How Reducing Engineering and Commissioning Costs Can Dramatically Impact Your Profitability
Machine builders and OEMs are some of the most cost-conscious customers that I have ever worked with.
That was true when I worked with OEMs as a Commercial Engineer at Hanley Automation, helping OEMs to select the best hardware for their machines, and it's still true today when I consult with OEMs, helping them to reduce their costs and improve their profitability.
Of course, I can understand why OEMs are so focused on cost. In a competitive environment, customers expect machines that deliver more value at lower prices. For an OEM to remain profitable, they have to keep costs to a minimum.
What surprises me is how focussed most OEMs are on hardware costs. Many OEMs that I work with are so focused on getting components for the lowest price, that they fail to see the woods for the trees (or in this case, the components for the machine).
Don’t get me wrong, managing hardware costs is important, but hardware is not the most expensive part of the machine. Therefore, it’s not where you can get the best return on your investment of time.
According to the Automation Initiative of the German Automotive Industry (AIDA), almost 60% of the total cost of an automation project comes from engineering and commissioning hours (including pre-commissioning and robotic programming).
Based on this data, it makes sense for OEMs to focus on increasing their engineering efficiency to reduce the cost of engineering and commissioning their machines.
So how can OEMs invest in improving their engineering efficiency and what kind of ROI can they expect?
At KB Controls, we help OEMs to improve their engineering efficiency using three key tools. They are:
Systematization, where we map out and define the processes that the engineering team uses to realize a machine. By systematizing the team’s processes, we ensure that everyone is doing their work in the right way at the right time. Systematization helps to reduce the number of project hours that are lost to inefficiencies and re-work.
Standardization, where we define hardware and software modules that can be reused across multiple machines. By reusing standard modules, OEMs can reduce the development cost of each machine while increasing the quality of the realized machine.
Automation, where we automate tedious, repetitive tasks such as parameterizing block calls, adding objects to an HMI screen, importing data from planning tools, and creating test plans. Automation reduces the number of hours spend on low-value add tasks and increases your team’s capacity without adding additional resources.
Most OEMs can reduce their engineering and commissioning costs by 20–50% by investing in these three key areas. I’ve seen these results with clients, and companies like Arla Foods have published data showing that their OEMs have achieved similar results.
In financial terms, what would a 50% reduction in your engineering costs mean? Let’s look at the financial impact on a typical OEM, ACME Automation.
ACME Automation builds 10 machines a year for their customers. They are limited by their capacity to build machines, not by a lack of demand in the market.
ACME Automation’s machines sell for an average price of €200,000 and their net profit margin for each machine is 10%. This means that ACME Automation’s annual revenue is €2,000,000 with €200,000 net profit.
The cost breakdown of each machine is as follows:
To summarize, ACME’s situation before investing in reducing their engineering and commissioning costs looks like this:
Over the course of a year, the engineering and commissioning cost of each machine produced by ACME Automation is reduced by 50%.
The price of ACME Automation’s machines remains the same but their costs have been reduced. Because of this, ACME’s profit margin has increased from 10% to 13%.
ACME Automation has also increased its capacity — since each machine takes 50% less time to engineer and commission, they can now deliver 15 machines in a year.
Since they are delivering more machines, ACME’s revenue has grown to €3,000,000 (+50%) and its net profit has grown to €390,000 (+95%). All this growth has come from improving efficiency — ACME Automation hasn’t had to add any resources to the engineering team.
To summarize, ACME’s situation now looks like this:
The results of ACME Automation’s investment are increased profit, revenue, and capacity:
By reducing their engineering and commissioning costs, most OEMs can dramatically impact the profitability of their business and their capacity to deliver machines.
If you want to calculate your ROI in reducing your engineering and commissioning costs, simply fill out the form below and we’ll send you our ROI Calculation worksheet. You can plug in your numbers and see what impact improving your engineering efficiency can have on your business.
If you realize that it makes sense for your business to invest in reducing your engineering and commissioning costs, then drop a line to email@example.com or fill out the form here to organize a free consultation call.
In the consultation call, we’ll walk you through our process for improving your business through systematization, standardization, and automation and ensure that we can add value to your business.
Part 2 of Software Standardization for OEMs
Part 1 of Software Standardization for OEMs