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Get Your Assembly Equipment For Free: How To Propose a Winning Capital Equipment Justification

The heat is on!! The direction is set for us in the U.S. Global competition is driving U.S. manufacturing to fiercely compete. Gone are the days when we can sit back and “crank out” thousands or millions of products per month just to make the budget hours. Lead times have shrunk. In most industries today, customers are demanding 1-2 day deliveries for standard products, just-in-time replenishment, top quality, and reliable delivery promises.

As an example, a recent survey we conducted of the NEMA electrical enclosures market revealed that customers are demanding 1-2 day deliveries from stock. Customers are also demanding high levels of reliability to the extent of 95-98% on-time-customer-delivery performance. In addition, markets are demanding improved service, both in the up-front order cycle, but also with post delivery service and after-market field support. With more and more companies adopting Six-Sigma strategies, top quality is a given. You can no longer get away with 10-15% defect rate. To top it off, they want better pricing, because they, too, are undergoing intense competition.

But that’s not all. The new emphasis more and more is now on specialization, or as we refer to it, “customerization.” Not only do they want products with high quality and short delivery, they also want some changes to a standard product. It could be a wiring harness knock-out slot 2” to the left of your standard slot located on your standard drawing. It could be a different PCB in a sub-assembly for a control motor drive assembly. It could be fire insulation in the chassis of an off-road tractor. So companies are faced with meeting the demands of the market by finding new ways to accommodate their customers.

To increase productivity and competitiveness, many companies in the continental U.S. have adopted Lean and Continuous Improvement philosophies and have incurred productivity gains through use of 5S’s and Kaizen events. They typically start by engaging in the “Lean Learning” process by hiring training firms to train in Lean philosophy. This usually leads to facilitation of Kaizen events where employees get their hands on examining their own work and challenging current methods to increase productivity.

Unfortunately, these approaches by themselves can produce rather superficial results. The reason is they only “pick the low hanging fruits.” But there is a point that is reached that in order to make substantial gains in productivity and performance, new equipment is needed for various reasons such as faster cycle times and increased capacity: automatic tool changers, automated pallet changers, flexible machining centers, scalable assembly modules, robotic sub-assembly soldering, robotic welders, lasers to replace turrets, and quick changeover tooling or fixturing. So then we are faced with the annual capital budget ritual and “Dancing with the Stars” contest for a piece of the corporate capital pie.

The Corporate Budget Dance

This is how it normally works. Companies set aside a finite amount of funds for capital improvement projects as a percent of net revenue or otherwise. Each division in the company competes for money to fund their capital projects. This occurs when annual budgets are complied for the following year. In some cases each division allocates an amount of money in their budget for capital equipment based on past successes. For instance it could be $2 to 3 million or more for a division that produces $100mm in annual revenue, depending on the generosity of the corporate moguls. So now you vie for a piece of division capital funding, and you find yourself not only faced with competition among manufacturing plants, but also within your own plant.

So how can you rise above this process and produce a winning proposal for the capital equipment you need? Creating a solid economic analysis and an enticing financial package is a start, but it is only that. There is a lot more involved in getting the attention of upper management, and getting the signing authority to approve your proposal over someone else’s. The following describes an approach consisting of a series of elements that, when included, can make all the difference in the world.

Think Strategically

It’s been said that when you’re in the foxholes with bullets flying over your head, it’s hard to reason the war. Both top level and division level executives think on a higher, broader, and strategic level as com-pared to middle managers or first line supervisors. A manager of manufacturing or assembly engineering will be influenced and limited by the level of visibility and exposure he or she has. The same holds true for a production manager. Both production managers and engineering managers will think in terms of relieving a current bottleneck operation, or replacing a high maintenance piece of equipment, or buying an automatic tool changer. Engineers who work for these managers will think at the process level, where productivity gains can be made by combining operations with a single piece of equipment. This can cause a disconnect with general managers who want to increase sales, make gains in market share, or find new sources of revenue through added product lines.

When developing a capital equipment justification proposal, engineers and engineering managers need to think strategically: think as a higher level manager or customer would think. Answer the question: “What’s in it for the customer? A customer wants his assembly that he is buying from you as quickly as he can get it. Why? He may be in trouble, out of stock, and there is an old saying among salesmen re-garding stock items “You can’t sell it if it’s not on the shelf.” He may be reducing inventory. He may need to turn it around quickly to his customer. In any case, the customer is going to want short deliveries, high quality/low defects, competitive pricing, availability, and reliability of promised deliveries. If the proposal can address the needs of the customers, it will likely appeal to those who think on a strategic level and enhance the chances of success.

Align With Company Goals and Objectives

Every company wants to increase productivity and reduce costs, and so many of us attend the Assembly Expos to see what’s new in terms of technology and product offerings. Or we might know of equipment that has potential to increase productivity from sales literature left by an equipment manufacturer. When the need arises, we spec out the requirements for a piece of equipment, such as a soldering robot, and request a quotation from the supplier. Once we have the dollars, we have the amount that we would request for the equipment. Next we might determine that the soldering robot can replace two soldering stations manned by two workers, we think we have found our justification. But what if the company is currently competitive in price, management’s key objective is to increase market share, and a slight reduction in price caused by a slight reduction in cost won’t make a difference? If you justify your new piece of equipment through direct labor savings, and the cost reduction is minimal, you probably won’t get to “first base” with your proposal.

All proposals for capital expenditures, to have a chance of winning, must be aligned to the company’s objectives and goals.

State the aligned objectives in the proposal as in the objectives section of the proposal accordingly as increase capacity, reduce throughput time, reduce lead time, reduce scrap and rework, reduce setup times, increase flexibility, etc. You may have several levels to identify. First what are the corporate goals? If final approval of your proposal rests at the top of the company organization, you need to know what they want to accomplish. Is their marketing strategy to have a physical presence in all regional markets by close proximity?

One company we worked with developed a marketing strategy to have close proximity to key customers, with specialized finishing of semi-finished products performed at the regional centers. A proposal by one of the engineers to completely finish the products at the manufacturing plant didn’t receive “the right time of day. “

Once you have identified the vertical alignment of objectives, you need to determine what the perform-ance metrics are those divisions and plant managers are being measured by. If quality defects are meas-ured, and the goal is to decrease defects to a certain level, you need to state how your proposal will sup-port this goal. If total lead time reduction is identified as a key objective, and the division and plant are being measured by extent of results, you need to focus on how decreasing cycle time and throughput time will help achieve this goal.

Format the Proposal Appropriately

Most executives prefer an Executive Summary at the beginning of the proposal. The summary should be a synopsis of the proposal and should be no longer than 2-3 paragraphs. Make it positive and uplifting. Include a summary of the costs and benefits in graphical format. A graph of the costs and benefits such as that depicted above provides a great “perspective-at-a-glace” for the approving executive. Remember, what is in the Executive Summary will determine if your proposal gets read any further. The proposal should include objectives, assumptions, total costs including annual maintenance, and benefits, but make it short. Long dissertations won’t get read. Use charts and graphs to provide a quick visual perspective to the executive reviewing your proposal. Detailed analyses and calculations should be positioned in the appendices and referenced in the body of the proposal.

Include Total Costs

One of the last things an executive wants to happen is to be “blind-sided” or surprised by additional costs of implementing new assembly equipment that were not included in the original justification. That could quickly make an assembly engineer of engineering manager “highly unpopular.” So the task at hand is to ensure that you have all of the costs included for a complete and successful implementation. Cost of direct materials, if applicable, is first.

Fixed costs would include fixed overhead, such as lighting, utilities, supervision, payroll benefits, overhead wages, quality control, inspection, expediting, rework, maintenance, equipment depreciation, and utilities. Variable costs might include direct material expenses, component costs, added assembly direct labor costs, inspection, testing, and payroll benefits.

Some of the implementation costs might include equipment purchase price; equipment installation such as rigging; power, electric and air connection costs; tools and fixtures; personnel costs related to acquisition and project management; site preparation and clearing the area; and costs related to relocating the current equipment to another “home”. You may also recover some of your costs through the sale of current equipment. This should be identified and treated as an offset to the total costs.

One method of summarizing the total costs and offset is to include them in a chart within the proposal body, with details, if needed, in the appendices. An example of such a chart is depicted above.

Include All Benefits

The key benefit that executives want to see is the net revenue gain generated by the proposed capital ex-penditure. Benefits should display strategic significance such as increasing plant capacity, reducing customer lead time, increasing sales, increasing market share, improving net profit, improving quality as well as reducing cost. An increase in sales resulting from the implementation of the proposed equipment might be a result of increased production capacity. Or the proposed equipment might improve quality resulting in reduced scrap. Another benefit of a substantial improvement in quality might be the opportunity for the company to sell the product at a premium price, thereby increasing the profit margin.

Savings should include materials, direct labor, indirect labor, material handling, elimination of material handling equipment, overtime premiums, equipment maintenance, indirect materials, indirect supplies, tools & die, elimination of an operation, and reduction of unit cost through a fixed overhead spread over more units produced as a result of increased capacity. Remember to include hidden costs in the benefits section that will be eliminated through the purchase and implementation of the capital equipment.

One company we worked with was incurring excessive warranty costs as a result of poor quality, and when these were identified, the payback period reduced from 2 years to 6 months, resulting in a more desirable return on investment. Examples of some of these caused by poor quality, such as excessive warranty costs, can be found in the chart below.

Create a Solid Economic Analysis

There are different approaches and methods used to justify the purchase of capital equipment. Most large companies have formal procedures that standardize this process. In this case you need to follow the pro-cedures. This promotes familiarity for the executives when reviewing capital expenditure proposals, and provides the approving authorities with the information they need to analyze the merits of the proposal. At a minimum you should include a credible, detailed analysis of the total costs and estimated savings. This should be included in the appendices of the proposal, and summarized in the body of the proposal. Remember that executives want to see the “bottom line” to determine if they wish to consider the proposal further. This should be in the Executive Summary of the proposal.

A variety of methods can be used to calculate the potential savings of your proposed assembly equipment. The people who will be reading your capital equipment proposal will be looking for key factors. If you don't have the convenience of a company-established form to use, your presentation of facts and figures can make all the difference whether or not your proposal is approved. Some of those used are return on investment, internal rate of return, return on book value, projected cash flow, payback period, net present value, and life-cycle expectations of the project the capital equipment will support.

You should follow the company capital equipment justification procedures if they are available and ensure you are in full compliance with them. We suggest that as a minimum you should have the full costs and benefits, projected cash flow, payback period, and return on investment. You should also include a timeline that depicts the length of time needed to implement the actual buying, installing and testing of the equipment before beginning actual production.

Bundle the Package for a Greater Benefit

Thinking strategically and more broadly is quite often key to developing a much better capital equipment justification package. Instead of focusing on a single piece of equipment, and justifying its purchase through direct labor savings, which can be minor in significance, a wider perspective of the potential improvements in an operation can reveal much greater benefits to the plant.

As an example, in the Shovel Supercell depicted below, a blanking operation consists in induction heating followed by forming. By narrowing the focus to this level of visibility, the benefits are narrow and confined to the smaller floor area. Instead, by viewing the entire product line processes and operations of “shovel making”, and devel-oping a Supercell that not only consists of consists of forming, but is expanded to hardening, quench, tempering, coating and assembly, a much greater strategic impact is created and the benefits are also much greater.

Get Your Assembly Equipment For Free

There is nothing more enticing to an executive than the thought of getting new revenue producing equipment for free. It sounds unrealistic and “pie-in-the-sky” but a case can be made to prevent net outlays of valuable cash. If you think strategically, and bundle a package for a greater benefit, then there exists the potential of greatly reducing inventory.

For instance in a Lean Assembly environment, if you reduce assembly cycle times at the work center, for example 50%, that results in doubling of units proceed at that work center with the same direct assembly labor. That in turn results in a reduction in assembly throughput time and increased capacity. As assembly cycle times reduce, the need to carry the same level of raw materials, purchased components, manufactured components, and work-in-process reduces accordingly.

An inventory reduction for a Lean Assembly initiative (depending on the starting point) can be as much as 80-90 percent with an 85-90 percent reduction in throughput time, which is not uncommon. The reduction in inventory can be treated as a one-time cash conversion, essentially creating the scenario where the implementation pays for itself. Thus the company controller recovers his or her cash as the inventory progressively reduces following implementation: a win-win scenario.

Identify the Audience

Most capital expenditure proposal writers are not aware of this. Just as you would when preparing for a conference speech, you have to identify what the individuals who will be reviewing and approving your proposal want. Answer the questions:

  • 1. What do they like to hear?
  • 2. What do they want to know?
  • 3. What’s in it for them?

    Key here to successfully answering these questions is identifying what the approving executive likes and prefers, and outside of asking your management, as well as others in other parts of the organization, a few subtle clues may help you accomplish this. If the executive came from sales, and he possesses a B.A., then he might likely be more interested in how a change in performance will be affect customers, and it may increase annual sales and market share.

    On the other hand, if the executive has an accounting background, he may focus on cost, and it will behoove you to lace the proposal with details and strong economic analysis. Someone whose background is engineering will respond to numbers and details. If you have this information, and you incorporate it wisely into your proposal, it’s not going to guarantee approval, but it may give you an edge over someone who didn’t.

    For the second question “What do they want to know”, they will want to know if what you propose is credible and on solid footing, and will produce the intended results you claim. One of the last things ex-ecutives want is to suffer the embarrassment of failure of an investment they made. That could be a career-ending event. Therefore you need to provide a compelling and credible case. Both top management, middle management and purchasing agents will be more likely to approve you proposal if you have a solid economic analysis.

    For the third question, “What’s in it for them?” executives only ent the proposal expertly, and you will have a winning capital equipment justification proposal.

    ©2007 Rockford Consulting Group, Ltd.



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    Author
    Richard G. Ligus CMC - Keynote Author/Speaker

    Richard G. Ligus is President of Rockford Consulting Group, Ltd., located in Rockford, IL., with over 30 years experience in manufacturing, procurement, transportation and distribution. He specializes in developing and implementing manufacturing, distribution, and supply chain strategies. Rich is an author and a speaker, and has developed seminars with the American Management Association. He is certified by both the Institute of Management Consultants and the The National Bureau of Certified Consultants.

    Rich has a bachelor of science degree in mechanical engineering from the New Jersey Institute of Technology, and a master of business administration degree from Rutgers University. He is a member of CASA/SME, and has been listed in Jane's Who's Who in Aviation and Aerospace. He has been a speaker at IMTS, USCTI, APFA, NEPMA, MCAA, Hand Tools Institute, CASA/SME, and others. He has appeared several times on WREX-TV, Mid-Morning Magazine.



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    ©2007 Rockford Consulting Group, Ltd.



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