How to Calculate Expected ROI on Liquid Packaging Automation

Because investing in packaging line automation is a major decision for any business, it is important to both understand the return on investment (ROI) and ensure that the move to automation will provide a good ROI. At Liquid Packaging Solutions, we provide the packaging equipment - conveyors, rinsing machines, liquid filling machines, capping equipment, and more - that will help a business increase efficiency and provide a positive ROI. This guide provides a simple method to calculate ROI when automating your packaging process.

Why ROI Matters in Packaging Automation

While the answer to why ROI matters may seem obvious, there is more to automation than just the cost. Any business wants to get a positive return on their investment from a financial standpoint and justify capital expenditures, but ROI also matters when it comes to efficiency and speed, as well as consistency and scalability. In other words, ROI always matters from a cost perspective, but packagers must consider more than cost to feel secure in purchasing equipment for automation! What follows is a step-by-step guide to factor in cost, investment, savings, output, and more to estimate your packaging automation ROI.

Step 1: Identify Your Current Costs

Whether packaging by hand or using semi-automatic machinery, the first step is to evaluate your current costs. Certain costs are easily identified. For instance, if you have five laborers operating machinery or hand filling making $40,000.00 a year, your labor costs are $200,000.00. Other costs might not be as easy to pin down, but will include downtime, product waste from inefficient processes, production speed itself, and things like reworks to products from customer complaints. All of these costs can add up quickly, and even be overlooked, until a business owner takes the time to truly identify them.

Step 2: Estimate Automation Investment

Determine the total investment necessary for your desired automation. This will include quotes for machinery mentioned above - conveyors, fillers, cappers - that can be acquired from LPS or OEMs to find the cost of the machinery. Integration of equipment, installation, training, and continued support should also be included in the estimate. These upfront costs can often be daunting to a business, but it must be remembered that this step is only one in the total equation.

Step 3: Calculate Labor Savings

Using our earlier example, if we can cut manual labor from five to two with the automatic machinery, still at $40,000.00 per year, per employee, then we know we can cut those $200,000.00 in labor cost down to $80,000.00. So, reducing our labor force by more than half can immediately save us about $160,000.00. However, the analysis should start, not stop, at the labor costs.

Step 4: Measure Increased Output

In addition to labor costs, automation can dramatically improve production speed and consistency, leading to higher output! For example, if current production produces 4,000 bottles of finished product per day, but the automated system can produce 16,000 bottles per day, output is quickly increased by 300%, opening up the potential to expand your market, reduce backlog and increase potential revenue. While not as straightforward as calculating labor savings, a business can estimate a gain from increased output for the ROI equation.

Step 5: Factor in Waste Reduction

The precision of an automatic filling machine can provide accurate fills that typically just cannot be matched by hand filling. Liquid filling machines ensure that bottles or other containers are accurately filled to a specific volume, weight, or even level. This precision reduces overfilled bottles as well as spills or product loss due to human error. A simple reduction in waste can lead to significant savings over time, especially for high-value liquids. Like increased output, the savings from waste will likely need to be estimated from past experience with the current filling process.

Step 6: Use the ROI Formula

Once your analysis is done and you have the numbers from the above steps, simply apply the ROI formula:

ROI (%) = (Annual Savings - Annual Costs) / Total Investment x 100

As an example, let's use the numbers from the Steps above as well as estimates for output, waste reduction, and an automated packaging line:

Example:
Annual Labor Savings:                              $160,000.00
Annual Waste Reduction:                         $10,000.00
Annual Efficiency/Output Value:              $30,000.00

Total Annual Benefit from Automation:  $200,000.00

Equipment Investment:                             $350,000.00

ROI = (200,000 / 350,000) x 100 = 57% ROI in Year One

As you can see from the above example, over half of the investment is paid back in the first year of using the automatic packaging equipment! While our example may not apply to every company, in many cases a business will see full return on investment within 1 to 3 years. This makes the ROI analysis critical, as looking at the cost of automation can often be intimidating if the benefits are not understood.

Step 7: Consider the Intangibles as Well

Not all benefits of automating the packaging process are financial, though we see the importance of understanding the financial consequences above. Automation also improves product consistency, which can lead to an enhanced brand reputation. For processes like capping and even filling, automation can increase workplace safety by eliminating repetitive motion injuries. Finally, an automatic packaging line makes growth an easier process, allowing for new products, new contracts, and the increased output noted earlier. These intangibles contribute to long-term success of products and the business as a whole.

Common Mistakes to Avoid When Calculating ROI

It can be common to underestimate the labor related costs, from human mistakes leading to downtime to vacations, sick days, and simple fatigue. Analyze your employee salaries along with downtime and inefficiencies. Also, do not fail to account for future growth, understanding that growth without automation often entails adding more employees and labor costs. Finally, do not look only at upfront costs without doing the rest of the analysis. Packaging machinery can be expensive, but at the same time, it can pay for itself and begin increasing profit much more quickly than most business owners realize. Just remember that a complete ROI analysis should consider both short-term costs and gains as well as long-term impact!

At LPS, we design and manufacture equipment tailored to each projects specific product, container, and production goals as well as provide the services necessary for long-term success. Our team will work with you to analyze your current process and help identify the benefits of adding packaging machinery. If you are considering automation, contact LPS to find your packaging partner today.