Would you make an investment without knowing what the return could be? The answer to this question may seem obvious, but it serves precisely to give an idea of the importance of an ROI calculator aimed specifically at industries and manufacturing facilities.
But before we understand why calculating ROI is so crucial to industrial operations, we need to grasp the meaning of this term. ROI is an acronym for the expression “Return on Investment.”
In general terms, Return on Investment (ROI) is a financial indicator used to calculate the benefit an investor will receive in relation to how much they invested in the first place. The higher the result, the greater the benefit.
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ROI in Manufacturing
Calculating ROI is undoubtedly indispensable in today’s manufacturing industry. It is a Key Performance Indicator (KPI) that allows us to identify the returns the company is obtaining based on its investments. This calculation can be carried out in a broad or specific way.
In industries overall, investments are a fundamental part of growth strategies and other competitive advantages. When financial resources are allocated to a new investment, ROI helps us understand the result generated from that invested amount. In other words, we can determine if this investment is profitable or not.
ROI is a simple ratio that divides the investment return by how much was invested in total. The final result is expressed in percentage form, enabling a comparison of the effectiveness or profitability of different investment options.
How to Calculate My ROI?
In this case, to find out how to calculate the Return on Investment for an industry, it’s necessary to divide the net profit by the investment cost and multiply that by 100. The result should be represented as a percentage.
Below are the two most common ways to represent the ROI formula:
Return on Investment = (Net Profit / Investment Cost) x 100
Return on Investment = (Revenue – Investment Cost / Investment Cost) x 100
ROI Calculator: What Is the Ideal Value?
The concept of an ideal ROI (Return on Investment) amount is complex, as it varies according to many factors specific to the industry or organization. Understanding and establishing a target ROI value is crucial for effective investment management and the overall financial strategy of a company. Here are some considerations and steps to determine and analyze the ideal ROI value:
It is crucial to establish an initial ROI for each potential investment, projecting what would be considered good profitability. In other words, such an investment would only be carried out with the assumption of achieving a defined ROI value.
This way, the company will conduct a more thorough study of certain investments and identify the best opportunities to achieve the expected annual return. In the business world, for example, there is a consensus that a good annual ROI would be in the range of 7 to 10%, adjusted for inflation over that period.
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ROI and Maintenance
Many associate ROI strictly with the financial areas of a company. However, the analysis of Return on Investment has expanded beyond the financial departments, proving to be crucial in understanding the impact of various operations on the overall profitability of an organization.
In the industry’s modern era, the maintenance sector has evolved from being simply a “necessary evil” to becoming a strategic pillar. This is because a positive ROI in maintenance translates not only to functioning machines but also to a reduction in unplanned downtime, an increase in asset life cycles, and the optimization of production.
The ability to calculate and demonstrate maintenance ROI allows plant managers to justify investments in best practices, technologies, and training. Companies that grasp and apply ROI analysis in maintenance position themselves ahead in market competitiveness, ensuring quality production, high asset availability, and, of course, better profit margins.
Maintenance professionals who master the understanding of ROI and apply this metric in their strategies not only optimize their operations but also become key players in the financial success of the company.
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The Importance of an ROI Calculator in Preventive Maintenance
The initial cost of preventive maintenance, or PMs, may seem high, but it is an investment that can yield tangible benefits in the long run when evaluated through the lens of ROI. Adopting a strategic approach to preventive maintenance means understanding that every dollar spent today can save many more in the future.
Consider the following example: a company that doesn’t practice preventive maintenance may face an unexpected failure in one of its critical assets. The immediate cost of repair can be significant, not to mention the downtime, which translates to lost production and possibly even contractual penalties with clients for delays. However, with a preventive strategy in place, the company could have previously identified and addressed minor anomalies in the equipment for a fraction of the cost of an emergency repair.
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In addition to direct financial benefits, preventive maintenance also brings:
- Reduced Downtime: By avoiding unexpected failures, machines remain operational for longer, optimizing production.
- Extended Asset Life Cycles: Well-maintained equipment tends to last longer, postponing the need for costly replacements.
- Improved Product Quality: Properly functioning equipment is less prone to errors, which could compromise product quality.
- Enhanced Safety: Faulty pieces of equipment can pose a safety risk. Preventive maintenance reduces these risks, protecting employees and preventing potential legal disputes or penalties.
- Effective Planning: With preventive maintenance, machine shutdowns are scheduled, allowing for more efficient resource and production planning.
In summary, when considering ROI, it is essential not only to look at the immediate costs associated with preventive maintenance but also at the long-term benefits. It becomes evident that a preventive approach is not only a sensible strategy but also a financially prudent decision.
The Importance of an ROI Calculator in Reactive Maintenance
Understanding the ROI calculation based on reactive or corrective maintenance is also important. This result will show us how excessive repairs and machine downtime hours are affecting the industry’s results.
We know that using this strategy is sometimes more advantageous in the short term, considering the criticality of certain assets that need to be in operation at all times. However, understanding this result is important to determine if more assertive strategies, such as predictive maintenance solutions, could be employed.
Expenses on labor and spare parts in reactive maintenance, for example, can directly impact your company’s results. This is because they generate costs that are typically unplanned, arising from unplanned interventions. And even if expenses are strategically forecasted, it is always ideal to avoid them as much as possible. Because over time, with the accumulation of reactive actions, ROI will always be negatively impacted.
Understanding Maintenance Bottlenecks
With management’s knowledge of the importance of ROI as a financial indicator, applying data to decision-making becomes easier. If the focus of the maintenance department is to achieve the best performance and health of its assets, it is necessary to find the financial strategy that maximizes this performance, as well as the company’s profits.
It’s essential to understand how the strategies being used are impacting this index, for better or worse. And, of course, to improve this and other indicators, it is important to work on responsible resource management, such as materials, labor, and management systems.
Establishing efficient maintenance management is equivalent to having relevant data and means to carry out all activities coherently. Understanding the major challenges of the department is essential in decision-making. The focus should undoubtedly be on a good management system, a qualified maintenance team, and an appropriate stock of spare parts.
Effective maintenance strategies in the industry are based on adequate preventive measures, an increasing focus on predictive techniques, and establishing the necessary periodic inspections, avoiding costs associated with corrective repairs.
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Maintenance and ROI in Industry 4.0
Maintenance is becoming, day by day, a more strategic area for the success of any industry. Like any other department, Maintenance works to contribute to the value generation of the final product.
Therefore, knowing and applying the ROI Calculator in this type of activity is to quite literally understand how much all the resources used in your company are contributing to improving the results.
And if you’re looking for a tool to assist you, TRACTIAN offers an Industry ROI Calculator for those who want to assess the financial return on their investments in maintenance techniques and tools. Access it here.
