Plant & machinery investment: Replacement investment & expansion investment

1) Separate replacement investment from expansion investment

The first step is to define for yourself why you need a new machine or system. In my experience, in most cases this happens very late or not at all, which makes it difficult to justify the investment and decide on a system concept.

Does your existing system often break down and can no longer produce reliably? Do you have quality problems or does the system require more personnel than comparable solutions? Then a replacement or rationalization investment (hereinafter referred to as a replacement investment) could be in order: The system is replaced 1:1 and brought up to the current state of the art.

Is your capacity no longer sufficient because your company has grown or the product mix has changed? In these cases, an expansion investment is necessary. This can be done by converting the current system or by purchasing an additional or larger system.

Do you want to cover both cases with the new system? Then separate the system components into the different categories and consider what a pure replacement investment or expansion investment would look like. It is not necessary to obtain two further quotations and have systems redesigned; a simple estimate and breakdown of the items is usually sufficient.

2) Is a new purchase really necessary?

In order to be able to justify a new purchase, you should first carry out a make-or-buy analysis. Do you have a reliable partner who can offer products of the same quality at a lower price than your manufacturing costs would be with the new investment? This analysis should not only be carried out from a purely economic perspective, but also from a strategic one. The following reasons could speak against outsourcing despite economic arguments:

• Know-how Loss of your core competence
• Quality cannot be guaranteed
• Lack of reliability of the supplier
• Increase in delivery time

Another option could be minor optimizations of the system or in the process: When investing in expansion, ask yourself the question “Why can demand no longer be met?” Reasons could be, for example

• The system itself achieves the necessary production output, but feeding is the problem. Solution: You could provide additional personnel or improve/automate the feeding process.
• The performance of the motor is not sufficient. Solution: Replacing a drive could bring about an improvement.
• Find out more about process mining in production and logistics or how to increase delivery reliability with batch size 1.

When making a replacement investment, you ask yourself the question “Why is the machine failing?” or “Why is the quality not as desired?”

• Machine downtime could be minimized through predictive maintenance.
• Quality could be improved by replacing wearing parts, for example.
• Find out more about the topic of quality in the blog article “Ensuring product quality with the Control Plan”.

Come to the conclusion that an additional purchase makes sense or that optimizing the system will lead to a significant improvement: Very good, you have saved on investment and can now stop reading. If not, you have come a good deal closer to justifying the purchase of a new system!

3) Involve your production employees

If the necessary information is missing or insufficient, there is a high risk of making the wrong decision. So use every opportunity to generate information. Your plant operators and maintenance staff know best about the advantages and disadvantages of the current plant. Do you already have a suggestion scheme in place in your company or have you already asked for suggestions for improvement? If so, have you implemented them or explained to the person making the suggestion why it would not make sense to implement them? Communication is essential in order to receive good suggestions in the long term and to increase the motivation of the workforce.

However, at the latest when you are planning a replacement or expansion investment, you should seek the opinion of your employees. Have them show you critical system components on site and place a special focus on them in the preliminary discussions with the manufacturers and in the specifications. Use the information and suggestions when reviewing the new acquisition (see point 2).

4) Find out about the current state of the art and think outside the box

Do you already have a manufacturer’s system configuration in mind? Take a step back and check several alternatives. This is the only way to make the best possible decision. To do this, it is necessary not only to talk to the manufacturers of your machinery and equipment, but also to sound out the market. Are there new players on the market? Has a system manufacturer expanded its portfolio?

A good first step is to visit relevant trade fairs and talk to experts. Independently of this, you can research on platforms such as www.werliefertwas.de or exhibitor lists at trade fairs and contact the manufacturers directly. Invite them and let them show you the latest generation of systems with optional extensions. Ideally, you should plan reference visits to get an impression in practice.

An investment in a new system is also a good time to think about alternative processes, production technologies, greater vertical integration, digitalization potential or a higher degree of automation. Think outside the box. At the start of the process, all options should be examined at least briefly. For example, additive manufacturing technologies could be more economical than your conventional manufacturing technologies for small batch sizes.

5) Have the courage to make decisions!

In the previous section, I recommended that you open up the solution space as widely as possible and think “out of the box”. In the next step, however, you should again focus on two to three variants in a pragmatic comparison, otherwise there is a risk that the project will become too complex and thus disproportionately prolonged. I recommend documenting the reasons for deciding against a variant so that the entire procedure is comprehensible.

If variants are similar or there are only slight variations, summarize them. If you have difficulties with the selection, you can already carry out an initial rough technical and economic benefit analysis. (See Figure 3)

The aim is to focus on around three variants. These can now be planned and evaluated in much greater detail. In the next step, create a decision template for your line manager or management and recommend a variant. I will explain the procedure in the next section.

6) Calculate a detailed business case according to your company’s specifications

Various tools exist for the economic evaluation of variants. Essentially, all methods are concerned with

• the saving of (running) costs and/or
• the generation of additional margin

the (one-off) investments.

The first step is to estimate the one-off investment and costs. As a general rule, if no comparative or empirical values are available, either consult an expert or obtain budget offers. Investments and one-off costs can be, for example

• Acquisition of the new system or machine
• Conversion/extension of the existing system
• Relocation/dismantling of the existing system
• Any residual carrying amounts of the existing system
• Extension, conversion or new construction of the building
• Project management
• Items for contingencies (5-10% of the total amount)

In the second step, the savings are determined:

• Lower personnel costs (e.g. due to a higher degree of automation)
• Lower maintenance costs (personnel and spare parts)
• Material savings (e.g. through technology change)

In addition to the savings, the theoretical margin lost due to system failure can also be taken into account for replacement investments. This requires an analysis of how long the system would be out of operation.

In the case of an expansion investment, the lost margin can also be taken into account. In this case, it is the demand or the planned growth that cannot be met – usually the greatest leverage.

The variants can then be compared. This can be carried out using the net present value method (dynamic or static), by calculating the EBIT(DA) effect or many other methods.

In addition to the economic factors, there are other technical criteria to consider, such as

• Expandability
• Flexibility
• Implementation risk
• Project plan and implementation period

These are best weighted and evaluated using pairwise comparisons. I will also go into more detail on the technical-economic utility value method in another blog article.

Summary

Many factors must be taken into account to ensure that an investment in a new system or machine is cost-effective: Check carefully whether there is an alternative to a new purchase, involve your employees and compare different options technically and economically. Only by making a comparison can you be sure that you have identified the best option for your company. To make sure you don’t forget any of the factors, get expert support!