Unlocking Manufacturing Efficiency: Leveraging Operating Leases and Automation for Process Optimization
New Paths to Manufacturing Efficiency
The manufacturing industry is transforming. The IoT and advanced automation are making it easier than ever to scale. This year, however, capital spending has become increasingly constrained. As a result, small- and medium-sized manufacturers face a growing challenge: optimizing and improving business processes to maintain a competitive advantage without the benefit of significant capital expenditures.
With capital dollars likely off the table until 2025, manufacturers need innovative strategies to drive efficiency and protect cash flow.
Two solutions that have emerged recently are operating leases and automation technology. These tools allow manufacturers to add productivity-enhancing automation tools without the cash outlay typically accompanying technology upgrades.
This article explores how manufacturers can use these two strategies in tandem to unlock new levels of efficiency, highlighting how to implement operating leases and scalable automation to transform operations.
Shifting to Operational Expenses—How Operating Leases are Transforming Manufacturing
Manufacturers have traditionally relied on capital expenditures (CapEx) to acquire new equipment and technology. However, the economic turbulence of 2023 and 2024 caused shop owners to postpone many capital investments. This climate created an opportunity for innovation in factories’ business process management (BPM).
Unlike CapEx, operating leases fall under operational expenses (OpEx), or lease expenses. This classification enables manufacturers to access advanced equipment without significant upfront costs. Leasing impacts shop owners’ balance sheets, as the recurring payments are
captured in operating income – like a rental fee. This difference makes it crucial for the shop’s financial leader to adjust operating income accordingly while considering the implications of ASC 842 regulations.
The flexibility offered by operating leases means manufacturers can upgrade their systems, improve efficiency, and maintain production quality—today—while conserving cash flow to allocate for other operational needs. This approach allows businesses to increase efficiency in a tight financial environment.
Understanding Operating Leases
Operating leases provide a strategic option for manufacturers who need to upgrade their equipment but cannot afford significant capital outlay. Instead of purchasing equipment outright, businesses lease it for a predetermined period. Payments on finance leases are made periodically, and at the end of the lease term, the equipment can be returned to the lessor and replaced with more modern technology. Alternatively, it can be purchased at the fair market value of the equipment at the end of the lease.
Along with operating leases’ primary competitive advantage of shifting costs from the capital budget to the operational budget, the business is not burdened by asset depreciation because the equipment is leased, not owned.
Consider a manufacturer that needs to upgrade its SCADA system to improve shop floor visibility and operational control. Instead of delaying the upgrade, the manufacturer opts for an operating lease, enabling immediate access to advanced technology and avoiding a large cash outlay. As a result, the manufacturer improves data collection, enhancing decision quality and increasing the shop’s operating efficiency.
How to Shift to an Operating Lease Model Traditional Approach
Because CapEx involves purchasing machinery upfront, the financial hurdle can be cost-prohibitive, especially when margins are tight or market demand fluctuates. As a result, companies often delay critical upgrades, waiting until the budget loosens or until machinery becomes obsolete.
Both these approaches can introduce operational inefficiencies due to wear and tear on equipment or competitors adopting new technology entering the market. Additionally, purchasing equipment ties up CapEx dollars that could be allocated for growth initiatives, product development, or scaling operations.
The New Way with Operating Leases and Lease Payments
By shifting to an operating lease model, manufacturers can overcome these challenges and gain access to modern equipment without the lesser financial strain.
Implementing an operating lease starts with thoroughly analyzing the equipment that needs upgrading and assessing the available leasing options. Manufacturing leaders need to ask:
● What equipment is limiting production rates or causing inefficiencies?
● What is the expected lifespan of current machinery, and how does it compare with newer models available for lease?
● Does newer equipment add technical capability or benefits over the existing pieces?
● What are the monthly costs associated with leasing versus purchasing?
After answering these questions, shops can select the leasing option that aligns with their operating budget, considering lease term flexibility, maintenance coverage, lease liability, and end-of-term equipment options (purchase or return).
Steps for Implementing An Operating Lease
1. Audit Current Equipment: Review legacy equipment or machines approaching obsolescence or warranty period. Often, machines approaching warranty will likely need significant maintenance in the near future.
2. Engage with Leasing Providers: Identify leasing options that provide the latest technology to address operational inefficiencies.
3. Evaluate Costs: Compare the monthly leasing cost against the operational efficiency gains and potential ROI in reduced downtime and increased productivity.
4. Sign and Implement: Begin integrating leased equipment into operations, ensuring staff is trained, and systems are optimized for the new technology.
Implementing Automation for Process Optimization
Factory automation equipment able to be leased
Process optimization requires a systemic approach to ensure that the recommended improvements are sustainable and financially viable. Combining data-driven insights, creative problem-solving, and stakeholder input is the best way to rank the problems in order of urgency to address. The steps below are perspectives from Turner Process Solutions’ process optimization experts that can help organizations implement process optimization effectively.
Expert Insights for Continuous Improvement in Manufacturing
For manufacturers to remain competitive, they must embrace a culture of continuous improvement: competitors are pushing to gain market share, so standing still is falling behind. Process optimization involves implementing lean manufacturing tools like value stream mapping and 5S. This approach means regularly evaluating processes, identifying inefficiencies, and implementing small changes these tools identify.
Manufacturing leaders can conduct full, ~3-month lean events to employ these tools or accelerate identifying process improvement ideas through a Lean Sprint: 1-month rapid-fire assessments where experts come in and find an immediate 10% efficiency savings.
Following the rapid assessment, the lean team makes recommendations to deliver longer-term savings, around 30%. Automation provides many of the recommended improvements, which is why operating leases can be so impactful. Gaining access to the equipment delivers the full benefit of automation at a portion of the equipment cost upfront.
Benefits of Leasing Automation Technology
One of the key benefits of operating leases is the ability to lease automation technology, like CNC machines, robotic arms, or PLCs. These technologies are critical for improving efficiency and optimizing manufacturing processes, but their high upfront costs can be prohibitive. Leasing provides a flexible alternative, enabling manufacturers to access cutting-edge technology while spreading costs over time.
An additional benefit to automation leasing is that it enables companies to match recurring revenue with constant monthly payments to ensure consistent profitability after adding the new equipment.
A Real-World Example
A mid-sized manufacturer of automotive components leases advanced robotic welders to handle repetitive assembly steps. Including robotic welding allows the company to improve throughput and consistency and reduce labor costs without the need to lay out the cost of the equipment upfront. As production scales, the company can lease additional robots, adding automation to the products at the pace of growth – just in time.
Another Real-World Example
A small manufacturer of precision aerospace components conducted a Lean Sprint, which identified an optimization opportunity for a critical [manually-welded] joint that carried a 12% scrap rate. The shop added a robotic arm to weld the joint and saw scrap reduced below 2% while increasing throughput and quality. The shop leased the robotic welder, allowing it to address the issue much sooner and improve the product for its customers in kind.
Leveraging Lean Solutions for Sustainable Growth
In a time when CapEx is under intense scrutiny, operating leases and automation solutions provide small and medium-sized manufacturers with the advantages they need to optimize their processes without large capital expenditures. Manufacturers can improve efficiency, reduce
costs, and maintain competitiveness in an evolving market by optimizing processes, shifting to operational expenses, and embracing scalable automation.
Practical strategies like utility audits, SCADA integration, and continuous improvement processes further empower manufacturers to unlock new levels of efficiency, all while preserving cash flow and minimizing financial risk.
📞: Schedule a call today for expert advice on any process optimization task and options for operating leases to let you automate today!