Invest in new technology regardless of size, cost

The most successful clients I have are the ones investing in new technology.

And manufacturers have many investment avenues to explore beyond equipment that can have a positive effect on their business.

Companies have a significant number of cost centres that can’t be financed, such as material, tooling, labour, and even product development where cash must be used. However, there are other areas where using a lender’s money has just as big an impact on the bottom line. Following are a few of them.

Automation

Finding and keeping good people was very difficult even before the pandemic, and the coronavirus made it even harder.

One option is to add automation to a stand-alone machine, regardless of whether it is already in the shop or a new purchase.

Equipment sellers, for the most part, sell stand-alone machines. But just adding another, single machine to the shop floor doesn’t always eliminate bottlenecks or provide immediate, additional capacity because there is more to getting a machine running efficiently than simply powering it up, including skilled labour.

If automation is added to a new machine, a well-established equipment vendor typically offers a complete cell capable of running finished parts.

When you consider the scope of work required to supply such a service, the cost associated with it also is considerable. However, it can make a lot of financial sense to automate a new machine, particularly if it can be financed as part of a larger, turnkey package.

Software

Having the newest technology on your floor is great, but if the systems aren’t in place to support it, the gain could be diminished.

The best example of this that I have come across recently was a manufacturer that installed a new machine but continued to use 10-year-old CAD/CAM software.

A software product specialist once told me that there are three pieces that enable a manufacturer to be most efficient: the machine, the tooling, and the software. When we talked about a few mutual customers of ours who had recently upgraded and leased some new software, this became very apparent.

One customer is a Tier 3 supplier to the aerospace industry that just bought a new 5-axis machining centre but had not upgraded its software system in years. The new machine improved the cycle time, but not as much as the manufacturer had anticipated. It wasn’t until a new software package was implemented, at a cost of roughly $12,000, that the benefits of the new equipment were fully realized. After the software update, the company’s cycle time for a part was reduced from 2.5 hours to 25 minutes.

The second customer that works in the telecom industry also recently installed a 5-axis machine. It is used to run several different part generations, which were taking eight hours to program and then had a cycle time of 12 hours.

Its investment in new software was approximately $30,000, but the result was a reduction in programming time to only three hours with an eventual cycle time of just five hours.

The savings for this shop were so dramatic that the ROI for the machine, which was originally pegged at 24 months, became less than one year.

In each case, the software was financed over a three-year term, which is an industry standard for software, as opposed to five years for equipment.

This financing made sense for transactions of this size, and most important, did not have any effect on cash flow.

I have other clients who are implementing new software systems, or new seats for their application engineers, at a cost of more than $100,000. If they are buying a complete licensed copy (as opposed to a subscription, which is how many software providers are now supplying instead), lenders will approve a five-year term.

Accessories, Repair/Rebuild

This last year alone I had more than a few customers land new contracts. But instead of investing in new equipment, which didn’t make sense based on the size and duration of the contracts and their concerns with COVID-19, they wanted to instead use existing equipment. However, this equipment either was not configured properly or was in disrepair and needed service work to be useful once again.

In the first case, my client had won work that required a rotary table. The company had a vertical machining centre with capacity, but it needed both a software and hardware upgrade (the rotary table) for the job. The rotary table was leased, and it provided the collateral needed for the transaction, so getting the application approved was just a formality.

In the second case, a longtime client had landed enough work for the two EDM machines he had on his floor. However, only one of the machines was functional; the other required a significant amount of repair.

The machines are well-known brands, but the repair and rebuild for the second EDM was going to cost more than $45,000, an amount he was not comfortable pulling from his working capital. Because the machine, when repaired and functioning, would easily be more valuable than the repair cost, all we had to do was take the machine itself as collateral and arrange for a lease to pay for the repair.

Investing in new technology is very important to remain competitive, but it is just as important to ensure that the investment is being used as efficiently as possible. Sometimes even a small addition makes all the difference.

That’s why it is good to know that when additional funds are required, they can be sourced for something beyond large equipment and machine tools.

Ken Hurwitz is vice-president, Equilease Corp., 416-499-2449, ken@equilease.com, www.equilease.com.