The case for return on investment

Every business aims for competitiveness and profitability. Whether as part of an internal improvement, a new product or a new process, an investment must be justified by a series of indicators that we will present to you.

This article aims to cover the majority of cases and is intended to be general. If your need does not fit these scenarios, get in touch! We will be happy to point you in the right direction.

When buying a machine tool, there are two main scenarios:

• Improving / technically modifying a manufacturing process
• Launching a new product / service

I – Technical improvement of a manufacturing process

This category covers the following concrete cases:

• Replacing an old or worn machine tool with a newer, higher-performing model
• Buying one or more additional machines to increase capacity
• Improving the manufacturing process
• Changing the manufacturing technique

The calculations here are relatively simple.

1 – Costing the initial investment

This is the initial cash outlay corresponding to the purchase of the tool and any options. We provide you with a precise quote, aligned with the technical need we will have studied beforehand.

2 – Costing the running expenses

These are the combined costs of everything required to operate the tool properly. This includes, but is not limited to, consumables, maintenance, energy consumption and the labour needed to run the machine.

As part of our service, we provide you with a rough estimate of annual maintenance and consumable costs, based on your projected throughput.

Be careful, however: for a CNC machine, the consumable cost of ownership (cutters, heads, etc.) can vary greatly depending on the type of tooling and operations performed. If you have any questions, get in touch.

3 – Costing the gain

Here the goal is to calculate the net benefit generated by the new acquisition. It is often easier to think in terms of monthly benefit. To do so, compare the cost price of the current operation against the projected running cost per operation, multiplied by the number of operations carried out per month.

CP current monthly − Running cost projected unit × Capacity monthly

When buying a supplementary machine, the calculation is simpler: work out the added value specific to the operation performed, minus the unit running cost, and multiply by the number of operations carried out per month.

( VALUE added − CP running ) × Capacity monthly

4 – Calculating the return on investment

The formula is very simple: divide the monthly gain calculated previously by the initial investment:

ROI months = Investment / Gain monthly

From that point on, the machine is considered paid off and starts generating profit.

The result is expressed in decimal months. Our goal is to offer solutions that pay for themselves in one year or less. Some very specific needs may involve longer returns on investment. In addition, for bank loans, interest rates must be taken into account when calculating the initial investment.

II – Investing for a new product

This scenario works in the same way as described above. The difficulty comes from capacity planning, which must be adjusted according to the business plan, or the forecast produced after market research.

Nevertheless, thanks to their strong competitiveness, our machines fit perfectly into projects to bring new products or services to market. Their high profitability helps to mitigate risk and can let you start an activity at a low output rate, so as to better understand market dynamics.

III – Intangible gains

This category covers all the benefits of acquiring a machine tool beyond the financial ones. These include:

• Logistical simplicity from bringing a process in-house: no more supplier lead times, better quality control.
• Scalability and modularity: by keeping control over manufacturing, you can evolve your product or services quickly to better follow market needs and trends.
• Responsiveness: a one-off need? A prototype to make? An urgent batch? Having the right equipment in-house ensures you can react quickly.

In conclusion, buying a machine tool can be a complex subject. Alternatives such as subcontracting can be tempting, but often turn out to hold back your growth. With these elements, you have everything you need to make your decision with full knowledge of the facts.

If you have any questions about your profitability, if you have a need but can’t quite define it, or if you need more information about our products or services, don’t hesitate to get in touch! We’ll be happy to answer.