An automation proposal promises higher OEE. Here is how to turn that promise into a payback period, and how to see which assumptions carry the case.
Post 1 measured a packaging line at 73.4% OEE. Post 2 showed that the lost capacity is worth about $1.08M of revenue a year on a $3.0M line. Now a supplier proposes a $1M automation cell for that line. Should the owner sign?
Step 1: state the gain in OEE terms
The proposal should say which factors improve and by how much. In this case, automated loading and faster changeovers lift availability and speed, and in-line inspection lifts quality.
Table 5. OEE before and after the project
| Factor | Today | Target | Change |
|---|---|---|---|
| Availability | 85% | 90% | +5 points |
| Performance | 90% | 95% | +5 points |
| Quality | 96% | 97% | +1 point |
| OEE | 73.4% | 82.9% | +9.5 points |
Moving from 73.4% to 82.9% means 12.9% more good output from the same scheduled hours. On a $3.0M line, that is about $388,000 of extra revenue a year, provided the output can be sold.
Step 2: convert revenue to profit, then add the other savings
Extra units need material, so only the contribution margin reaches the bottom line. At a 50% margin, $388,000 of revenue becomes $194,000 of profit. The project also changes labour and running costs.
Table 6. Annual benefit at full performance
| Item | Basis | Per year |
|---|---|---|
| Profit on extra output | $387,868 revenue × 50% contribution margin | $193,934 |
| Labour saved | One operator position per shift on two shifts at $60,000, less a quarter of an operator per shift to tend the cell | $90,000 |
| Indirect savings | Lower hiring, training and turnover cost | $30,000 |
| Maintenance and energy | Service contract plus 2 kW over 4,000 hours | −$10,800 |
| Net annual benefit | $303,134 |
New equipment rarely reaches its target in the first month. This case assumes the first year delivers half of the OEE gain, so year 1 brings $206,167 and every later year brings $303,134.
Step 3: read the result three ways
- Payback: 3.6 years. The cumulative benefit passes the $1M investment during year 4.
- Net present value: about $774,000. This is the ten-year benefit discounted at 10% a year, less the investment. A positive value means the project earns more than a 10% return.
- Financed cash flow: positive from year 1. A ten-year loan at 10% costs about $158,600 a year. The project covers that payment and leaves about $47,600 in year 1 and $144,600 in each later year.
Step 4: test the assumptions
Two inputs carry most of the risk: the contribution margin and whether the promised OEE gain arrives. Table 7 shows the payback when each one moves.
Table 7. Payback period and ten-year NPV under different assumptions
| Contribution margin | Full OEE gain | NPV | Half the OEE gain | NPV |
|---|---|---|---|---|
| 30% | 4.7 years | $333K | 6.2 years | −$4K |
| 50% (base case) | 3.6 years | $774K | 5.1 years | $213K |
| 70% | 3.0 years | $1.22M | 4.4 years | $430K |
| 100% (revenue counted as profit) | 2.4 years | $1.88M | 3.7 years | $755K |
The last row is the mistake to avoid. Counting all extra revenue as profit makes the project look as if it pays back in 2.4 years. With a realistic margin it takes 3.6 years, and if only half of the OEE gain arrives it takes more than 5.
Try it: build your own case
The starting point is the line from Posts 1 and 2: availability 85%, performance 90%, quality 96%. The first year delivers half of the OEE gain. Running costs are $10,800 a year and the discount and loan rate is 10%.
Before you sign
- Measure the baseline first. Record OEE and the six losses for at least four weeks. A supplier's gain is only as credible as the starting number.
- Buy the cheap points before the expensive ones. Changeover practice, minor-stop logging and preventive maintenance often recover several points for little capital. Those gains also shrink what the big project has left to deliver, so run the case on the improved baseline.
- Confirm the sales. If the market will not take 13% more product, replace the revenue line with the overtime or shift cost you would actually save.
- Ask for the gain in writing. Have the supplier state the expected availability, speed and quality figures, and tie part of the payment to an acceptance test.
- Plan the ramp-up. Training, spare parts and a named owner for the cell decide whether year 1 delivers half the gain or none of it.
Takeaway. A $1M investment on a $3M line can pay back in under four years and cover its own loan payments, but only at a realistic margin and only if the OEE gain is delivered. Run the case with your own numbers before the supplier runs it for you.
The line, its revenue and the project in this series are an illustrative example. The calculators are screening tools and do not replace a full financial analysis.
