Should You Automate? A Financial Decision Guide for Manufacturers
- Alexander
- Apr 22
- 4 min read
As a manufacturing business owner, you're likely actively considering or facing pressure to automate. Industry publications showcase impressive case studies, equipment vendors highlight compelling ROI calculations, and competitors may already be implementing new technologies. But automation isn't always the right move for every operation, and the decision deserves careful analysis before you commit significant capital.
Here's a practical guide to help you determine if automation may make sense for your specific situation.
Start with Clear Objectives, Not Technology
Before exploring automation solutions, define exactly what you're trying to achieve. Common drivers include reducing labor costs in a competitive hiring environment, solving persistent quality or consistency issues, eliminating production bottlenecks, increasing capacity, optimizing footprint, addressing workplace safety concerns or keeping pace with increasing customer demands.
Automation projects fail most often when they begin with a solution rather than a problem. Being specific about your goals will guide your evaluation and help you measure success.
The Financial Assessment
When evaluating automation, many manufacturers focus solely on labor savings versus equipment costs. This oversimplified approach often leads to disappointing results. Instead, conduct this more comprehensive analysis:
1. Commercial and Strategic Assessment
Review and understand the commercial and strategi assessment
If one hasn’t been done or isn’t recent, hold off on any calculations until, and work with the various department heads and stakeholders make assessment. It’s too easy to jump into numbers and find a spin, parameters to make the numbers work. It’s important to know what the purpose, what’s important, what’s the problem we want to solve. Then you can run the financial analysis to model and stress test the different options and levers.
2. Calculate true current costs:
Direct labor costs (including benefits, training, turnover)
Quality costs (rework, scrap, returns, warranty claims)
Opportunity costs of bottlenecks (lost sales, overtime)
Inventory carrying costs caused by process inefficiencies
Workplace injury and ergonomic costs
3. Assess total automation costs:
Equipment purchase vs lease
Installation, integration, and facility modifications
Programming and customization
Training and skill development
Ongoing maintenance and spare parts
Production disruption during implementation
Energy consumption changes
Parallel production or not prior to cut-in
4. Consider your capital position and timeline:
How will this investment affect your cash reserves?
What's the impact on your debt position and borrowing capacity?
How does the payback period align with your business planning horizon?
Could smaller, iterative investments yield better results?
For most small to mid-sized manufacturers, automation needs to deliver meaningful returns within 18-24 months to justify the investment and risk. Projects with longer timeframes should have compelling strategic advantages beyond financial returns.
Operational Readiness
Automation amplifies your existing processes—both the strengths and the weaknesses. Before automating, evaluate:
Process Stability: Automation requires consistent inputs and standardized procedures. If your current process changes frequently or isn't well-documented, address these issues first.
Data Visibility: Do you have the data collection capabilities to measure current performance accurately and track improvements post-automation?
Team Capabilities: Will your existing team be able to operate, maintain, and troubleshoot the new equipment? What training investments are needed?
Companies often underestimate the organizational change management required for successful automation. Budget time and resources accordingly. This is especially true for well seasoned and efficient product lines which aren’t “broken”. This is where it’s important to understand disruption and change management vs anticipated benefits. If the benefits are marginal and the risks are high, the project should probably be sent back to the drawing board.
Balance The Multiple Factors
When making your final decision, consider these factors with appropriate weighting for your business situation:
Financial Drivers (40-50%):
ROI timeline
Capital requirements vs. availability
Cash flow impact
Cost reduction potential
Strategic Drivers (20-30%):
Competitive differentiation
Customer requirements
Industry direction
Scalability needs
Risk Factors (20-30%):
Technology maturity and reliability
Process complexity and variability
Implementation challenges
Workforce impact and readiness
A simple scoring approach: Rate each factor from 1-5, multiply by your chosen weight percentage, and sum the results. Projects scoring 3.5 or higher typically warrant serious consideration.
Strategic Alternatives Worth Considering
Automation isn't all-or-nothing. Consider these alternatives:
Phased Implementation: Start with the highest-impact or simplest process to automate, learn from the experience, and build on success.
Collaborative Automation: Semi-automated solutions that enhance worker productivity rather than replacing labor entirely often have better ROI and lower implementation risk.
Process Optimization First: Apply lean manufacturing principles to streamline operations before automating. This reduces the scope and cost of automation while improving results.
Automation-as-a-Service: Explore rental, leasing, or pay-per-use models that reduce capital requirements and technology obsolescence risks.
A Practical Example
Consider a manufacturer struggling with quality inconsistencies in a critical assembly process. Their options:
Full automation ($450,000 investment, estimated 30-month payback)
Partial automation with collaborative robots ($180,000 investment, 18-month payback)
Process redesign with improved quality controls ($40,000 investment, 9-month payback)
The right choice depends on multiple factors: their cash position, growth forecasts, labor market conditions, and competitive landscape. For many mid-sized manufacturers, option 2 or 3 would be the prudent starting point, with option 1 as a future consideration once the process is stabilized and growth justifies the larger investment.
The Bottom Line
Automation can transform your manufacturing operation, but only when deployed strategically with clear financial justification. The most successful manufacturers approach automation as a targeted solution to specific business challenges rather than a blanket strategy.
Alexander Savage
Every business is different, if you are wondering if investing in automation is right for yours, the Advanceo team is here to assess your current situation and help you make the correct, informed decision. Contact us to learn more.
