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Direct and Indirect factors When Evaluating ROI for an I-4.0 Initiative

August 28, 2019
Evaluating Indirect and Direct Factors for I.40 ROI

“Think of the tangential benefits from the Space Program”

In July, the World celebrates the fantastic Journey that Apollo 11 performed in 1969 when the first men were sent to orbit the Moon. Just think of what has happened as a result of the single-minded goal of putting a man on the Moon. At that time, the total computing power needed for that effort was less than the computing power of a smartphone. The main computers that powered the Apollo 11 mission were the size of four refrigerators! 

Most likely, the majority of us don’t remember the protests at the spending ($40 billion for the entire 12 years of the NASA Man-on-the-Moon project), but looking back, just look at the unforeseen benefits of the digital age. Technology has shown itself to have the capacity of producing exponential ROI hindsight.


The Investment of Industry 4.0

When considering the important investment in I-4.0, it’s logical that both operations and the C-Suite will collaborate in the decision-making process. In fact, a strong case can be made that having a third-party business analysis be part of the process. 

Typically, a production manager spends a lot of time pondering important operational issues that directly impact the factory’s bottom line; such as:

  • Are today’s orders are running on time?
  • How can we improve the productivity of temporary workers?
  • How much capacity is available for the week?

While in the C-Suite, the executive leaders concern themselves with different costs and how to optimize pricing, capital budgeting, and longer-term strategies and goals. 

Indeed, it does seem to be a definite dichotomy in how both groups’ perspectives; C-suite more focused on Enterprise issues and operations on daily operational issues. That same distinction can apply to how they evaluate the potential ROI of an Industry 4.0 initiative.

People in Meeting

Extracting Knowledge from Data

C-suite executives will be more interested in possible cost savings or additional revenue over the course of months or years. However, in most cases, it will be difficult to envision exactly what future benefits may be derived from what AI and big data may reveal.

Years ago, I did an analysis of a furniture and cabinet manufacturer. The company was suffering from low margins and was slowly eating into its reserves. Upon analysis of the company financials, it was found that the only real profit center the company had was selling its wood chips and sawdust to a famous Whiskey maker who packaged their well-known product using wood chips and shavings. This was by no means a big data/AI insight, but it goes to show that there are some important opportunities that can be revealed by detailed analysis of data already collected by most companies in the course of normal operations. Just imagine how big data cannot only optimize operations but also provide new opportunities that may lead to new sources of revenue and a change in enterprise evolution.

Indeed, the collection of daily operations can help operational cost reduction but can also provide business leaders with objective data that can also help the company innovate and assess opportunities for new revenue opportunities.

Evaluating the direct and indirect impact

Calculating the potential business value of an Industry 4.0 project can be difficult. After all, there is usually no historic data available as a baseline. Instead, examining the potential direct and indirect impacts of the project can help shed light on both operational and business value.

Direct impacts are those that occur as soon as you hit the “On” button and are operational. The following are areas to look for some immediate impact:

  • Quality improvement
  • Reduction of downtime
  • Quicker reaction times 
  • Increased capacity for customization
  • Reduction in administrative overhead

Indirect impacts accrue over time and are more likely to relate to business value:

  • Improved transparency yields opportunities for strategic potential; cost/price optimization; benchmarking standards; and more accurate capital budgeting.
  • Operational improvements allow more accurate detection and prevention of bottlenecks; and the ability to develop and implement best practices.

By analyzing an organization’s existing metrics with a realistic estimate of potential Industry 4.0 improvements, it is possible to calculate the probable ROI-or range of ROI- of the improvements.

Sample solution

Faced with excessive unplanned downtime, an injection molding manufacturer was searching for an Industry 4.0 solution for quickly responding to machine failures.

The key inputs included the number of shifts, shift length, number of workstations, unexpected downtime, average downtime duration, average notification duration (the time that passes before the right person is notified of the interruption). Outputs included the number of interruptions per day and notification time per day, along with the potential new notification duration and the potential uptime increase. Reducing the average notification duration (5 minutes) by 90% promised to yield an additional 15 hours of uptime per day.

Calculating Business Value

On the one hand, these were the number of workdays per year and the revenue per year, but also the costs per hour of production hour and the share of material costs on the revenue. Regarding the 15 hours of production downtime saved per day and the costs per production hour, this resulted in a potential saving of around 118,000 € per year. Assuming that in these 15 hours per day production would take place instead, there was even a profit potential of around € 137,000 per year. Given those figures, business leaders were enthusiastic about the initiative.

The SME’s most successful at Industry 4.0 initiatives take a step-by-step approach. They identify opportunities for quick wins and implement one solution at a time. The ideal quick wins tackle a major pain point, and they also affect the worker, production manager, and CEO. When a problem impacts stakeholders at every level of the organization, it’s often easier to get company-wide support for the initiative, and this can be critical for the success of any first Industry 4.0 project.

Understanding the true ROI of Industry 4.0 requires examining both the operational and business value of the initiative. Articulating these values can help to gain buy-in from various stakeholder groups, while also providing a more complete look at the potential ROI of the project.


About Cara Chatellier

Cara Chatellier is a digital marketing strategist & content writer. She lives in the Boston area and has worked with MetaExperts since October 2018. She loves travel, wine tastings, and podcasts.

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