Machine and Process Management

Do automation systems provide “improved business value”?

Industrial Automation valueMy newest book, The Value of Automation: The Best Investment an Industrial Company Can Make was recently published by ISA. The title of this book begs the question: “Do industrial automation systems always drive improved business value for industrial companies?” As much as I would like to answer this question in the affirmative, my personal experience with a large number of automation projects over the past two decades is that many, if not most, automation system projects result in very little, if any value add. This may seem like an unusual admission by someone who has written a book on “the best investment an industrial company can make”, but it is unfortunately quite true.

Automation projects are often categorized as greenfield – new automation systems going into new plants or plant expansions, or brownfield – new automation systems going into existing plants to update or upgrade existing systems. The value proposition for greenfield automation projects is pretty clear and significant. The automation system is simply required to get the plant or plant expansion up and running making it essentially a binary value proposition. If the plant is operating the automation system has done its job and the company is making money. If not, and the automation system is the cause, the negative value is huge. With this in mind the primary value proposition for automation systems in a greenfield environment is to minimize the risk of on-time delivery of a working system and an operating plant. A second value proposition in greenfield environments is delivering the system on budget. Following the introduction of the Distributed Control System during the 1970s and early 1980s there were a significant number of greenfield automation projects. This skewed the overall industrial automation value proposition to on-time, on-budget system delivery and led to a strong market focus on ease-of-use (primarily engineering) and lowest system cost. Since greenfield projects do not really involve incremental business improvements to the operation, this aspect of automation system selection did not receive the same level of importance.

The value proposition for brownfield automation projects should be focused on the incremental value the automation system provides. In fact, when industrial companies are trying to justify the capital expenditure for an automation system upgrade they typically have to project an expected return on investment (ROI). If the projected ROI is above a threshold limit set by the company’s financial management team the capital investment has a reasonable chance of being approved. This focus on ROI would seem to imply that the industrial company would evaluate the different potential automation solutions on the basis of which of the alternate solutions might maximize the ROI by driving the most incremental business/financial value at the most reasonable cost.

From my experience with the requests for proposals (RFPs) I have seen over the past two decades is that they seldom focus on the incremental business/financial value the system may provide. They are more likely to focus on what is seen as state-of-the-art technological features and reduced cost. Perhaps the reason for the technology focus is that engineers tend to produce most of the RFPs and being technologically-focused they like to see new technology features in the systems they buy. Or perhaps it is the technologically-focused suppliers who like to boast the new technology features of their systems.

The more interesting aspect of the focus of the RFPs is that the financial focus is typically on ease-of-use/reduced cost rather than ROI or incremental business value generated. Perhaps the reason for this is that ROI and incremental business value are very difficult to calculate after the automation systems are started up. I have polled a number of project professionals of industrial companies over the years and very few indicate that they actually calculate ROI after a project is completed. Calculating actual ROI requires the calculation of the actual costs of the system, both initial costs and ongoing costs, as well as the calculation of the actual business benefits the system delivers. Most industrial companies can typically make a pretty good estimate of the actual cost of the system because they tend to know the project costs and can estimate the ongoing operational and maintenance costs. But calculating the incremental business benefit the system provides is not so easy. Plant engineering teams may look to the cost accounting systems to try to determine the incremental business benefit, but most installed cost accounting systems lack the specificity necessary to be able to discern the actual benefit provided.

This situation presents a huge problem for industrial companies and industrial automation suppliers. Industrial companies are typically not getting the value they should, and could be realizing from their automation investments. Automation suppliers find themselves in the position of having a hugely valuable capability that is perceived as providing little of no value. This may be one of the reasons that industrial companies are waiting longer and longer to upgrade installed automation systems. Why would you update a system that is working pretty well if the new system offers little of no incremental value. This may also be the reason that automation systems, which can provide value, are becoming commodities at an ever increasing rate. Automation systems are simply not seen by industrial executives as adding value.

This has to change! Industrial companies can benefit greatly through the effective utilization of automation technologies, but, for the most part they are not benefitting to the degree they should be. Automation systems can be highly valuable if applied and measured effectively. Perhaps it is time to question the traditional business processes and perspectives that are diminishing the value of automation.

Interested to know your thoughts…please leave a comment below.  Or you can visit us at the upcoming Connect 2016 Automation Conference for further discussion.

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6 Responses
  1. jiawei

    Undoubtably, I support the automation system because it maximizes the economical level for companies, increasing efficiencies and reducing costs; 3D printing is a great example of that; Schneider is a pioneer in this field. However, Automation is a double-edged sword, it also generates the issues of socialized division of labour and of the unemployment. Globally, the poor is poorer and the rich is richer, their income influence their literacy class. When high-skilled machine replaces human labor, how can the poor improve their education without jobs? As a business student, I am wondering how can a company like Schneider optimize its business value as well as social value?

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  2. Peter Martin Peter Martin

    Dear jiawei – your points are well made and very important. However I believe your point on the division of labour actually occurred well befor the advent of automation systems. With industrialization the increasing levels of complexity took place in such a short period of time that industrial managers determined that the most effective way to deal with the complexity was to implement a divide and conquer approach by partitioning organizations into areas of specialization. This can be clearly seen by studying Frederick Taylor’s Scientific Management approach which systematized the division of labour. There are entire books dedicated to this issue. This decision is still significantly impactful in today’s industrial organizations.

    There was on aspect of the division of labour that was necessary at the time but may be more in line with what you are referring to. That is that a schism formes in industrial organizations with the professionals & managers on one side and labourers on the other. Initially this seemed to be necessary because of the lack of skill and education at the labour force level resulting from the migration of people from farms to industry. Capitalizing on this large unskilled and uneducated workforce was a huge challenge. Scientific Management essentially turned this people into robots, performing a very small part of the overall functionality needed to produce product. This was financially reasonable because the labourers were very poorly paid. As a result the labout force organized and became much more expensive. Industrial companies were having difficulty paying the higher wages for this increasingly costly labout force. This was one of the earliest economic value propositions for the utilization of automation technologies because industrial companies found that they couls reduce their labour force by automating functions previosly performed by people. From this point of view automation was definitely used to eliminate jobs so industrial companies might be competitive. There is an ongoing struggle between wages and competitiveness that is still alive and well today.

    Fourty years ago one of the top economic value propositions for the acquisition of automation technologies was headcount reduction. But over the past 25 years the headcount in most industrial companies has actually stablized. The question today is how automation can be used to improve the work environment, capabilities and value of industrial personnel and thereby help to improve their lot in life. Schneider Electric as well as other major automation suppliers have taken this challenge very seriously by building capabilities into the automation systems specifically designed to improve the quality of life and effectiveness of plant personnel and thereby make the more valuable to their organizations. For example, we have embedded into the automation systems both offline and online training so personnel working with the automation systems have to opportunitiy for lifetime learning. This is having a huge impact on the worth of what used to be the labout force. We have found that experiential education is much more impactful than academic education and that frontline personnel are starting to manage and control the business of their industrial domains and to drive higher levels of value for their operations. We won’t be completely happy untill the phrase “labour fource” is struck from industrial vocabularies and all personnel in industrial operatios are considered to be “performance managers.” It will be at that point that the traditional schism breaks down and goes away. I believe that should be the goal of industry as a whole. It is certainly the goal of industrial automation and Schneider Electric.

    I hope this helps.

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  3. Peter Hume

    As one who works in an area where automation is creeping further and further into the fore I’m fascinated by the ethical boundaries being tested. From the perspective of a military man I’ve seen massive changes to the fielding of automatic systems which either have some human interface or are completely autonomous. The ethical boundaries regarding the conduct of war are still primarily unchanged but questions are being asked about the use of autonomous systems which have the capacity to take life.
    I see the world of business as having a whole set of ethical challenges which can be dependent upon the organisations ethical compass. For instance it could be argued that a manager following a shareholder centric ethical pattern of business may not see the value in upgrading an automation system which is currently performing to expectations. Given that some tend to have rather short sighted strategic views it fits that they wouldn’t invest for a seemingly small short term benefit.
    Another interesting aspect would be to consider how an organisation which embraces a stakeholder model would view automation. Such an organisation may embrace automation if it can lead to a better work environment for the employees. They may embrace automation if it can provide a better interface between suppliers and eventual customers. The manager who uses a holistic approach based upon a stakeholder ethical model will, in all likelihood, consider the inputs provided by all (including suppliers of automation systems), along with the outputs of the organisation and its downstream reach. The use of automation, if carefully considered, can be of immense benefit both in the short and long term.

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    • Peter Martin Peter Martin

      Dear Peter,

      Thank you for your comments relative to “The Value of Automation” and its ethical implications. They are very interesting and insightful. I had not considered the ethical implications of automation from this perspective previously. I would believe that the ethical implications in a military environment, especially with respect to autonomous systems, may be significantly greater than those in an industrial environment due to the ultimate objectives of the systems involved. But the implications need to be seriously considered for industrial automation systems as well.

      I believe you first point on the ethical implications of industrial automation systems based on a shareholder-centric perspective in industrial companies is true for automation and almost any other investment opportunity. Due to the nature of stock markets the shareholder-centric perspective leads to very short term business decisions that may lead to better financials in the short run, but may also severely limit the strategic value of a company. I believe that some of the decisions to delay automation investments are impacted by this perspective. On the other hand, if the actual value of an automation system upgrade is not effectively measured and made visible, it hard to blame management for delaying automation investments. I believe as an industry we owe it to management to clearly measure the value delivered by automation solutions so they can make better decisions on where and how to invest the limited capital they have. This does not meant the will always make the right decisions for the business, nor does it mean that the decision criteria they use will be best for the short term and strategic interest of the business. But the facts should certainly help to move this in the right direction.

      As you point out, the potential value that automation can deliver in organizations that have a more balanced stakeholder model can be multi-faceted. Certainly automation systems can help make industrial employees more effective, make the jobs more interesting and drive a better work environment. Automation can also have positive implications across industrial value chains as you have suggested. It can be challenging to drive a unified automation approach across multi-owner value chains and this can open a can of worms with respect to new ethical issues, but automation does enable such initiatives. I also agree with you that automation, effectively applied can provide “immense benefits” both short and long term. I know that publicly traded companies tend to be very short-term focused, but I believe there is so much potential for business improvement through automation that both short and long-term goals can be satisfied simultaneously.

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  4. David R. Brousell

    Peter: How are you? Interesting discussion on automation. I thought you might be interested in the following: last week I hosted a round table discussion of the Manufacturing Leadership Council to discuss the question of “Are There Limits to Automation?” You can check it out here: http://www.gilcommunity.com/

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  5. Peter Martin Peter Martin

    Hi David,

    It is great to hear from you. I hope all is very well.

    It appears as though the recent Manufacturing Leadership Council meeting covered a variety of very interesting topics. The discussions appear to have been quite engaging. In particular the discussion on “Are there limits to automation?” is an interesting topic that we should be reviewing on an ongoing basis. From my point of view the short answer is yes. I believe automation solutions should be applied only when appropriate levels of returns on those solutions can be reasized. As some of your participants seem to have pointed out, those returns can either be in economic, safety, employee satisfaction and effectiveness, environmental integrity or other areas aligned to the industrial companies’ strategies. I guess the point is that if we apply automation to the areas that provide visible and measurable returns that are over the company’s threshold limits we will be intelligently encountering the appropriate limits of automation at the point in time that the automation is being implmented. This is why I believe developing effective real-time measures of improvement for industrial operations is critical to the success and value of automation.

    I also believe that the boundary conditions on the appropriate limits of automation are continually in flux based on technology, company strategy and market conditions. There may be an automation solution that does not provide the appropriate levels of return at one point in time but a few months later conditions have changed enough that is falls into the approriate ranges.

    From a somewhat simplistic perspective it can be useful to partition the automation platform from the functions it delivers to industrial companies. Automation systems were initially designed to deliver process control solutions to improve the efficiency of industrial operations. Most of the value delivered by the automation platforms came in the form of open (manual) or closed (automatic) loop control. I believe th same is true today. When we talk about real-time information, for example, it should be information that can be used to make better automatic or manual decisions and thus empowers control. Information that is not usediin this manner is typically difficult to justify. Therefore, when trying to discern the value of automation and whether an automation solution should be implemented it may be useful to determine whether the incremental level of open or closed loop control provided by the solution will impact operational value in a manner that provides returns over corporate threshold limits. The scope of this should be far geater than traditional process control. Most traditional process control has been applied to improve operational efficiency, which is very necessary, but notr sufficient in today’s industrial environment. Improving efficiency is only one of a number of real-time process control domains that can add significant value to industrial companies. There are others, such as controlling profitability, safety risk, environmental risk, security risk, and reliability. With the increasing speed of industrial businesses all of these need to be seriously considered.

    In a nutshell, a company may have reached their appropriate limts of automation, but those limits keep expanding based on the value that automation can deliver.

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