The True Installed Cost of Packaging Automation

The machine price is what the supplier invoices for the equipment. It says nothing about what it costs to get that equipment making sellable packs on your line, and payback figures built on it alone come out too short.

Count every cost you have to pay to reach normal, accepted production, whether the supplier invoices it or not. In the worked example below, an $80,000 machine becomes a $117,500 project, and payback moves from 40 months to about 59 months. The sections after the example show which of these costs belong in the ROI investment and which reduce the annual benefit, and how to estimate the total before any supplier has quoted.

Six groups of cost

The costs beyond the machine price fall into six groups. Go through all of them for each quote, even if you expect some to be zero.

Getting it there means freight from the supplier to your site, plus unloading and rigging at your dock. Heavy or tall machines may need a crane or specialist movers, and a delivery that arrives without them sits on the truck.

Getting the site ready means floor preparation or anchoring, the electrical supply (new circuit, breaker, cabling, the right voltage and phase), compressed air at the right pressure and volume, and any water, drainage or extraction the process needs. Space and layout changes belong here too: moving racks, relocating a conveyor, clearing a service aisle.

Making it fit the line is where the machine’s neighbors come in. Integration covers the upstream feed and the downstream conveyors, checkweighers, metal detectors, coders and printers, case packers, and the controls link between them. Each pack size beyond the first usually needs change parts, and those are tooling with a price.

Making it safe and accepted covers guarding and a safety assessment, a factory acceptance test (FAT) with the travel it needs, a site acceptance test (SAT), and documentation. On regulated food or pharmaceutical lines, add validation work: protocols, material and contact-surface records, and the staff time to review them.

Getting it running covers supplier commissioning and start-up engineer days, operator and maintenance training, the packaging material and product consumed during setup and trials, and an initial set of spare parts.

Then there are the costs people forget: production lost while the line is down for installation, the ramp-up period when output is below target, and internal project-management and engineering time. None of these appear on an invoice, but all of them are real.

A worked example

Worked example: an $80,000 machine price plus the cost lines below. Replace each amount with the supplier’s quote and the plant’s installation records before using the payback.

Assume a machine priced at $80,000 that replaces a manual packing step and feeds an existing conveyor.

The non-machine lines add up in stages: getting it there $3,500; site $5,500; fit to the line $8,500; safe and accepted $4,000; running $9,000; forgotten costs $7,000. Together they are $37,500, and $80,000 + $37,500 = $117,500.

How these costs enter the ROI calculation

Installed cost is an input to ROI, not a rival to it. ROI compares net gain over a stated horizon with the investment; simple payback divides the investment by the annual net cash benefit. Each cost must enter the appropriate input once. The rule follows the formula in Automation Payback, ROI and TCO: one-time costs go into the investment (I), and costs that recur every year come off the annual net cash benefit (B).

Two rules keep the arithmetic honest. A cost counts on one side only: the ramp-up shortfall in the example is in I, so the annual benefit is not reduced for it again. And a cost that recurs does not belong in I just because it appears on the first invoice. Spares bought as an initial set are one-time; the parts you replace every year are running costs.

The difference between ROI and cost is the difference between a ratio and one of its inputs. Installed cost tells you what you spend; ROI tells you what that spend returns over a stated horizon. Using machine price instead of installed cost leaves the benefit unchanged and shrinks the denominator, so ROI comes out too high.

On the example’s numbers, over a five-year horizon with the same $24,000 annual net cash benefit:

Total net benefit = 5 x $24,000 = $120,000

ROI on machine price   = ($120,000 - $80,000) / $80,000   = 0.50, or 50%
ROI on installed cost  = ($120,000 - $117,500) / $117,500 = 0.021, or about 2%

The same project shows a 50 percent five-year ROI on machine price and about 2 percent on installed cost. Neither figure is a forecast for another plant: both use the example inputs above. The point is the size of the gap the choice of denominator creates.

How it changes payback

The simple formula from Automation Payback, ROI and TCO is:

Payback (years) = Investment / Annual net cash benefit
Payback (months) = Payback (years) x 12

Suppose the machine saves a net $24,000 a year after operating costs. On machine price alone:

$80,000 / $24,000 = 3.33 years = 40 months

On installed cost:

$117,500 / $24,000 = 4.90 years = 58.75 months (about 59)

The gap is almost 19 months. Machine price alone flatters the project because it counts the full benefit against only part of the investment. A project that looks like a three-year payback to the board becomes a five-year payback on the same savings. Whether that still clears your hurdle is your call, but make it before the purchase, not after the invoices arrive.

The benefit side carries its own risk. A machine only delivers its annual benefit if the line around it can use the speed (see Why Faster Machines Do Not Always Increase Line Output), and it matters how many hours the machine actually runs, which How Equipment Utilization Changes Automation Payback covers.

Estimating installed cost before the quotes arrive

A business case often needs an installed-cost figure before any supplier has quoted, to decide whether the project is worth a request for quotes at all. Cost estimators describe three common ways to produce that figure. The U.S. Government Accountability Office’s cost estimating guide names them as analogy, engineering build-up and parametric, and notes that the method chosen depends on how far the program has progressed (GAO-20-195G, chapter 10).

For a packaging line the methods map onto the checklist above. An analogy starts from your last comparable installation and asks what is different this time: a longer conveyor run, two extra pack sizes, a validated line instead of an unvalidated one. A parametric estimate needs your own records from several projects; do not borrow a ratio from someone else’s plant, and this article does not offer one. The worked example is a bottom-up estimate: it can only be built once you know which lines exist and who supplies each one.

Use the methods in sequence. An analogy or parametric figure answers “is this worth pursuing?” A bottom-up table, filled in as quotes arrive, answers “what will this cost?” The GAO guide lists analogy and parametric estimates as cross-checks as well, which is a useful habit here: if the bottom-up total comes in far below what your last comparable project cost, look for a missing line before you celebrate.

These methods come from project and program cost engineering, not from packaging. The GAO guide was written for government program estimates. AACE International’s cost estimate classification system, written for project cost estimates, grades an estimate by how mature the project definition is: at the earliest class it lists methods such as capacity factoring, parametric models, judgment or analogy, and at the most defined classes detailed unit costs with detailed take-off (AACE RP 17R-97; RP 18R-97, Table 1). The detailed version, 18R-97, covers the process industries and says it does not address “dry” processes such as assembly and manufacturing. Applying either framework to a packaging machine purchase is an analogy, and the accuracy ranges those documents give for process plants should not be read across to a packaging project.

How to read a quote

You want every supplier to state what you are buying in the same terms. Ask each one for the following in writing.

• Scope. What is included in the price: the machine, the guarding, the controls, the tooling for which pack sizes, the documentation.
• Exclusions. What is explicitly not included. If the quote is silent, ask for the list.
• Who supplies what. Freight, unloading, utilities connections, foundations, conveyors, and interfaces to existing equipment. Name the party for each.
• What acceptance means. The test, the sample, the speed and reject rate that count as passing, and what happens if the machine fails.
• What the warranty covers. Parts, labor, travel, the start date, and who pays to ship a failed part.
• Commissioning days included. How many engineer days, what happens when they run out, and the day rate for extra days.

Then compare quotes on the same scope. A lower machine price with fewer commissioning days, no change parts and your own freight is not cheaper. Put each quote into the same cost table and add the lines the supplier left out, using your best estimate and marking it as an estimate.

Comparing Packaging Machinery Quotes on a Like-for-Like Basis shows how to enter each quote in one table and how that can change the ranking.

When some costs are zero

Not every project carries every line. Replacing a machine like-for-like on an existing line can remove most integration, layout and utility costs, because the connections already exist. In-house fitters and electricians reduce the outside labor, though their time is still a cost if it displaces other work. A supplier that delivers on its own truck, or a machine that ships on a skid with a standard plug, removes rigging and electrical work.

Watch the zeros that depend on timing. If the line can be installed over a planned shutdown, lost production may be nil. If it cannot, it may be the largest line in the table. Call a line zero only if you can say why.

Checklist before approval

• Every group of cost has a number or a written reason it is zero.
• The quote lists exclusions, and each exclusion has an owner and an estimate.
• Commissioning days, FAT and SAT are in the scope.
• Change parts are priced for every pack size you plan to run.
• Imported equipment has its own additional lines: see Imported Equipment Costs Beyond the Factory Price.
• Payback is calculated on installed cost, with the machine-price-only figure shown beside it for comparison.
• One-time costs sit in the investment and recurring costs come off the annual benefit, each counted once.
• Any pre-quote estimate says which method produced it (analogy, parametric or bottom-up) and is replaced by the bottom-up table once quotes arrive.
• After start-up, the actual installed cost is checked against this table; see The 90-Day Post-Installation Review: Did Automation Deliver?.

Keep reading

• Automation Payback, ROI and TCO: What Each Metric Tells You: the formulas behind the payback comparison above.
• Imported Equipment Costs Beyond the Factory Price: the extra transport, duty and service costs when the machine crosses a border.
• How Equipment Utilization Changes Automation Payback: how run hours change the benefit side of the same calculation.

Assumptions and limits

• Replace the dollar amounts with the supplier’s quote and the plant’s installation records before comparing them with the machine price.
• The payback figures ignore taxes, financing, the time value of money, depreciation and residual value.
• The $24,000 annual net cash benefit is held constant and starts on day one. Replace it with the plant’s labor, scrap and energy records. The ramp-up shortfall is counted once, as a cost in the table, not again as a lower benefit.
• Regulated lines, unusual sites and imported equipment add lines this table does not cover.
• This is a comparison model, not financial, legal, safety or engineering advice.

Sources

• U.S. Government Accountability Office, Cost Estimating and Assessment Guide, GAO-20-195G (March 2020), chapter 10, “Cost Estimating Methods”
• AACE International, Recommended Practice 17R-97, Cost Estimate Classification System (rev. August 7, 2020), public preview
• AACE International, Recommended Practice 18R-97, Cost Estimate Classification System as Applied in Engineering, Procurement, and Construction for the Process Industries (rev. August 7, 2020), public preview