Packaging automation: Making the financial case

A packaging automation project involves many variables, all of which influence the investment necessary for the undertaking. But how do you make the financial case and make sure the project justifies the cost?

Start with a thorough examination of the current process

Making the financial case for your proposed packaging automation project starts with documenting every step of the current process. It lays the foundation, which is an essential step, but it’s only the beginning.

At this point, if you’re of a certain age, you may be imagining a nerdy engineer hovering over everyone with a clipboard and stopwatch, conducting a procedure known as a time and motion study. Now, these studies do still happen, but the format has changed a lot since the 1980s.

Today’s version of a time and motion study usually starts with a Kazien event to generate as many ideas for process improvement as possible. In the past decade, we’ve used video to precisely document packaging processes and process variability. This method allows the Lean engineering team to get a stop-motion, second-by-second view of current procedures. It facilitates re-watch and documentation as well as a comprehensive comparison of existing and proposed processes.

Document the full range of the project’s economic benefits

As automation complexity and scope increase, costs and equipment needs will increase commensurately. Together with cost and scope is the increasing scrutiny of cost impact and payback. Companies refer to this as a return on capital (ROC) or, more commonly, a return on investment (ROI).

For clarification, ROC is the financial ratio obtained by dividing net income by the total invested capital (debt+equity). It quantifies the precise profitability of an installation. ROI is the ratio obtained by dividing the net income by the owned capital only (equity).

The more you scrutinize the processes and all affected points in the supply chain and their associated value, the greater the possibility of a final ROC meeting corporate goals. It’s also essential to understand that every CFO or controller will have a firm grasp on the cost of money to the business as well as specific time targets for the realization of return. Many of our clients have realization targets of about two years. This is a much shorter timeframe than 40 years ago, which was closer to five years.

With automation increasingly in demand — and more expensive — it becomes harder to reach the sought-after two-year ROC. That equation changes when you consider every potential supply chain touchpoint.

The following graphic should jump-start your thinking about the widespread factors packaging automation affects, and that should be part of a complete ROC calculation.

Additional packaging automation considerations

Automation will affect many elements of your packaging operation. Internal stakeholders must agree on the physical format of the final packages. Once the packaging processes are automated, it'll be more difficult and expensive to change the format. Changes to the visual design of the packaging are much easier to implement.

The team should document potential changes in time, materials, labor, vendor(s) and warehousing. Most importantly, planners must project business needs and growth five to 10 years into the future; you don’t want to be throughput-constrained before the lifespan of the equipment expires. Much of today’s equipment has a lifespan of about 25 years. As such, it makes sense to design the packaging automation system to be either expandable or provide for an additional packaging line if business growth is higher than expected.

As you begin the documentation process, you should specify downstream equipment to easily recover from an upstream accumulation release. Designers typically require downstream equipment to outproduce the immediate upstream process by 10–20%. As you start to block layouts for new equipment, you may need ongoing line balancing. Determining and coordinating the takt time of each corresponding step ensures that each phase in the process is more or less in sync with the next.

Make the financial case: Beneficial ROC factors throughout the supply chain

Many inputs contribute to the ROC from the earliest points in the supply chain:

• Inbound supply (filling trailers with the highest possible amount of raw materials)
• Changes to raw materials (for example, premade bags to form-fill-seal [FFS] film), case quantity or case design for new automation (for example, a regular slotted container versus a Bliss box), and changing cases to film bundling
• Managing raw material inventory and the cost of warehousing (the service level of your suppliers can have a significant impact here)
• Material handling, from unloading at the receiving dock to the number of trips to an in-bound warehouse

The middle of the supply chain primarily focuses on internal packaging processes:

• Rate of replenishment and the supplier’s negotiated level of service (from assisting to managing all materials)
• Rate of replenishing raw materials to the automated equipment from auto-replenishment (silo)
• Reduction in Takt time
• Improved throughput
• Integrated and automated delivery of product from manufacturing to packaging
• Reduction of labor required to complete the entire process
• Minimizing the changeover process (cleaning, machine setup)
• Automated unit loading
• Material handling (automated to finished goods warehouse or directly to outbound trailers)

Some end of the supply chain levers to assess:

• Unit load quantities (finished goods warehouse, trailer capacity)
• Outbound trailer use (GHG, reduced logistics costs)
• Recycle-ready materials (mono-material for polymers)
• Reduced damage signals from customers (more consistent packaging should result in a lower damage rate)
• Packaging designed for a better consumer experience — also called the out-of-box (OOB) experience (Amazon refers to this as “Frustration-Free Packaging”)
• Reduced dunnage and waste impact on the customer

Your packaging automation project may entail expanding the current operation (an internal re-design and space allocation), moving the packaging operation off-site, relocating into a building expansion or even moving into a new or existing building. No matter what it is, the planning that goes into launching an automation project will be exhaustive to ensure operational and funding success.

— By Eric Carlson