You just placed an order for those new machines you saw at the trade show. The ones you had to have.
You're not sure where you're going to put them, but those machines work great anywhere, right?
Sound a little scary? Many contractors do it every time they buy equipment. They forget to consider the "shop-burden" costs - the price of operating that piece of equipment in their facility.
By knowing the real annual cost of a piece of equipment - necessary for shop-burden calculations, contractors can also learn the return on investment they can expect from the piece.
With that knowledge, equipment buyers have more than just sales pitches and "gut" feelings to help make these important decisions. With a little thought about the specific operations, placement and the products the machine will be used for, buyers should be reasonably comfortable with the decision to buy or not.
Use the formula below to determine the annual shop-burden cost of a machine.
Machine cost - salvage value (usually 10 percent) divided by the amortization period (usually five years) = burden cost per year
So, if a machine costs $125,000, the formula would look like this:
$125,000 - $12,500 divided by 5 = $22,500
In this example, the burden cost per year comes out to $22,500, not including owner equity and indirect expenses.
Return on investmentThis figure should be helpful in determining your return on investment, commonly called ROI.
You should apply three steps to predict ROI, now that you know the annual cost of the machine. You must determine the labor savings relative to your volume of work.
1. Determine your actual productivity in pounds per hour using your existing methods and equipment.
2. Determine your expected productivity in pounds per hour using the new equipment. (Note that one of the best ways to do this is to request that the machine salesperson take you to a demonstration or show you a video tape of the machine in use and do a one-hour time study and determine the pounds-per-hour productivity of the machine being considered.)
3. Using your annual volume in pounds (or units) of the product being fabricated, calculate the labor hours required using your existing method. Subtract the labor hours expected using the new machine and multiply the labor hours saved by your hourly wage rate.
If the annual labor savings at least equal the annual machine-burden cost, the investment will be a trade-off. Many sheet metal equipment purchases can return their investment within three years; those should always be easy decisions.
Here's an example of how to figure a machine's return on investment. Say you're purchasing a new partial coil line that shears, beads and notches straight duct, with joint "L" section blanks.
Assume that the machine will cost $125,000. Your shop has a $35-per-hour average wage rate and you produce 241,588 pounds of straight ductwork annually. Here are the formulas with the numbers plugged in:
Manual241,588 pounds of ductwork divided by 110 pounds produced per hour manually = 2,196 hours x $35 per hour = $76,860 (the amount it costs you to manually produce the duct)
Machine241,588 (pounds of ductwork) divided by 250 pounds per hour produced by the machine = 966 hours x $35 per hour = $33,810 (the amount it costs you to produce the duct with the machine)
Now subtract the machine figure from the manual figure.
$76,860 - $33,810 = $43,050 in direct labor savings (a 2.6-year ROI)
Note that a significantly shorter return on investment occurs if a used partial coil line is purchased. Consider these scenarios:
· If a used partial coil line were purchased for $31,250, assuming $35 an hour wages, the ROI becomes about 8 months.
· If a used partial coil line were purchased for the same amount, assuming $17.50 an hour wages, the investment would pay for itself in 16 months.
· If the annual duct volume was doubled in the above scenarios, the ROI time would be proportionately less or longer if the volume was 50 percent less.
Used partial coil lines are easily available and when purchased from a reputable dealer, can be set up in your shop and reconditioned to very dependable working order for relatively small investment dollars.
Used partial coil lines are much simpler and more dependable than full automated lines, but can bring many of the same advantages, such as pre-beaded variable-length sheets for labor and material savings on plasma tables and full joints (2 percent to 3 percent scrap savings), and the advantage of purchasing coils on theoretical weight.
Your return on investment is relative to:
· Wage rates
· Expected increase in productivity
· The actual cost of the machine
· Current and future volume of work
A common mistake is the failing to seek the input of the people who will be assigned to use the machine and will be expected to increase productivity with it. They are the true "shop experts" who can have invaluable input in judging their weak areas and what will fix them.
Let them help you make those equipment-investment decisions. They also have to live with what you decide.