Top 7 Steps to Evaluate The ROI of a Multi-Year Service Agreement

Why Your Consumer Experience Could Be Taking You in the Wrong Direction

Much of our business lives are informed and influenced by our lives as consumers:  How we want to be treated as a customer.  How we look for and evaluate value.  How we build trust in our preferred suppliers.  But one area runs the risk of taking us down the wrong path if we just rely on that consumer experience, which is the necessity of investing in a multi-year service agreement for capital equipment in our factories.

In our consumer lives, we have all experienced that moment at the cash register when buying a consumer product.  The cashier asks “would you like to buy the extended warranty?” – and most of us immediately say “No”.  More than half of consumers say “No” every year.  The decision to not invest in your TV or coffee maker extended warranty can make sense.  The risk of failure is low.  The risk when it breaks to your business or life in general is just an inconvenience.  And statistically, you can purchase another one over the life span of the extended warranty with minimal financial risk.

This is simply not the case for industrial automation equipment.  It’s important to break free from your consumer life and experiences and consider these Top 7 steps for evaluating the benefits of a Multi-Year Service Agreement.

#1: Economic Impact and Risk of Downtime:  For industrial automation equipment running in a high-speed packaging line, even one day of down time can be devastating to both your financial results and customer satisfaction.  Consider these numbers:

Containers Filled Per Day:  300,000 to 500,000 containers per day

Revenue Per Container:  $1.00/container

Margin Per Container: $0.20/container

Total Lost Revenue for 1 Day of Downtime:  $300,000 to $500,000 per day

Total Lost Profit for 1 Day of Downtime:  $60,000 to $100,000 per day

 

One day of lost production could equate to your service contract investment over the entire 3-year period. 

This is not an inconvenience – it’s a mission critical decision for your business.

#2 Predictable Equipment Performance & Maintenance: Packaging lines are always busy.  And often smaller problems on those lines are ignored or postponed to keep the line running.  Proactively scheduling those maintenance visits allows an equipment expert to audit the end to end line and adjust or fix those small problems before they become big problems.  And the time is scheduled when it’s most convenient for the operations and your customers.

 

The same is true for maintenance expenses and budget performance.   It’s very challenging for a business when expenses vary greatly each month.  It’s hard to manage cash flow and creates needless work to explain why this month’s results are so different from last.  Spreading the cost of maintenance evenly across a long period of time, and having those visits occur when you want them, all create the kind of stability that business leaders desire.

#3 Saves You Money:   Paying Time & Material rates for on site service calls when you’re reacting to an unplanned equipment failure can greatly distort your expense management and cost flows in the period.  And it can be very expensive, particularly for emergency visits.  Having a contractually agreed-to rate, scheduled at a defined period of time, will improve your financial performance.  Make sure you evaluate the entire program benefits.  The best service agreements include other benefits beyond less expensive site visits.  They can include discounts on spare parts, discounts on new services, or free access to software upgrades.   In total, the entire set of discounts included in a good service program will typically save the plant 25-50% annually in expenses, versus buying those parts and services a la carte.

#4 Labor Shortages:  Almost all packaging operations have in-house maintenance teams to keep their lines running.  Additionally – almost all packaging operations have maintenance teams who are short staffed and overworked.  This can be due to high turnover, and the increasing complexity of automated systems.  Having 3rd party help on site, proactively scheduled, can lessen overtime requirements, and make sure critical maintenance work gets done in the least time possible.

#5 Training: Employee turnover in U.S. manufacturing plants has consistently run close to 40% a year for the past few years.  This means in a 1-2 period, over half of the lead operators trained by the automation equipment supplier have been replaced, and those new team members are simply learning on the fly.  Keeping your operations team fully trained prevents equipment issues and product errors.  And team members are more confident and more engaged when they have been given adequate training to be good at what they do.

#6 Access to Prioritized Service Support & Software:  Great service programs provide priority scheduling and quicker access to support specialists. This can greatly reduce downtime and prevent wasted hours and days troubleshooting in the wrong system or area.  In addition, evaluate the supplier’s service program related to software access.  With the advancement of equipment automation has come an increasing dependence on software.  You want to make sure software updates and remote support are part of the program to fully maximize the service contract value. 

#7 Extending Your Equipment Life:  Every packaging operation who invests in automation wants that equipment to last for years to come.  You look for a reputable equipment manufacturer, who designed the equipment to last, and has fleets of equipment in the field for years.  Maintenance and service quickly become the biggest drivers of equipment life once that equipment has been installed. Similar to the high costs of downtime, equipment replacement can be very expensive.  Gaining another year or more of life out of your automation can allow you to postpone upgrades and redirect that investment to other critical areas of the company.

So, when your OEM partner introduces maintenance contracts, fight your consumer instinct to say no.  Evaluate the offer against these top 7 criteria and make the right investment decision.  You can find more details and information on Ska Fabricating service contracts HERE.

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