Engineering - A Cost or Profit Centre?
Have you ever thought about why Engineering departments working in a non Engineering product company, e.g Food, are always considerd as an overhead cost of manufacturing? Something to be reduced to as low as possible or even outsourced to some third party.
There are many reasons why this thinking has to change. Engineers can add value through innovation and changing business practices if given the opportunity.
During my life working in Engineering I fought hard to get a Company to develop transferrable assets as part of its Capital investment programme. For example let us look at where Engineers may be able to play a part in improving business performance.
Consider the typical accountants calculation of return on investment. Everybody knows that:
Return on Assets (ROTA) = Sales - Costs X Sales
ROTA = Profit x Asset Turnover
Suppose a Company had a profit of 151m on sales of 1677m and assets of 1245m
the ROTA would be 12.1%
i.e. 12.1% = 9% (profit) x 1.34 (asset turnover)
Remember that Engineering is all about assets provision and maintenance (in a non engineering product manufacturer) so looking at ROI we can determine the following:
ROI = Sales - Costs x Sales
Sales Fixed Assets + Working Capital
In the first part of the equation the costs are costs of manufacturing and in the second we have the fixed assets provided by engineers and the working capital of manufacturing work in progress and stocks needed for the manufacturing plant. By reducing the Fixed asset cost or the working capital cost then the asset turnover can be increased and hence the return on investment capital.
Engineers have the ability to reduce the cost of fixed assets and working capital these which will be reflected on the balance sheet by:
Improving the design of plant and equipment and making sure the designs can be transferred to other plants and internal companies at reduced costs. This might be in the form of any aspect of engineering, hardware, software or improved manufacturing/business processes or just the knowledge of how to do things better. We all learn from each other and the knowledge of the Engineering team is always far higher than the knowledge of the individual engineer or Company.
Improving the use or need of working capital by reducing the need for work in progress or minimising the need for stocking holding, the latter might be improved by providing more timely usage figures of material consumption in manufacturing to planning systems so that replenishment re-ordering quantities and times are reduced, resulting in lower working capital figures. Many Companies cannot operate a ‘just in time’ stock and manufacturing scenario because the design of their plant and information systems will not enable it to be implemented. Thus engineers can help in improving manufacturing efficiency as well as designing for ease of maintenance and repair.
Few Companies realise this benefit if they outsource engineering and maintenance to the lowest cost supplier, as these suppliers do not have the skill and expertise to realise these internal operational benefits. Outsourcing engineering does not enable continuity of supply or knowledge transfer by in-house engineers to build up and gain sufficient competitive advantage which would lead to major impact upon the ROI equations.
Few companies treat R&D or Engineering as a profit centre whereby their budget is based on a fixed percentage of sales by product on a declining basis. If R&D prdce new profitable products and engineers design efficient systems for their manufacture then improved returns on investment will be realised. If the products and manufacturing plants are not profitable R&D and Engineering budgets will reduce this providing a key incentive to improve
For those Companies that value their engineers and for engineers to understand the dynamics of how they can contribute and explain the business benefits then there are greater returns on investment to be achieved.