Randy Broadwater, product manager, Miller Electric Mfg. Co.
Edited by Bruce Vernyi, editor-in-chief

Welding engineers and operations managers can compete effectively to purchase new equipment by learning to speak the "financial language." However, before going to the capital approval process, welding personnel need to know how to measure improvements to help them speak to make their case with financial people.

Modern manufacturing and high volume fabrication operations must focus on continuous improvement to remain profitable and competitive, and this can take many forms. Improvements obtained through use of digital control technologies in modern welding systems have helped to increase throughput, reduce the costs of warranty, lower scrape rates and cycle times, and to improve quality. Digital control technology also can reduce costs associated with inspection, weld testing, engineering evaluation and disposition and subsequent rework. These technologies lead to financial gains that must be considered when they are being purchased.

To determine the financial impact of these activities, a baseline must be established so that improvements can be measured. It must be remembered that the real impact of improving a welding process may be felt beyond the welding cell. In come cases, upstream operational areas such as the tooling, forming, stamping, bending, fixturing, and even the associated piece part tolerances and welding preparation (grinding or shot blasting to remove mill scale, degreasing, applying antispatter solution, etc.) could be affected. In other cases, downstream operational areas such as rework and repair stations, inspection and paint preparation (removing weld spatter, grinding and polishing) could be improved.

Because welding can affect broad areas of the manufacturing process, measuring the impact of new welding processes or equipment may require input from all of those areas affected by welding. Often, companies form purchasing or project teams that include a technical person (typically the welding supervisor/engineer/ manager) who specifies the welding equipment, a financial or management person, a representative from the purchasing department, a safety manager, a maintenance manager and a person who represents the welding operators.

Although labor may account for a significant the portion of the total manufacturing costs, it also is important to keep in mind material costs, utilization costs and cost avoidance opportunities — especially if production rates are increasing. Each situation may differ, and to understand costs — and to gain a valuable outside perspective — equipment suppliers, integrators and distributors who take a consultative approach also could be included as advisors to the project team.

A good vendor/supplier partner will explore and understand his client's operations by asking openended questions that will allow them to explain issues in depth. Stereotypical salesmen who do all the talking and offer quick solutions should raise red flags. Rather, suppliers should ask questions to help discover needs and to uncover cost saving opportunities. Good questions are "What are the welding problems and their implications?" or "If factor X is changed, how would it affect the organization?"

A good consulting partner probes needs in depth and listens most of the time, and should want to get out of the conference room or office to walk the production floor. A consultant needs a deep understanding of the manufacturing processes to determine which solutions will solve the problems that are being faced and to benefit the organization and be justifiable economically.

A supplier partner must seek a solution to the problem rather than a sale of a welding system. In manufacturing, no one should want to acquire equipment just for the sake of being new or technically interesting. What is needed is a way to lower costs over time and that is the justification for most financial people.

The time value of money
To acquire new equipment successfully, welding engineers and maintenance superintendents also need to understand the time value of money. Consider that a company can receive a 10% return — at relatively low risk — by investing in mutual funds and stocks. When it comes to capitalized expenditures, any equipment that does not produce a return greater than 10% actually could deplete company resources. The same holds true for equipment that does not have a payback time of 24 to 36 months.

To differentiate a request, its benefits have to be put in financial terms such as return on investment percentage and payback time. Also, a request has to be made with consideration for capital expenditure policies and key measurements that management might use.

What factors do managers with financial responsibility and accountability look for? Return on Investment = Savings divided by the amount invested; expressed as a percentage. Look for return on investment greater than or equal to 20%. Payback = Investment divided by savings; expressed in time. Look for greater than or equal to 24 to 36 months. Other Key Measurements: Lower warranty costs. Reduced rework. Customer satisfaction rates. Faster order fill rates. Safety measures. Increased efficiencies. Reduce labor costs. Chronic personnel shortage (cannot find welders). Lean manufacturing, kaizen, 5S (Sort, Set-In-Order, Shine, Standardize and Sustain). Spending Policy What is the dollar-spending limit before a project must be capitalized? Capitalized = cost depreciated over time. Cost expensed in smaller increments. Different depreciation methods make a difference. Expensed = "take the hit now and its gone." No asset on record with residual value. Immediate impact on bottom line. Typically easier to justify.

The mathematics of cost savings Knowing actual labor costs, the largest component of welding costs, is important when making a financial case for equipment purchases, but understanding material costs, utilization costs and cost avoidance opportunities is just as important. Welding engineers and operations managers can use this table as a guideline for determining costs.

Calculating return on investment and payback
Refer to the simple Economic Evaluation Summary shown in Table 1.

The numbers used in Table 1 are based on a real situation and can be used to increase the approval potential for a project. This example is from a company that had poor part fit-up that necessitated a multi-pass welding technique to fill the gaps. The technique slowed cycle times, and increased spatter and the likelihood of faulty arc starts. To solve the problem, the company considered new technology, then implemented a process that welded parts in one pass while also compensating for gaps. The new process reduced spatter, improved bead appearance, cut arc starts in half, and reduced the use of consumables and need to clean the fixture.

Also, the new process reduced cycle time from 144 to 84 seconds, representing an improvement in throughput of 18 parts per hour and lowering labor/part costs by 42%. However, that is not enough to justify investing $10,250 in a new welding solution because the benefits are not phrased in financial terms.

Fortunately, the Economic Evaluation Summary does just that. Based on labor savings of $66,171 per year, this company will receive a 433% return on its investment and will see a payback time of 2.77 months — that makes this capital expenditure a slam dunk for a financial officer to approve.

When communicating with the financial stakeholders in business, there is no substitute for understanding their terminology, spending policy and driving forces. Simply do the math to calculate return on investment and payback on what is known or has been measured about welding process improvements. However, reaching the point at which savings have been calculated can take several incremental steps, including trials on the shop floor and documenting improvements offered by new welding equipment and processes.