The Truth about ROI IMTS 2016

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1 The Truth about ROI IMTS 2016 September 12 th, 2016 Jeffrey L. Reinert President & CEO INDEX CORPORATION

2 Overview of Process Traditional View Production Cost Return on Investment ROI Investment Decision

3 Overview of Process Modern View Production Cost Return on Investment ROI Product Quality SPC Equipment Flexibility / Corporate Strategy Single Step Process Tooling, Operating, Changeover Investment Decision

4 Investment Factors This presentation will show the need to take a comprehensive look at all factors that influence the success of an investment What the different factors are How important they are How to use them 1. From a perspective of factors that cannot be calculated 2. From a return of investment perspective 3. From a detailed production cost-analysis perspective

5 Investment Factors Internal vs. External View Return on Investment Customer Satisfaction Production Rate Flexibility Now Single vs Multi Step Process Price On Time Delivery Flexibility In the Future For Retooling Market Considerations Impact on Competitiveness Operating Convenience Internal Factors Environmental Issues External/ Customer related Factors Reputation Product Quality Scrap Rate Zero Defects Returned Parts Strategic Impact: Where does the Company want to be in The Future Financial and Technical Solidity of the Company

6 Cost Factors Comprehensive View To compare different types of equipment for the same investment, it is essential to consider capability differences as well as factors that can not be converted into time or cost savings such as: Quality/ Accuracy/ SPC capability Advantages of a Single Step Process Flexibility & Retooling Costs Tooling / Setup / Changeover Benefits Strategic Considerations and Advantages These benefits are crucial and necessary and must be considered in the decision process to assure the success of the investment!

7 Cost Factors Calculable vs. Non Calculable Calculable Factors Productivity Cycle Time Set Up and Tool Change Time Uptime and Efficiency Single Step, Complete Process Throughput Scrap Rate Tooling Cost Maintenance Cost Preparation Cost Depreciation Cost Non- Calculable Factors & Benefits Quality, Accuracy, SPC Surface Finish Flexible verses Dedicated Lower Retooling Cost Preset Quick Change Tooling Standardized Insert Tooling verses Custom Tooling Single Point Turning vs. Form Tools Single Step Drop off - Complete Processes Simpler Operating (on CNC Equipment) Quality that does not depend on operator skill (conventional vs. CNC) Environmental issues Technological Status and Competitiveness of the Company in the Future

8 Cost Factors Non Calculable Non- Calculable Factors/ Benefits Quality, i.e. dependability, scrap rate, deburring cost, Accuracy, i.e.: SPC capability/ Cpk, thermal stability, roundness, runout Surface Finish, i.e.: single point CNC turning vs. forming with form-tools, machine rigidity Flexible vs. Dedicated i.e. easy to retool for new part, easy to change over, capable to run wide range of parts, easy to add or remove features, easy to re-task equipment

9 Cost Factors Non Calculable Non- Calculable Factors/ Benefits Single Step Drop off Complete Processes: main benefits: eliminating secondary operations, closer location tolerances and alignment of part features, eliminating fixturing cost, less set-ups, less work in process, faster throughput Lower Retooling Cost i.e.: simple standard (insert tools), no special tool holders or attachments Standard Preset Quick Change Tool Holders, i.e. VDI. Capto Quick tool change for tool replacement or retooling

10 Cost Factors Non Calculable Non- Calculable Factors/ Benefits Simplicity of operation i.e. CNC equipment vs. conventional Quality that does not depend on operator skill but on the equipment Environmental benefits ie. Oil coolant vs. water soluble? is your machine choice green? Does it move heat in or out of the plant? Market considerations; Will one part run forever? Lifecycles are getting shorter and shorter. Reputation based on equipment, will impact future business Technological Status and Competitiveness of the Company in the Future

fight Without properly evaluating the investment factors

11 How to chose the right tools to win the battle I cant be bothered by any crazy new technology I have a battle to fight Without properly evaluating the investment factors you will lose the battle Investment Tools NEW TECHNOLOGY

12 Financial Financial Methods Internal Rate of Return IRR determines ROI (Return on Investment) This is currently the most widely used financial tool and will be explained below Discounted Cashflow Analysis Similar to ROI calculation It just looks at the cashflows from a different perspective than ROI caculation Custom financial Software

13 IRR- Internal Rate of Return Calculable Factors: ROI calculation using IRR / rate of return formula in the Microsoft Excel program

14 IRR- Internal Rate of Return The rate of return, r, is calculated is based on the sum of cash flows for a defined number of years, and the total of the sum (the net present value) to be zero, NPV=0 N=number of years C= Cash flow (inflow - outflow) for year number (1,2,3,4..) NPV= Net Present Value t= year number (0,1,2,3..) r= return rate, or discount rate, or depreciation acceleration rate

15 IRR- Internal Rate of Return Spreadsheet Example RETURN ON INVESTMENT ANALYSIS FOR A PROJECT A MACHINE PURCHASED TO RUN 1 PART FOR 3/ 5 YEARS Example CNC Single Spindle Purch Price Resale Value Value Difference MACHINE COST LESS VALUE AT END OF PROJECT: $400, $100, $300, PARTS PER HOUR PRODUCED NET 50 LABOR COST PER HOUR $40.00 HOURS PER YEAR 3,500 OVERHEAD ALLOCATED BASED ON LABOR HOURS $210, INFLATION FACTOR 1.02 PERISHABLE TOOLING PER PART $0.30 NUMBER OF PARTS TO BE MADE/YEAR 175,000 SELLING PRICE/PART (LESS RAW MATERIAL) $3.60 CASH INFLOW: YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 REVENUE $0 $630,000 $630,000 $630,000 $630,000 $630,000 CASH OUTFLOWS: INITIAL CAPITAL EXPENDITURE $300,000 PERISHABLE TOOLING COST $52,500 $53,550 $54,621 $55,713 $56,828 LABOR COST $140,000 $142,800 $145,656 $148,569 $151,541 OVERHEAD COSTS $210,000 $214,200 $218,484 $222,854 $227,311 NET CASH FLOW PER YEAR -$300,000 $227,500 $219,450 $211,239 $202,864 $194,321 CUMULATIVE CASH FLOW -$300,000 -$72,500 $146,950 $358,189 $561,053 $755,374 PROJECT RETURN ON INVESTMENT AT END OF YR % 31.47% 53.42% 62.91% 67.36% IRR Formula calculations: Cash Flows $ ini -300,000 yr1 227,500 yr2 219,450 yr3 211,239 yr4 202,864 yr5 194,321

16 IRR- Internal Rate of Return Based on NPV to be 0 after 3 years, (already knowing r=53.42% from excel sheet) The formula would look like this: NPV= -300, , , ,239 = ( ) ( ) ( ) or NPV= -300, , , ,490 = 0 The rate of return r calculated as shown above is an indicator as to: How fast the investment is depreciated, How long the payback period is, and How high the rate of return is. This calculation emphasizes the importance of productivity, because productivity is the key factor influencing the return rate. The detailed piece cost analysis shown below will demonstrate this point.

17 Calculation Method Excel Spreadsheet The detailed piece cost calculation method using an Excel spreadsheet is helpful in comparing different types of equipment for the same project and understanding the importance of productivity. In the following we will show you the blank spreadsheet consisting of two sections: 1.The input data, and 2.The calculated data which is automatically calculated by excel

18 Calculation Method Excel Spreadsheet Excel Piece Cost Calculation Spreadsheet Template Part 1 Input Data Item # Input Data Unit Remark Machine A 1 Lot size pcs/lot 2 Number of lots lots/yr 3 Cycle time sec/pc 4 Set-up time (on the machine) min/lot 5 Set-up time (outside the machine) min/lot 6 Presetter time min/lot 7 Programming time min 8 Computer time min 9 Cost of replacement or purchase price of machine $ 10 Power consumption KVA 11 Space required sq. ft. 12 Depreciation years yr 13 Number of operating hours per year hr/yr 14 Efficiency % 15 Interest Rate % 16 Maintenance cost / percentage of price % 17 Common cost / percentage of wage cost % 18 Space cost $/sq.ft. 19 Energy cost $/kwh 20 Programmers wage cost $/h 21 Computer cost $/h 22 Tool presetter cost $/h 23 Tooling cost $/h 24 Wage cost $/h 25 Job planning cost $ 26 Number of setup pieces 27 Number of machine operators INPUT DATA ONLY

19 Calculation Method Excel Spreadsheet Excel Piece Cost Calculation Spreadsheet Template: Part 2 Calculated Data Item # Cost type Unit Calculation formula A 28 Depreciation cost / hr $/h 9/(12x13) #DIV/0! 29 Interest cost / hr $/h 0.5*x(9x15)/(100*x13) #DIV/0! 30 Maintenance cost / hr $/h (9x16)/(100x13) #DIV/0! 31 Space cost / hr $/h (11x18)/13 #DIV/0! 32 Energy cost / hr $/h (10x19)/2* Tooling cost / hr $/h Machine cost / hr $/h #DIV/0! 35 Wage cost / hr $/h Common cost / hr $/h (35x17)/100* Personnel cost per hour $/h (35+36)x Machine rate per hour $/pc #DIV/0! 39 Individual part cost $/pc (3x38x100*)/(3600*x14) #DIV/0! 40 Job planning cost $ Programming cost $ (7x20)/60* Computer cost $ (8x21)/60* Trial run cost $ 39x26 #DIV/0! 44 Total preparation cost $ #DIV/0! 45 Preparation cost per piece $/pc 44/(1x2) #DIV/0! Calculated DATA 46 Set-up cost (on the machine) $ (4x38x100*)/(60*x14) #DIV/0! 47 Set-up cost (outside the machine) $ (5*37)/60* Tool presetter cost $ (6*22)/60* Repeat set-up cost $ #DIV/0! 50 Repeat set-up cost per piece $/pc 49/1 #DIV/0! 51 Total production cost per piece excl. material $/pc #DIV/0!

20 Calculation Method Excel Spreadsheet In the following we will show the influence of investment cost as well as the influence of productivity on the piece cost, by looking at an actual case study of two machines 1. Decreasing the cost of the lower priced machine 2. Increasing the price of the higher cost machine 3. Increasing the productivity and see the impact it has on the piece cost

21 Productivity vs. Investment Cost Key Factor Influences Example Influence of lower Investment Cost on Piece Cost Investment Cost machine A vs. B -20% -40% Item # Input Data Unit A B B B 1 Lot size pcs/lot 50, , , , Number of lots lots/yr Cycle time sec/pc Set-up time (on the machine) min/lot Set-up time (outside the machine) min/lot Presetter time min/lot Programming time min Computer time min Cost of replacement or purchase price of $ 585, , , , machine 10 Power consumption KVA Space required sq. ft Depreciation years yr Number of operating hours per year hr/yr 5, , , , Efficiency % Total production cost per piece $/pc In order to compete with the more productive machine, the cost for the lower priced machine cost would have to reduced by 40%!!

22 Productivity vs. Investment Cost Key Factor Influence Example Influence of higher Investment Cost on Piece Cost Influence of increased Investment Cost on Piece Cost Machine A vs. Machine B 20% 30% Item # Input Data Unit Remark A B A A 1 Lot size pcs/lot 50, , , , Number of lots lots/yr Cycle time sec/pc Set-up time (on the machine) min/lot Set-up time (outside the machine) min/lot Presetter time min/lot Programming time min Computer time min Cost of replacement or purchase price of $ 585, , , , machine 10 Power consumption KVA Space required sq. ft Depreciation years yr Number of operating hours per year hr/yr 5, , , , Efficiency % Total production cost per piece excl. material $/pc Even if the more productive machine s price would be raised by 30% it would still be competitive

23 Productivity vs. Investment Cost Key Factor Influences Example Influence of Increased Productivity on piece cost Influence of increased productivity on piece cost Productivity +5% Productivity +10% Productivity +15% Item #Input Data Unit A B A A A 1 Lot size pcs/lot 50, , , , , Number of lots lots/yr Cycle time sec/pc Set-up time (on the machine) min/lot Set-up time (outside the machine) min/lot Presetter time min/lot Programming time min Computer time min Cost of replacement or purchase price of $ 585, , , , , machine 10 Power consumption KVA Space required sq. ft Depreciation years yr Number of operating hours per year hr/yr 5, , , , , Efficiency % Total production cost per piece $/pc If the productivity of machine A is increased, the piece cost decreases by about the same percentage!! Piece Cost

24 Graphic Depiction of Cost Factor Influence Preparation Cost/Hour + Investment/ Depreciation Cost/Hour + Depreciation cost depends on hrs/yr runtime and number of depreciation years Additive Factors Interest Cost/Hour + Space and Power Cost/Hour + Maintenance Cost/Hour + Tooling Cost/Hour + Wages and Overhead Cost/Hour Productivity is the only factor that has a Multiplying effect on the piece cost All other factors only have an Additive effect on the piece cost = Total Hourly Costs X Productivity = = (Cycle Time + Efficiency) Cost per Piece

25 Comprehensive Focus Importance of Quality of product Importance of Comprehensive Focus Benefits of single step processes Benefits of Flexibility Detailed Standardized Production and Piece Cost Analysis Impact on Labor Content Degree of Automated Processes Equipment Quality and Longevity Impact on Long Term Competitiveness Strategic Impact Company s Position in the Market Comprehensive Methods Lead to Long Term Success

26 Overview of Tools Key Steps in the Process: 1. Research Your Customers Needs, Problems and Problem Consequences 2. Understand the IRR Calculation 3. Show and Calculate Benefits of Productivity by using Excel Piece Cost Template Include Set- Up, Tool Change Time, Uptime and Efficiency 4. Consider the Importance of non - calculable Benefits regarding Quality, Flexibility to assure the future competitiveness of the company 5. Consider Benefits of Single Step Drop off Complete Process regarding Throughput Scrap Rate and increased Overall Equipment Efficiency and Quality

27 Summary The Truth about ROI is, that: It is important to take a comprehensive look at all aspects of an investment. This includes: 1. Factors that are crucial to the success, but cannot be calculated 2. Having a good understanding of the financial impact of the investment, as calculated in the IRR/ ROI formula 3. Looking at a detailed piece cost analysis to compare competing equipment, and understand the overwhelming importance of Productivity.

28 Thank You Questions?

Interest and equivalence

Lecture 10 Interest and equivalence Know how to obtain one value P, F, or A from another value Given the interest rate and the number of time periods Know how to use: (P/A, i, n), P/F, i, n), (F/P, i,