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Inspection Equipment Can Pay for Itself
Justifying an inspection investment can be tough; here’s a guide to how it can save money and provide peace of mind
by Bob Ries
There’s no question—we are in a recession. Budgets are tight, and every dollar spent faces more scrutiny than ever. But this is no time to sacrifice product quality or take chances when it comes to product inspection. Consumers are reigning in spending, so any question about a product’s safety or integrity may prompt shoppers to switch to another brand.
The economic downturn may leave some companies in a challenging position: While looking to save money and trim budgets, they may also be overdue for a metal detector or X-ray system investment or upgrade. Making a case to purchase non-value add equipment may seem difficult. Whatever the reason for an inspection investment, however, it is critical to build a rock-solid case before asking for capital to invest in new equipment. Management teams prefer to see hard evidence showing how the new equipment’s total cost of ownership (TCO) will be paid back over a relatively short period of time. By using a simple payback model, any quality or process engineer can compare the costs of using outdated technology or techniques to investing in a new inspection system and, potentially, show clear savings in dollars and cents.
Most companies choose to invest in either a metal detector or X-ray system to inspect their products for a variety of possible contaminants, from small rocks or metal equipment parts to glass or missing or damaged components in a package. Usually, this investment is driven by an internal mandate or policy, not a law or regulation. Deciding whether an X-ray system or metal detector is right for your inspection needs depends on a number of variables such as possible contaminants, product packaging and, of course, budget. Both types of systems offer clear advantages and disadvantages, but making the right choice begins with understanding the technology and how its limitations will affect your desired inspection process.
Companies choose to install inspection systems for a host of reasons, and the cost of technology varies considerably based on their needs. Most production facilities must comply with hazard analysis and critical control point and/or International Organization for Standards policies and want to select systems that will assure they achieve mandated levels of safety. In other cases, contamination problems may be unavoidable or random and companies want to be proactive, such as when a contaminant must be separated from raw materials. Finally, for some companies, it can be potential customers or past contamination issues that prompt management or engineers to purchase an inspection system. And this can steer them toward a particular technology.
Know Your Costs
The task may seem daunting. To build your argument, you must calculate costs associated with not purchasing new equipment and compare those to how long it will take to earn back TCO. Surprisingly, you don’t need to be a mathematician to gather the information needed to lay out how soon your company will earn back its investment. You simply need a model for calculating payback that is specifically tailored to inspection equipment.
First, you have to know what your costs are over a typical five-year period. The first year of ownership is obviously the most expensive because it includes expenditures like the cost of equipment, installation, and start-up, training, spare parts, engineering services, and, sometimes, the disposal of old equipment. After the first year of ownership, operating costs, maintenance costs, unscheduled downtime, and extended warranties all continue to be expenses.
Second, you have to explain all potential areas in which new inspection equipment will save money. Typically, the most savings can be found in scrap reduction, rework reduction, avoided inspection charges, eliminated product returns, and tax incentives.
The greatest savings, though it may be hardest to quantify, comes from brand protection. A recall can seriously damage your company’s reputation and create a host of unexpected costs, including attorney expenses, fines, and the value of recalled products. It’s also important to remember that a contamination issue is significantly less expensive the earlier it is detected in the production process. In other words, it’s more expensive to resolve a contamination issue that is first detected in a warehouse before shipment than a problem that is detected at the raw ingredient stage. Careful screening of raw materials can save a lot of money down the road, and you may want to include this point in your proposal.
There are a lot of variables to incorporate into a proposal, so the easiest way to show how to calculate inspection system payback is to walk through an example. Let’s use an X-ray system as the potential purchase and begin with the expenditures section. These expenses are fairly straightforward; you may even know some costs offhand, while others will take a little research. Equipment, installation, and training costs should be readily available; you may rely on staff or equipment vendors to determine expenditures such as operating costs, disposal fees, and unscheduled downtime.
When it comes to calculating savings, you have to examine your current costs. For each of the categories—scrap, rework, inspection, and product returns—you can calculate estimated savings by figuring out how often these events occur and assigning a cost to each one. Let’s say you are calculating scrap costs and you know that, on average, your plant’s product is scrapped five times a year due to a contamination issue found in a quality assurance sampling process. You need to determine the average amount of product lost and the number of production hours devoted to looking for the cause of the contaminant, for example, a broken piece of equipment or a blade.
Perhaps you estimate one hour of lost production at a cost of $1,000, with $2,000 of scrapped materials for a yearly total of $15,000. If your company must pay for scrap disposal, calculate that cost into this figure. When product is reworked, you only need to compute overtime and repackaging costs; for inspection, you need to know rental and labor costs associated with hiring a third party service to inspect a contaminated product, typically 10-15% of its retail price.
With product returns, there are more possible factors to consider, including attorney fees, inspectors, and recalled product costs. It’s important to know the costs of each part of an event and average the frequency of its current occurrence. Tax incentives vary from state to state, but if your state offers a tax credit, it is usually deducted directly from your tax bill. Be sure to look into this.
In the example, you’ll see expenditures laid out in red and savings in green. The annual difference between the two creates the cumulative cash flow. In this analysis, cumulative cash flow returns to a positive balance about one and a half years after the time of installation and commissioning, an ideal TCO payback time. Each variable can have a direct effect on how much time it takes your company to earn back TCO. Taking the time to gather accurate information ensures a reliable picture of payback time.
While hard numbers are invaluable, the case for new inspection equipment does not end with the payback model. There are a number of intangible factors to consider when building an argument for new inspection equipment. For example, because the largest branded food producers or retailers are always looking to do business with companies that have world-class inspection practices, these practices can be a differentiator. Likewise, updated inspection equipment comes with state-of-the-art traceability technology, vital for any company having to produce evidence and records to disprove a customer’s contamination claim.
Regular quality issues, stoppages, and quarantines can ultimately impact inventory and just-in-time deliveries to customers. Reliable inspection equipment will clear up these production bottlenecks. And the knowledge that you are prepared for new regulations or inspections, combined with all the other benefits described here, creates a peace of mind that allows you and your team to remain focused on production volume and profit.
Finally, remember that your company’s policy on new equipment purchases is not always the last word. Use this process to develop a comprehensive, justified plan for a new investment, and you’ll ensure that your team is working with the technology that’s best for your business.
Bob Ries, BSEE, MBA, is a product manager at Thermo Fisher Scientific. Contact him at firstname.lastname@example.org.