Assessing the Value of Custom Tooling: A 5-Step Cost-Benefit Analysis for Manufacturers
In today’s business landscape, custom manufacturers with sophisticated product offerings are realizing that turn-key equipment frequently puts them at a stark disadvantage. It’s not only supply chain disruptions and quality issues that can impact production, but poorly suited tools and equipment can also reduce productivity and increase costs.
That’s why manufacturers have increasingly turned to custom tooling design to boost their competitive edge. However, custom tooling requires higher upfront costs to gain their long-term financial benefits. Therefore it is necessary to compare absolute value of turn-key tooling versus custom tooling. This article offers a simple, 5-step breakdown on how to approach this decision process.
Understanding Cost-Benefit Analysis
Investing in a custom manufacturing tool can enhance efficiency, reduce waste, and improve overall productivity, which are at the core of achieving a competitive advantage. It’s no surprise that the global custom manufacturing market, in which custom tools and solutions are designed by specialized engineers and scientists, was valued at almost $900 billion in 2021 and is expected to reach over $1.3 billion by 2031.
But, custom tooling design involves upfront design costs, which can be steep. That’s why it’s important to determine if custom tooling design is worth pursuing from a business perspective. That requires a thorough and comprehensive cost-benefit analysis comparing the return on investment (ROI) for custom tooling vs.the ROI for your status quo. This comparison is what transforms tooling considerations from a business cost to a crux of your business strategy.
A 5-Step Approach to Cost-Benefit Analysis for Custom Tooling Design
Conducting a thorough cost-benefit analysis is a challenging endeavor, but it pays back by giving you an understanding of your market position going forward.
Here’s a five-step breakdown to help get you started:
Step 1: Think Through Challenges and Benefits of the Current Tooling Status-Quo
Determining areas for improvement involves thinking about costs over time. Those costs can be in the form of financial costs to replace tools and equipment, manual labor costs to service and maintain tools and equipment and the costs of downtime or inefficiency of the status-quo manufacturing process.
Also, think about challenges associated with your current tooling solutions, like supply chain issues, that directly increase cost of production.
Lastly, consider the benefits of the current status quo, such as consistent, predictable costs, familiarity among your workforce and conservation of company funds and resources (as opposed to investing in a new tooling solution).
Step 2: Calculate the Lifecycle Costs and Profitability of Status-Quo Tooling
Life cycle costs (LCC) and life cycle assessments (LCA) enable you to determine the total cost of acquiring, maintaining, and disposing of an asset. This involves calculating all costs in acquiring, installing, operating, maintaining, financing and disposal of the tool, as well as its rate of depreciation.
Also, calculate the revenue that the tool generates for your business throughout its lifecycle.
Step 3: Estimating Costs and Estimated Revenue Associated with Custom Tooling Design
Now, conduct a life cycle assessment (LCA) for the custom tooling solution by estimating the project costs for having a custom tool designed. Again, you will need to know all costs involved in acquiring, installing, operating, maintaining, financing, disposal and tool depreciation over time.
Also, calculate the estimated revenue generation due to this custom tool.
Step 4: Calculating ROI
With all costs and benefits quantified, it’s time to calculate the return on investment (ROI) for both the status-quo and custom solutions.
- Get the net benefit of each by subtracting total costs from total benefits
- Divide the net benefit by the total costs
- Multiply that number by 100 to get the ROI as a percentage
If you get a negative percentage, it means that the investment isn’t profitable. A positive ROI indicates profitability. A higher percentage means a higher ROI and the best solution has the highest ROI.
Double-check your results by returning to the challenges of your status-quo tooling solution and reverse engineer the relative financial value of a custom tooling solution:
- Increased Production Capacity: Calculate the total production value of the increased output of using a custom designed tooling solution.
- Improved Product Quality: Consider the value of enhanced customer satisfaction, predicted reductions in return volume, and maybe even the additional revenue of a higher quality, higher-priced final product.
- Reduced Waste/Maintenance Costs: Take the cost of waste for your current solution and determine the cost-savings your custom tooling solution will deliver in terms of reduced waste.
- Decreased Labor Costs: Custom tooling can reduce the relative cost of manual labor and even automate some processes that were previously done by hand. Calculate the cost savings by multiplying the reduced total hours of manual labor by the hourly cost of that labor.
If the sum value here is more than the cost of acquiring and installing your custom tool, then it’s an overall financial improvement.
Step 5: Consideration of Intangible Benefits
In addition to direct financial benefits, also consider the more qualitative benefits of custom tooling design. Custom tools provide intangible benefits like improved employee morale, increased process flexibility and enhanced industry reputation. While these benefits are difficult to measure in dollars, they still create value for your business.
Merkur as Your Partner in Custom Tooling Design
Thorough cost-benefit analysis is critical when considering any investment for your manufacturing company, and especially important when considering the modernization of current manufacturing operations. Cost-benefit analyses are powerful tools in and of themselves, but they can be challenging to calculate, particularly for more traditional US manufacturing and industrial companies. When in doubt, seek the advice of professionals to guide you through the process. Learn more at merkurinnovation.com
Fernando, Jason. “Return on Investment (ROI): How to Calculate It and What It Means.” Investopedia. https://www.investopedia.com/terms/r/returnoninvestment.asp.
Lerea, Nisan. “The Alternative to Outsourcing: How New Subtractive Tools are Enabling Manufacturers to Keep Processes In-House.” Manufacturing.net. https://www.manufacturing.net/operations/article/22820700/the-alternative-to-outsourcing-how-new-subtractive-tools-are-enabling-manufacturers-to-keep-processes-inhouse.
Srivastav, Ashish Kumar. “Life Cycle Cost Analysis.” WallStreetMojo. https://www.wallstreetmojo.com/life-cycle-cost-analysis/.
“The Worldwide Custom Manufacturing Industry is Projected to Reach $1.3 Billion by 2031 – researchandmarkets.com.” Businesswire. https://www.businesswire.com/news/home/20221207005565/en/The-Worldwide-Custom-Manufacturing-Industry-is-Projected-to-Reach-1.3-Billion-by-2031—ResearchAndMarkets.com.