capital budget.
Is there any workforce reduction due to this conveyor equipment purchase? Consider the labor cost including
B) Indirect Expenses such as canteen, insurance, PF etc.
3) Direct Benefits to production
What are the direct benefits to manufacturing activity due to the installation of conveyors
Labour productivity increases - Due to ergonomic working, productivity increases.
Higher Speeds - Higher speeds will increase higher sales in turn increased profits.
4) Maintenance Cost of Conveyors
What is the maintenance cost of conveyor equipments?
Do I need to maintain separate manpower for it?
Is it maintenance free?
What is the preventive maintenance cost/year?
5) What is the Bank interest
Bank interest on the funds invested.
ROI = Benefits / Investment
ROI - return on investment is simply the profit/investment. The higher the result higher is ROI. Higher ROI means faster recovery of the investment.
Steps to calculate ROI
Find out your current cost without purchasing the conveyor equipment - C1
Above mentioned costs C2
ROI = (C1-C2) / C2 = Profit / Investment
Payback period = C2/(C1-C2)
Intangible benefits cannot be measured but affect the overall company performance or help to increase company brand image.
Labour Supervision Cost
Assume that there is labor reduction from 20nos to 10nos by purchasing conveyor equipment. If 10nos labors are reduced definitely the supervisor can have more time to do other priority work.
Product Damage cost & Brand Image.
If damaged products are received by customers, the brand image of the company is affected negatively. Conveyor equipment reduce the product handling and maintain the products. Due to this, the customer loyalty towards brand increases.
Are you planning to buy a conveyor? Call us now to get the benefit of our expertise in this field.