How to Calculate the True ROI of Industrial Consumables

Purchasing industrial consumables like cutting tools, lubricants, fasteners, abrasives, and other materials is a regular part of operations for many industries. But the challenge comes when it's time to evaluate how well those purchases are paying off. Beyond the initial costs, there are hidden factors that can significantly impact the total return on investment (ROI). Understanding how to calculate ROI on consumables is essential for making smarter, more cost-effective purchasing decisions. This isn't just about price tags—it's about how long the materials last, how well they perform, and how they affect your overall productivity.

I’ve been in the trenches with this before, where what seemed like a simple consumables purchase quickly turned into a larger expense due to downtime, waste, and inefficiency. After some trial and error and a little help from colleagues, I came up with a method that helped me understand what I was actually getting in return for those purchases. Let's break it down step by step.

The Basic Formula for ROI

To start, ROI is often calculated using this straightforward formula:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment × 100

In the case of industrial consumables, the "gain" doesn’t just refer to the direct financial savings from using a more affordable consumable—it includes factors like time saved, reduction in waste, and increases in productivity or tool longevity. However, the real trick comes in measuring these gains accurately and comparing them against your total investment.

Start with Total Costs

When it comes to consumables, total cost isn’t just the price you pay at checkout. It includes multiple factors that contribute to the overall expense:

• Initial Purchase Cost: This is the sticker price for the consumable, whether it’s cutting fluid, abrasives, or any other type of material. It’s what you see on the invoice.
• Shipping and Handling: If you order consumables in bulk or from out of state, this can add up. Make sure to account for these costs.
• Storage Costs: You’ll need to store your consumables, especially if you’re buying in bulk. Storage space or conditions that prevent spoilage or damage will have an impact on your costs, even if they're not directly tied to the consumables themselves.
• Labor Costs: How much labor is involved in using the consumable? If your workers need to spend additional time to set up, replace, or adjust machinery because of poor-quality consumables, this will reduce the ROI.
• Waste: Poor quality consumables can increase scrap material, defective products, or additional waste that needs disposal. This waste indirectly contributes to the overall cost of the consumable.
• Replacement or Repair Costs: Low-quality consumables can lead to more wear and tear on machinery or equipment, which could result in breakdowns or the need for repairs. A consumable that’s cheaper upfront but reduces equipment life isn’t a good investment.

Once you have a grasp on the total cost, you can then assess the returns.

What Are the Returns on Your Investment?

The "returns" aren’t just the direct savings you get from using consumables. The benefits can often be harder to measure but just as important.

• Increased Efficiency: If a consumable helps your machines run faster or allows workers to operate with fewer interruptions, it increases productivity. More parts produced per hour, fewer stoppages for maintenance, and quicker changeover times are all benefits that increase ROI.
• Quality of Output: Higher-quality consumables often lead to a better finish, more precise cuts, or fewer defects. This means less scrap, rework, or customer complaints, ultimately reducing operational costs.
• Durability and Longevity: A consumable with a longer useful life (for example, a cutting tool that lasts longer before needing replacement) helps to avoid frequent replacements. The longer a consumable lasts, the less frequent the need for reorders and the less waste is produced, which is a direct ROI benefit.
• Reduced Maintenance Downtime: If consumables are used effectively, they can reduce the need for equipment maintenance. Tools that wear down too quickly will result in longer downtime for repairs. This cost must be included when calculating the ROI of consumables.
• Energy Savings: High-quality consumables may enable machines to work more efficiently, requiring less power to perform tasks. If the machinery operates more smoothly, it can also reduce heat generation and the need for cooling, further reducing energy costs.
• Worker Productivity: The easier and more effective the consumable is to use, the more productive your workers will be. Consumables that are easy to install, require less frequent replacement, or have longer run times allow your team to focus on more value-added activities instead of downtime for changes or repairs.

The Calculating Process

Now that you understand the factors influencing both the costs and returns, let’s look at how to put this all together:

1. Determine the Total Cost of Your Consumables

Here’s a breakdown of how to calculate the cost of consumables:

• Consumable Unit Cost: Say you're buying cutting fluid for $100 a month.
• Shipping & Handling: Factor in $20 a month for delivery.
• Waste and Defects: Let’s say you account for an additional 5% in waste per month, which equals $5.
• Labor for Setup and Replacement: Workers spend about an extra hour each month replacing low-quality fluid, which costs you $50.

Total cost per month = $100 + $20 + $5 + $50 = $175

2. Calculate Your Gains

Here’s where it gets more interesting. To determine gains, think about how much you’re saving or earning from using the consumable:

• Increased Production: Perhaps the cutting fluid has improved the machine’s output by 10%, saving you $300 a month in labor and production costs.
• Less Waste: With this better fluid, you cut down on scrap, saving you an additional $25 a month in material waste.
• Lower Maintenance Costs: The better fluid reduces wear on machines, saving you $40 a month on repairs or part replacements.

Total gain per month = $300 + $25 + $40 = $365

3. Plug into the ROI Formula

Now we can use our ROI formula to calculate the return:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment × 100  
ROI = ($365 - $175) / $175 × 100  
ROI = $190 / $175 × 100  
ROI = 108.57%

In this case, you have an ROI of 108.57%. This means that for every dollar spent on consumables, you’re gaining $1.08 in return.

Understanding and Managing Your ROI Over Time

It’s important to note that ROI isn’t static. While consumables may offer a good return in the short term, their ROI may fluctuate based on usage patterns, machinery wear and tear, or changes in pricing. To manage and optimize ROI, it's wise to regularly review how much you're spending and how well those materials are performing. This can be done through:

• Regular Usage Audits: Track how often consumables need to be replaced or how much waste is generated during use.
• Performance Reviews: Compare the quality of the output before and after switching consumables, considering factors like output quality, defect rates, and customer feedback.
• Supplier Comparisons: Don’t get locked into one supplier. Periodically check if better deals or more efficient consumables are available.

Tracking and comparing these variables over time will give you a clearer picture of where your money is going and whether it’s worth the cost.

Key Takeaways

Calculating the true ROI of industrial consumables is more than just tracking the purchase price. The true value comes from understanding all the hidden costs and benefits—everything from waste reduction to increased production efficiency. The more accurately you calculate and track these factors, the better equipped you’ll be to make smarter purchasing decisions that can save your company time, money, and effort in the long run.

By considering all aspects of your consumables’ lifecycle—purchase, usage, efficiency, and maintenance—you can get a clear view of the value your purchases are actually bringing to the table. And remember, a well-calculated ROI doesn’t just keep your budget intact; it keeps your operations running smoothly, ensuring that you’re always ahead of the curve when it comes to maximizing your industrial investments.

So, the next time you make a consumable purchase, don't just look at the price tag. Look at the bigger picture, and watch the ROI unfold.