Issue 26 | 15.07.2024

In Episode 26, we had the pleasure to host Dr. Lucian Dold, Senior General Manager for Business Development at Omron and a true expert in investment strategies for automation projects. In our talk, we discussed commercial reasons that all too often become showstoppers for automation initiatives. One of them being the “classic” ROI calculation. Read on to learn how to avoid such showstoppers by applying the RODI (Return on Digital Invest): 

1. The Challenge of ROI in Automation

Convincing finance departments to invest in automation is difficult because traditional ROI (Return on Investment) calculations often don't fully capture the benefits of automation, complicating investment decisions.

The Productivity Paradox

The "productivity paradox," first noted by Robert Solow in 1987, is a great example in that context. Despite the widespread use of computers, their impact on productivity wasn't immediately clear. This paradox appears again with automation and digitalization, where long-term benefits aren't always immediately measurable.

The introduction of computers in the 1980s can be compared to current automation technologies like AMRs (Autonomous Mobile Robots) or AGVs (Automated Guided Vehicles). Just as computers eventually revolutionize productivity, so will automation, despite initial challenges and learning curves.

Primary, Secondary, and Latent Value Streams

Three layers of value in calculating ROI for automation projects can be outlined:

1. Primary Value Stream: Direct savings and productivity improvements that can be immediately measured.
    
2. Secondary Value Stream: Indirect benefits, such as data insights and process optimizations, which may not be immediately apparent.
    
3. Latent Value Stream: Long-term benefits and learnings from initial projects that improve future implementations and overall efficiency.

Considering secondary and latent benefits in ROI calculations is crucial. These benefits include information gained from automation that optimizes other processes and the cumulative knowledge from early projects that enhance future ones.

We therefore recommend a shift in investment perspective from a short-term ROI focus to a long-term, future-oriented view. Instead of only looking at the payback period, companies should consider the overall added value over a longer period, incorporating secondary and latent benefits.

2. Our suggestions for Practitioners: 

Automation Matrix

A practical approach to prioritize automation projects is recommended:

1. Identify the top losses in the factory.
    
2. Estimate the ROI, implementation time, and investment needed for each project.
    
3. Create a chart (or matrix) to visualize these factors and prioritize projects that offer the best balance of feasibility and impact.

Encouragement for Collaboration and Communication

Collaboration and open communication between logistics engineers and finance departments are encouraged to align on common goals and leverage the broader benefits of automation investments.

How to Calculate RODI (Return on Digital Investment)

To calculate RODI, follow these steps:

1. Identify Primary Savings: Calculate direct savings from productivity improvements, reduced labor costs, and other immediate benefits.
    
2. Estimate Secondary Benefits: Identify indirect benefits, such as process optimization and data insights, and quantify their potential savings.
    
3. Consider Latent Value: Factor in long-term benefits and learnings that will improve future projects and overall efficiency.
    
4. Create a Comprehensive ROI Model: Combine primary, secondary, and latent benefits to create a more holistic view of the return on investment.
    
5. Use a Longer Horizon: Extend the evaluation period beyond the traditional 2-3 years to capture the full value of the investment.

By incorporating these steps, companies can develop a more accurate and persuasive ROI model for automation investments.