ROI - Calculating the Return on Investment and Payback on Equipment Purchases
Making Smart Equipment Choices:
I'm sure you can list many of the different reasons to automate the different production processes in your bakery — Here are some reasons that come to mind:
• Increase production rates without increasing labor costs
• Reduce labor costs
• Improve ingredient and portion control
• Reduce injuries and injury claim costs
• Improve product quality and product appearance
• Perform tasks that can not be performed easily by hand
Knowing that there are good reasons for adding a piece of equipment to your bakery is only the first step in deciding to buy the equipment. The next step in the decision making process is to calculate the Return on Investment (R.O.I) for the piece of equipment and the time it will take for the equipment to pay for itself. In other words, the Payback Period.
Why calculate the Return on Investment and Payback Period? There are two good reasons. First the Return on Investment helps you decide if the equipment is a profitable investment. It may be that you are better off leaving your money in the bank rather than investing in the equipment. Second these calculations will help you decide between different pieces of equipment.
Let's take a walk through some real life examples. The first thing we have to do is to put a dollar figure beside each of the reasons for adding the piece of equipment to your bakery. Our first situation is where a staff member is depositing cake batter manually — ladle, hand scoop, measuring cup and so on. The reasons to automate the depositing are as follows:
• Reduce labor costs
• Improve Ingredient and portion control
• Reduce repetitive stress injuries
• Improve the consistency and quality of the finished product
You will note that I did not list "increased production rates without increasing labor costs" as a reason to automate. In our situation the current manual method of depositing is keeping up with the rate that the ovens can bake the cakes. Even though our automated depositing system is faster than the current manual depositing system the overall cake production will not increase. The primary reasons to automate the depositing are reduced labor costs and improved ingredient control with reduced stress and improved consistency being of lesser importance.
In our example we are baking 8 inch round cakes in 4 double rack ovens. In each oven we can bake 240 cakes each hour with 30 minutes of bake time and 1 minute to unload and load the oven. We are running 1- 8 hour shift, 5 days per week. Currently 3 people per shift are depositing and scaling the batter into the cake pans by hand. Batter costs are $0.40 per cake. With a depositor only one person will be needed to deposit and scale. The depositor is also very accurate from one deposit to the next so the amount of batter deposited in each pan is consistent. There is no over depositing and no under depositing. Batter is not wasted and cakes are not
rejected because they are underweight.
The dollar amount of savings per year from automation, are as follows:
1. Reduced labor costs Labor required reduced from 3 staff member to 1 staff member
2. 2 staff x 8 hours @ $12 per hour for 250 days = $48,000
3. Ingredient and portion control 1% saving on ingredients and rejects.
Ingredients cost per cake $1.00 (4 ovens x 240 cakes @ $0.40 x 8 hours x 250 days) x 1% = $7,680
4. Reduced injury costs 10% of the wage cost for 3 staff members 10% x (3 staff x 8 hours @ $12
per hour for 250 days) = $7,200
Total Savings $62,880
The next step in calculating the R.O.I and Payback Period is to bring the cost of the equipment into the equation. The manual depositing process in our example can be automated with a depositor and a batter pump to transfer batter from the mixing bowl to depositor. In our example the cost of these two pieces comes to $20,000.
1. Our Return on Investment per year is ($62,880 / $20,000) x 100% = 314%
2. The Payback Period on the equipment is ($20,000 / $62,880) x 12 Months = 3.8 Months
Another important calculation is the amount of money that is lost for every day that the depositing is not automated. Based on 250 working days per year the daily loss is $62,880 / 250 = $251.52 per day. If our bakery goes to two shifts per day the daily loss will double to $503.04 per day. The R.O.I will also double to 628% — the payback period will be cut in half to 1.9 Months