Abstract. Risk assessment is a crucial step in making decision on whether an investment of an asset is appropriate when dealing with uncertainties. To produce higher profit when running a manufacturing company, investment on new technology is common to increase the productivity and scale of the company. Every investment has certain level of uncertainties of the future outcome with certain decision made during the investment. The uncertainties are the risks. This paper discusses about the risks on investing a CNC Plasma Cutter machine in a manufacturing company. The main purpose of this paper is to assess the risks contained in an investment of new technology in a manufacturing company. Usually what an investor concern about the CNC Plasma Cutter machine is that it has higher production rate and have higher precision which can produce better quality products in a short period. However, due to the high cost of investing such a machine, the risk involved is crucial in helping the investor in decision making. Three main categories of risk which are production risk, maintenance risk, and marketing risk will be discussed in this paper as these three risks are the main issues in affecting the reliability of the decision on investing a CNC Plasma Cutter machine. As new technology has been introduced, the investor will face problems such as lack of technician with the skill to operate the machine, high cost of operating and maintaining the machine and future demand of the products. The three main risks mentioned above will cover these problems and this paper reflects the situation faced by some developing mechanical companies which might be transforming the scale of the companies.
There are many types of risks involved in an organization and one of the main risks which in concern is the risk that may result in loss or increased the cost. In a business environment, stakeholders and other business partner expect that information is presented in a way that is easily to understand. Every company need to take care of their asset and this can be done through asset management. The asset management is the systematic and well-planned activities and practices to manage the assets, associated performance, risks and expenditure over the lifecycle for the purpose to make sure company or organization working accordingly to its strategic plan. One of the main foundations of the asset management is the risk assessment of the asset. Risk management can be defined as the identification and evaluation of risks with the coordinated and economical plan. Thus, the risk assessment in asset management is the main business driver that should take into consideration to all decision making and should be done in a good way. This risk assessment involving assessing the risks relative to the assets. The main purpose of the risk assessment in asset management is to understand the cause and effect, the likelihood of the event to happen and to manage the risk with an optimal solution to reduce its harm to the lowest level. The risk assessment for the asset is categorized into several categories which is the market risk analysis, financial risk analysis, development risk analysis and operational risk analysis. The good for the risk assessment is not only focus on technical risks, but also extends to the management of the risks including the interpretation of an event for the whole complete system. In a business model, the company mission, vision and strategy are connected to overall business value such as quality, safety, finance, image or reputation and compliancy 1. When doing the asset risk assessment, the relation between the asset health and criticality to identify the asset related-risk. By using this, the company or organization is able to have a better planning processes when dealing with expenses related to asset.
There are some requirements for the asset risk assessment to be conducted. Firstly, is the risk policy. The risk assessment should cover all the asset life cycle activities which included daily operation, operating system, maintenance and many more. At the same time, the risk assessment should be working together with the strategy of the organization, understood and consistently applies across the organization and as an integral part of the overall risk assessment 2. Setting up the framework is the initial step of the risk assessment for the better identification and evaluation of risk. At this stage, it is important to identify which risks are severe and which one could not be tolerated. Risk identification can be classified as planning, management, delivery and physical asset risks. The overall risk depending on the consequence of the event and the probability for the event to happen. Next, discussion will be carried on and come out with the risk treatment option. When deciding to come out on what treatment or solution to apply, the organization should calculate the cost of risk avoidance vs the cost of accepting the risk 1. This is basically involving the benefit-cost analysis in order to choose which option is more likely better for the future planning. Before the treatment is decided, it should include the options to reduce the risk by pro-active maintenance expenditure, decreasing the effect of failure by planning on an emergency response plan and accepting some minor risk and carry the effected cost. Finally, implementation plan is developed by the committee members. The plan will be implemented at the same time it will be monitored and reviewed from time to time by the committee member of the risk assessment.
At the minimum risk assessment plan should clearly determine the type of service of the organization, the major assets which are important to the business operation, requirements to maintain the operation in term of social, environmental and economic, the acceptable level of risk and lastly the way to mitigate the risks 2. Overall, we can define that risk assessment is a regular business provides a way to determine, assess and treat an organization risk for future planning to reduce its negative impact. In addition, it also creates awareness and enables the network utilities to have control over risks and as a platform for discussing and explaining risks between the management team and the technical team of the organization. Risk assessment also used to support and explain the arguments for budgets planning of an organization. The asset risk assessment industry has grown rapidly in the past few years due to the global financial crisis that has spread and affected every industry and assets therein. As mentions earlier, risk assessment is not only removing the risk completely, but it also making a measure approach to the risk that in the future. After all, most of the industries success with taking the risk into account during their operation period of time. This is why an effective and impactful risk assessment process is important so that each of the business or organization can manage the risk and making the best decision to overcome the risk in the future 1.
THE ISSUE FACE BY INVESTMENT OF CNC PLASMA CUTTER
Productivity is the efficiency in manufacturing products. As a manufacturing company, productivity is one of the most concerned issues of the company. Machines that have high productivity can manufacture more quality products, thus generate more profit to the company after sales. Therefore, all companies always look for machines that can improve their productivity. In our case, we are assessing the investment of modern technology, which is CNC Plasma Cutter in a metal manufacturing company. The implementation of this modern technology will have its own risk on the productivity of the company.
Firstly, the implementation of CNC Plasma Cutters will affect the company’s production rate. Since the implementation of this technology will replace the previous manufacturing method, production ability will be affected, where the production ability might be increased or reduced. Production rate is a crucial concern in manufacturing industries, so this risk is severe and must be evaluated. The factor affecting this risk is the ability of the CNC Plasma Cutters to improve the production rate. Plasma cutting is a process where electrically conductive materials are cut by the means of an accelerated jet of hot plasma 3 while computer numerical control (CNC) is automation of machine tools by means of computers program 4. With the combination of both terms, a CNC Plasma Cutter is an automated cutting machine using the mean of an accelerated jet of hot plasma. A CNC Plasma Cutter does not need to be operated manually. Instead, it needs an operator to give command and order to it. During its operation, torch is controlled by the program command. The program command is usually a text file with “G-codes” and “M-codes”. These codes describe the contours of the torch and when to turn the torch on and off 5. As long as there is a command, the machine will execute its tasks automatically. Thus, the ability of CNC Plasma Cutter to improve the production rate depends on how well the program is written and how well the operators suits the machine. If the program written is simple and direct, its productivity will increase and vice versa. In addition, adaptation of operators towards this machine can affect its performance too. Recent years, CNC Plasma Cutters are equipped with touchscreen accessibility, minimizing the number of buttons involved in operating the machine and thus making it easier for the operators 6. There are also some improvements in the software to aid the auto-calibrating, hole cutting, cut-to-cut cycle and collision avoiding. All these approaches are to make the machine more user-friendly. However, the operators still need some specific skills to operate this machine. Thus, the operators’ performance will affect the machine’s production rate. If the operators do not have the ability, skills and knowledge to operate this machine, the production rate will have declined. When the production rate is low, the company most probably will sustain losses and will eventually loses its competing ability. Due to this severe effect, production risk must be considered and to be countered. This production rate risk is very likely to occur if the administrator of company does not communicate with the workers when making the decision to implement CNC Plasma Cutter. Since this risk is severe, the administrator needs to avoid or reduce this risk. They should get feedback and opinions from the workers regarding this machine before implement the changes. If the change is implemented, they should provide training or workshops for the workers and give time for them to adapt to this machine.
At the same time, the implementation of CNC Plasma Cutters will cause another risk in the company’s productivity, which is the production quality. The existence of production quality risk is due to the changing of manufacturing method. As different machines have different specifications and limitations, changing of machines will change the quality of manufactured product. Nowadays, the quality of products is one of the main concern of customers. If the quality is high, the products will become favorable by the markets. Thus, more sales will be achieved, and more profits will be generated. In contrast, low-quality products will have low market value and not favorable by the markets. Most importantly, low-quality products will cause dissatisfaction among customers and thus affect the company’s reputation. Therefore, quality of products is a very important concern and so, this risk must be considered. As a manufacturing company, various type of products needed to be manufactured from various raw materials. However, the CNC Plasma Cutters might not work well with some materials. The typical materials that can be cut with this machine are brass, bronze, copper, aluminum, steel, mild steel, stainless steel and some other conductive metals 3. CNC Plasma Cutters do not work well for high thermal conductivity metals like pure iron and pure silver. This is because when the thermal conductivity of metal increases, the cutting capacity of the machine will decrease. Thus, the selection of raw material for CNC Plasma Cutters is one of the factors for the production quality risk. This factor must be considered carefully to ensure the machine can perform the cutting. Another factor for this risk is the parameters of CNC Plasma Cutter. For metals that can be cut by this machine, cares should be taken for the parameter of CNC Plasma Cutter. Varied materials have their own temperature distribution, thickness of heat-affected zone (HAZ), surface roughness and hardness, thus different parameters such as cutting speeds, amperes and arc voltages need to be used in the machine for ideal cutting 7. Other than that, torch angle, torch height, kerf width needs different adjustment for varied materials 8. When the parameters used for the machine are suitable, then only high-quality products can be produced. On the other hand, the CNC Plasma Cutter has its cutting limitations. Based on information, the cutting accuracy of a CNC Plasma Cutter is ±0.01 to 0.05 in. with kerf widths as narrow as 0.05 in. 8. The thickness cutting limit of this machine is up to 15cm thick 3. Therefore, the desired size of the products is another factor to be considered in this risk. The company need to consider whether the requirements of their products is within the ability of the machine. If CNC Plasma Cutter cannot fulfil the sizes and tolerance for that product, then the product cannot be manufactured. In addition, the shape and design of the products play important roles in this risk. CNC Plasma Cutter is suitable for flat profile cutting from the metal sheets. Thus, products that have thick profile or complex interior design cannot be manufactured with CNC Plasma Cutter. Besides, the company need to consider the finishing surface of this machine. With the aid of computer technologies, the motion of CNC Plasma Cutter tend to be accurate and smooth. This allows them to produce plasma cut parts with a straight, smooth, nearly vertical drag lines, precise part dimensions and consistent edge quality 5 6. At such, the finishing surface of the products is usually high in quality. Thus, this factor is not likely to contribute to the production quality risk. In a nutshell, production quality risk is a severe issue that needed to be evaluated and countered. The company can avoid or reduce the likelihood of this risk by doing research regarding CNC Plasma Cutter. The company needs to compare the desired specification of the products with the ability of the CNC Plasma Cutter. Only when the ability of the CNC Plasma Cutter complies with the requirement of products, then high-quality products can be produced. At such, the company need to evaluate whether CNC Plasma Cutter is suitable and useful in their product manufacturing.
In making a decision on an investment on purchasing equipment involves certain risks that needed to be considered. One of the major risks that included is market risk. 9 Market risk is risk that involved investment that could face fluctuations in market which will cause reduce the investment value. It is also known as systematic risk which the term may refer to specific currency or commodity. Generally, market risk is contrast with specific risk such as business risk which related to the market sector or the performance of certain company. 9 There are several standard market risk factors that can be included which are equity risk, commodity risk, currency risk, interest risk and inflation risk. Equity risk is risk cause the fluctuation of company stock price. For commodity risk, it is the risk involves the price of raw material used in certain investment and currency risk is the probability of changing in foreign rate. While interest rate involved the fluctuation of interest in an investment and inflation risk is the risk of overall rises in price of good and services in an investment that will undermine the value of money which affect the value of investment. Besides that, there are also few risks that are not possible to prevent or foresee affect the market risk, such as natural disaster, political instability, terrorist attack and trade embargoes. According to the Board of Governor of the Federal Reserve System (America’s central bank), “market risk encompasses the risk of financial loss resulting in market price”, this can be interpreted as market price can be a factor of causing financial loss in an investment. Furthermore, the European Banking Authority (EBA) also defines market risk as the risk of losses on-and-off balance sheet positions that occur as a result of adverse movements in market prices. However, investment that comes with risk do provide potential reward and the greater the risk, the bigger the reward. From the topic of investing CNC plasma cutter, market risk can be implemented and there are several factors involved which are the initial investment and running cost of CNC machine, the supply and demand of CNC machine in the market, inflation of raw material price used and country economic stability.
Regarding the investment on the purchasing of CNC plasma cutter, the investment can be breaking down into several parts which are initial investment and operating cost. Starting from initial investment, the cost of a CNC plasma cutting machine is depend on its type, size and features. 11 For common industrial application, a four-axis CNC plasma cutter can be invested, and the price can between RM200000 to RM500000.Besides, the machine itself, computer-aided design (CAD) software is needed to run the machine and it cost around RM10000 to RM40000.Training cost also added into the initial investment, it will cost around RM2000 to RM4000. Hence, the overall initial investment would cost around RM300000 to RM600000. 10 For the operational cost, there are four major cost which are power cost, gas cost, consumable cost and labour cost. The major power consumed by the CNC plasma cutting machine is put directly to work on the material. The power supply efficiency of the machine usually around 85%. For example, a 200A CNC plasma cutting machine has an average operating voltage of 140V which means it provide a power supply of 28kVA, hence its total power consumed is 28kVA x0.85 = 23.8kW. According to Malaysian electricity billing rate, the cost is RM9.36 /kWh and the power cost can be calculated as power consumption used x operating time x electricity billing cost. For the gas cost, the consumption rate varies with the operating condition of the machine. For example, 200A oxygen plasma cutter consume 2m3 of oxygen while cutting. Hence, the gas cost can be calculated as the consumption used x operating time x price of air/m3. The consumable cost of the plasma cutter is tracked on monthly or yearly basis. The cost is depending on the part lifespan, operating parameters, duration of cuts, number of pieces and operating skill. The effective way on calculating the cost is the consumption rate x operation time x part cost. Labour cost is the major cost of the operation because it depends on the experience of the operator hired and the average hiring cost per operator in Malaysia is around RM1000 to RM1500. Hence, the labour cost is calculated as the total hours operated per year x shop hourly rate x number of people hired. In the overall starting investment in CNC plasma cutter machine is approximate RM 600000 to RM700000 which include the initial and operating cost. This investment is a huge risk to handle due to the amount of money would be invested and countermeasures on reducing the risk is needed to prevent the loss of value of this investment. 10 Therefore, there are a few recommended countermeasures that can optimize the productivity and reduce the risk of loss in investment. The first recommendation is the preventive maintenance should be carried out to prevent downtime for repair which is costly. Also, secondary operation needed to be minimized and this can achieve by optimizing cut quality. This method can produce better quality cut piece and reduce the use of raw material which could cut down the operating cost. Lastly, optimizing the consumable cost by hiring good operator could reduce the operating cost as this reduce the investment risk.
The second factor of market risk in CNC plasma cutter investment would be the inflation of raw material price. This is because the inflation of the price will affect the price of the product produced by the machine and the profitability of the investment may decrease. For example, hot rolled carbon steel sheet is commonly used in CNC fabrication. 12 According to MEPS (International) LTD statistics, the price of hot rolled carbon steel sheet in May 2017 is around RM 2092 per tonne and the price in May 2018 is around RM 2548 per tonne. The reason behind the increasing price of carbon steel is due to two main factors which are the high demand of supply from the market and the low supply provided toward the market demand. From the difference of the price given throughout the years, it is shown that the inflation of the hot rolled carbon steel had increased to 21.8% and this could increase the price of the investment which will leads to the increase of market risk. However, the increased price of the raw material can be covered by rising of the cost of final product and service. 13 In the manufacturing field, the price of CNC made product usually cost at least RM1000 due to its high operating cost. Also, the operating of CNC plasma cutter can be charged in operating hour to make profit. In the current market price, the use of CNC machine is charged around RM240 to 320 per hour. Thus, in order to cover the inflation of raw material price, increasing the price of CNC made product and service could be an alternative to reduce the risk bear by the investing company. Moreover, the demand of CNC cutting needs in the market also one of the influencing factors in market risk. 14 According to the Malaysia’s index of industrial production (IPI) in May 2018, the manufacturing sector output in Malaysia raised by 4.1 per cent and the major sub-sector which is non-metallic mineral product, basic metal and fabricated metal product had increased 5 percent. Based on the statistic given, the market has shown a good demand on manufactured product and the market risk on investing CNC plasma cutter will be less as there is high chance the CNC machine invest can fulfil the market demand. Hence, the value of the machine will be high due to its high demand in the market. As the value of the machine is high, there will be lesser risk for the investment to receive. For the last factor which affect the market risk of the investment is the economic stability of the country. 15 Malaysia has the one most open economy in the world with an averaging over 140 percent of GDP ratio since 2010. Malaysia economic is well-diversified and it is weathered toward the external shock. Also, the financial system and banking system of the country is well-functioning. Hence, the market risk will be low based on the current situation of Malaysia’s economy and investment of the CNC plasma cutting machine would being less affected by the market risk.
Maintenance on Machine
Maintenance is a process of preserving a condition or situation or the state of being preserved. On the other hand, risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. In this case, the maintenance risk of CNC plasma cutter is being discussed because it is very important as it is always the priority for a manufacturing company. Machines that have a regular preventive maintenance can prevent the unwanted break down, increase its uptime, maintaining the best performance of the machine etc. Hence, the company has to look forward to the maintenance risk as it will affect the profit of the company.
Before purchasing any product, an individual or a company has to do a lot of research and assessment regarding the risk of the product. One of the risks that the company has to consider is the maintenance of the product to determine whether or not to invest in that particular product. In order to discuss in detail, the product chosen by the company is fixed as CNC Plasma Cutter. First of all, the issue is the maintenance cost for the machine. According to the current market value, the preventive maintenance cost for CNC plasma cutter is around RM4000 per time for the first 5 years, 16. As time goes on, the component of the machine will start to get older and older. Hence, preventive maintenance cost will be increased based on the condition of the machine. Moreover, if there are many components of the machine break down, the maintenance cost will get higher and higher and the same goes to the time spend on the maintenance process. Besides that, 16 says that a minimum of 2 preventive maintenances have to be carried out to make sure the CNC plasma cutter is working in the best condition. Meaning to say that, the preventive maintenance cost for the first 5 years will be around RM8, 000 and the cost for the following years will up to RM10, 000 or above. Besides the preventive maintenance, plasma table cleaning also considers as one of the maintenances which can improve productivity and uptime of the CNC plasma cutter 17. Al Holst and Rachel Scheck 17 mentioned that “The plasma cutting arc produces a large volume of molten slag that pours over the slats supporting the metal being cut. After a few weeks of production cutting, the slat can become so coated with slag that they actually grow wider until airflow into the table is blocked.” The environment will become unsafe and fill with smoke if the maintenance of the table is being delayed 17. In order to increase the production rate, the company has to purchase more than one CNC plasma machine based on the company modal. So, the maintenance costs will be double up based on the number of machines purchased. In short, the company has to consider the recurring cost as it is a huge burden for the company.
In this case, let us make a comparison of table maintenance costs between conventional plasma cutter and modern plasma cutter and the total maintenance cost table (Table 2) to illustrate the total maintenance cost in 10 years. Assume the company is using the conventional plasma cutter and the maintenance cost for the first 5 years is RM4, 000 per time, RM5, 000 per time for the following years and a total of two maintenances per year.
Modern Plasma Cutter Conventional Plasma Cutter
Labor – Slag removal from table and slag bin RM 2536.25 RM 4869.60
Cost – Slag bin replacement RM 608.70 RM 3246.40
Cost – Slat and slat frames replacement RM 13886.48 RM 29530.07
Lost production (RM 910 / hour) RM 11869.25 RM 43826.40
Labor – Replace slats and slat frames RM 2556.54 RM 3043.50
Total RM 31457.22 RM 54985.90
Table 1: Maintenance of the table of CNC Plasma Cutter
Year 1 2 3 4 5 6 7 8 9 10 NPV
Cost (RM) 62985.90 62985.90 62985.90 62985.90 62985.90 64985.90 64985.90 64985.90 64985.90 64985.90 RM 639859
Table 2: Total maintenance cost in 10 years
The table above show the total maintenance cost of CNC Plasma Cutter machine in 10 years is RM 639839.00. According to 18, the actual amount of money must be larger than the NPV shown is the table above because the table above does not include the costs for major maintenance and emergency maintenance of the machine which will cost the most compared to annual maintenance fee. Hence, the company has to allocate some amount of money for maintenance purpose.
Next, the maintenance will affect the production rate of the company. During the maintenance process which may take a few days to finish, the production rate for the company will drop or even no production at all. Hence, the metal manufacturing company forced to delay or stop his work in order to get the maintenance done. Moreover, if the maintenance happens during the peak time, the company will lose quite an amount of money based on the quantity of work which may affect the total profit earned by the company. Besides that, when the situation becomes even worst where the maintenance period has to extend due to the condition of the machine, the company has to bear with huge loss of profit. Furthermore, if the company could not finish the order on time, there is a possibility to get sue from the respective buyer and a series of law action will be taken. As a result, the company may undergo huge fines as compensation and the reputation of the company will drop. Moving on, once the reputation of the company drops, customers will refuse to visit the metal manufacturing company and the company may go bankrupt in the future.
Furthermore, the company has to consider the breakdown frequency of the CNC Plasma Cutter. As the machine is working for a long period of time throughout the day, there is a high possibility for the machine to breakdown 19. This may due to the machine is overheated or component of the machine is broken 19. Frequency break down of the machine will affect the overall production rate of the metal manufacturing company. There are many reasons which may cause the breakdown of the machine, such as improper maintenance, poor electrical connections, overrunning machines, not replacing worn parts, misalignment etc. 19. In order to solve this issue, the maintenance of the CNC machine has to be done by a certified company or team. Moreover, the condition of the company itself has to be good enough to own a CNC machine as the performance of the machine may affect by the environment of it such as high humidity. Humidity environment will reduce the lifespan of the CNC machine as it will increase the rate of oxidation of the component inside the machine. Lastly, the life cycle cost of the CNC machine cutter has to be considered as well. As the machine getting older, the owner of the machine will be advised to sell the machine as the condition is not that good or the technology inside the CNC plasma cutter machine is not advanced enough to carry out the duty anymore. According to data found, the life cycle cost for CNC plasma cutter is RM4, 000 – RM12, 000. Meaning to say that, the company can get a return of RM4, 000 to RM12, 000 based on the condition of the machine. Hence, the life cycle cost of the machine is important as it may cut down some amount of the budget in getting a new model of CNC machine in the future.
In conclusion, the issues related to risk on investment of a CNC plasma cutting machine in a factory have been discussed in this project. The purpose of the risk assessment in asset management is to understand the cause and effect, the likelihood of the event to happen and to manage the risk with an optimal solution to reduce its harm to the lowest level in order to ensure profitability of owning the asset by the company. The issues related to risk assessment which have been discussed are categorized into production risk, maintenance risk, and marketing risk.
The risk related to the production is that the performance of the operator will affect the production rate as introducing new technology will require new skill and knowledge to operate the machine. If the operator do not have the capability to operate the new machine, the production rate would have declined and the company might sustain losses. To reduce this risk, training or workshop should be provided by the company to their workers and the company should get feedback and opinions from the workers before implement the changes on the technology. Another risk in production is the production quality. This is a severe issue as the quality of the product will affect the reputation of the company. As CNC plasma Cutters do not work well for some materials, the selection of raw material and suitable adjustment of the machine during the operation of the machine is important to ensure the high quality.
Maintenance risk assessment has a purpose of optimizing the maintenance effort in order to minimize any risk of failure. As time flies, the maintenance cost of the CNC plasma Cutters will be increased due to the worn out of the components. If risk assessment on maintenance is not applied properly, failure on the machine is most likely to occur. As maintenance cost on CNC technology is not a small amount and it is unavoidable to operate the machine, the company need to allocate some budget for maintenance before investing the machine. Furthermore, improper maintenance plan will affect the production rate and indirectly affect the reputation of the company because breakdown might happen if the machine continuously in operation without suitable inspection and maintenance.
Market risk is risk that involved investment that could face fluctuations in market which will cause reduce the investment value. The factors affecting the marketing risk are inflation of the raw material, demand of the market towards the product, and the economic stability of the country. Due to the high demand from the market but low supply for the carbon steel, which is a common material for CNC fabrication, the price of the carbon steel has increased within a short period of time. This causes the increase of the market risk as the amount involved in the investment of the machine have increased. Another factor that can affect the marketing risk is the economic stability of the country. The investors need to have good timing in investing an asset in a right time and need to consider the future value of the asset.
The purpose of this project which is to asset the risks involved in an investing a CNC Plasma Cutter has been achieved. In short, the three major risk categories are production risk, maintenance risk and marketing risk. The investors need to consider all the risks involved and need to have a asset management plan before start an investment so that the companies manage to optimize any unexpected downtime in their business life.