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ities to harness the otherwise inevitable chaos, and without estimating the real benefits.
The major feature of these investments is the long-term
nature of the introduction process and economic advantages. The strategic character of the decisions and investments is no longer a point of discussion (Wildemann
1988, Hayes et at. 1988, Gerelle and Stark 1988, Kaplan
1986). This creates the need to USe hurdles other than just
the payback-period to evaluate investments in computer
based factory automation (CBFA). In common economic
evaluation calculations the future costs of a system or
machine might be quite well known (Cooper and Kaplan
1988). But the flow of revenues caused by this investment
is always based on estimates. The assumed accuracy of
these methods usually suggests that one should not invest
in high-risk, high-technology investments with long
payback periods.
But all these methods have in common that they are
oriented towards financial flows and financial issues which
are based on single technical features of the investment
(see, for example, Gupta et at. (1988), and Baudin (1985)).
versus the existing one, the focus is on higher output per
unit time, or lower costs per unit. But the impact on other
functional units, the changed interaction with the surrounding machines, and the future capabilities for a
higher integrated concept are not included in those
calculations. Engineers could argue with those aspects by
using cost-benefIt matrices, but these are often neglected
by controlling interests if the short payback is not visible.
Besides the long-term issue connected with investments
for CBFA, there is another aspect of vital importance.
When looking at a 'traditional' investment, it is often
enough to concentrate on the functional area in which the
investment is placed. Effects on other functional units of
the enterprise are not look at (see, for example, Herroelen
et al. (1986) and Lederer and Singhal (1988)). But-and
330
this IS the major difference of the 'new' investments-most computer based systems are aimed at an
integration of functions, of information flows, and of data
generation and storage. It is therefore not enough to take
only the 'direct' effects into consideration; the 'indirect'
effects are usually much more important. Savage (1988)
pointed out that about 80% of the tasks and challenges
connccted with the introduction of CIM are organizational. Perhaps the difference between the two effects
should be explained briefly. Direct effects are generated
inside the functional unit where the investment is placed.
For example, when purchasing and installing a CAD
system, the direct effects are within the design department. Indirect effeas are generated in other functional
units, which can benefit from the former digitalization of
data, from higher accuracy of transmitted data, from
faster receiving of data, or by avoiding multiple dataentry. In our example, the process planning department
can benefit from CAD data by directly taking the geometric information in the form of the CAD data-set for
generating the NC program, or by using the drawing
information to create an explosion chart which shows the
order of assembly for the production workers. By avoiding the new data entry, this department benefits from the
investment placed in another department and therefore
take place
receives an indirect benefit. Comparable
in other departments, when drawings are received earlier,
or with higher accuracy, or cost information can be given
faster to the accounting department.
New approaches for justifying new manufacturing
technologies usually focus on just one point: to justify the
enormous expense of the investment it is suggested that
more and more of the qualitative aspects be taken into
consideration, which often means that the financial risks
arc neglected (see for example Meredith (1986, 1987),
Sullivan and Liggett (1988), Canada and Sullivan (1988).
Or, as Fine (1988) shows, one can concentrate on a
narrow, model based analysis (Lederer and Singhal t 988,
Gupta et al. 1988, Fine and Freund 1988) and neglect to
view the company holistically, which is absolutely necessary when stan ing to evaluate manufacturing technologies.
The method discussed in the next section enables one to
take these integrating effects of advanced manufacturing
technologies explicitly into consideration on a monetary
basis, and so to integrate the direct and the indirect effects
of investments in CBFA with the economic analysis in
order to justify-or cancel-the investment.
(eI)
(c2)
(c3)
(c4)
higher
higher
higher
higher
331
Table 1. Cost and performance implications of computer based factory automation (CBFA), (separated for the impact on the volume
and the value components of cost and performance).
Change in
cost/benefit
Volume/value
component
Volume
<0
Main effect
Productivity
Productivity
PPS:
Benefit
Cost < 0
Flexibility,
Group of
effect
throughput time
Productivity
Flexibility
Productivity}
Productivity
productivity
Productivity
Productivity
Volume> 0
{
Benefit> 0
Cost = 0
Value> 0
ProductiVity}
Productivity
throughput time
Productivity,
same capacity
More orders to be planned by same staff volume
Pf'S:
Higher value output by CAD, CAP, CAM, PPS:
Productivity
CAD:
CAP:
quality
quality
mistakes
CAM: Higher manufacturing quality, less rework,
quality
Quality
Flexibility
332
(1)
L; (cost
;
(3)
or, when the single cost categories relevant to the automation project (indexed by 'k') are analysed, by
cost effect;jk = costijk x RFijk
(4)
L; (cost
;
share; x RFij)
(5)
333
Table 2. Estimates of cost and benefit impacts, given by functional units and targets of factory automation, shown by the example of
CAD in a company with 500 employees and annual revenues of $45 million.
CAD
Design
Planning and
scheduling
9%
Plan: 40%
Status: 0%
Production
Assembly
37%
5%
- 2.80%
- 1.20%
- 0.20%
- 2.50%
Higher standardization
One-time data entry
Optimized use of material
Higher transparency of processes
-0.80%
3.00%
- $134k
-33%
Offering
control
department
Material
planning
Accounting
Cost impact of
target (J 000 $)
2%
6%
5%
5%
45000
14%
-0.10%
- 1.50%
- 0.50%
- 0.30%
- 0.90%
- 0.30%
2.00%
1.30%
0.03%
1.20%
0.90%
Quality
- 2.00%
-0.10%
- 0.70%
- 0.26%
- 0.20%
-0.20%
- 0.90%
- 0.25%
- 2.60%
- 0.40%
-0.08%
- 2.30%
-0.13%
- 0.50%
- 0.10%
-0.15%
- 0.03%
-0.18%
- 0.80%
- 0.70%
- 0.02%
0.05%
- $150k
-6.7%
- $716k
-4.3%
- S86k
- 1.4%
- $31k
-3.4%
- $143k
-5.3%
223
252
208
200
187
192
79
- 117
1
- $22k
- 1.0%
- $18k
-0.8%
- $1298
- 2.88%
-$1298k
- 2.88%
cost category
labour
material
machinery
interest
effect
1\
-2.30%
-0.20% leAD I
0
..lop.
.... \
0
---=unIt
higIw_.
--......
---
,
+a'"
/
/
.-/
labour
ISiiii material
machinery
interest
:.-sum:
'"
cost category
effect
labour
material
machinery
interest
I sum:
+3.0%
0
0
0
+3.0%
effect
-0.25%
0
-0.20%
0.05%
-0.5 0%
".-",.
\
\
cost category
Figure I. Examples of results of CAD in selected target categories for types of cost in design and manufacturing. Compare with
Table 2.
impacts of the investment are put into the left-hand
column of the table. Here the targets of factory automation or other specific targets can appear. According to
the impacts of the technology shown in Table 1, for every
target the impact in every functional unit has to be
estimated for the regarded period of time. This can be
calculated for each of the four types of cost (direct labour,
material, machine cost, interest), or globally for the
functional unit. Every result is fixed in the matrix.
Therefore the impact on a percentage of cost effect is
fixed; this might be a cost reduction (' - '), or a cost
increase (' + '). The investment itself is not included in
this analysis! This is done later when comparing the
amount of the investment with the potential for cost
:n4
from less labour cost (- 2.3%), but also less material cost
( - 0.2 %). The higher efforts and longer time for the first
data entry, or data generation, leads to 3% higher costs in
the design department, all due to labour cost.
In the final step, all cost-effect values are summed up
by multiplying the percentage value with the costs of the
appropriate functional unit. The sum along the lines is
used to figure out the contribution of every target of the
automation project, and the sum of the columns is used to
get the cost effect for every functional unit. Thus the
major and the minor targets become obvious; respectively
their contribution to the project, and the structure of cost
and benefit implications in all functions of the enterprise
become apparent. This shows, in supplement to the basic
analysis of the company for the investment, which areas
to focus on, or where other means can or should be taken
into consideration, along with the investment. This might
even suggest changes to the desired actions.
In the example reduced throughput time resulting from
the usc of CAD leads to an overall cost reduction of
$223 000, or - 0.49%. Reduced changing efforts lead to
an overall cost reduction of $200 000, or - 0.44%. The
total cost effect inside the design department adds up to
-$134 000, which is 3.3% of the total cost of the design
department, and 0.30% of the overall cost. The improvements for the manufacturing department add up to
-$716000 (-4.3% of their total cost), 1.6% of the
overall cost.
4. Which investments?
The last step described above supplies the gross
potential for cost reduction of the analysed technology or
measure. The economically determined investment can
be found by subtracting the risk premium, special interest, or desired profit that results from the net potential or
the economically maximum investment budget. As shown
later in the break-even analysis, only the net potential
should be considered for the investment, the influence of
(6)
(7)
335
overall increase in performance capabilities, and to maintain the relative market power. Implying higher revenues
or higher profits might turn out to be quite dangerous
when the expectations are not fulfilled. One major reason
for this effect is the influence of CBFA on the fixed cost.
Cost
BEP(1)=BEP(2)
xr
(0)
Cost
BEP(1) BEP(2)
xr
(b)
Cost
Figure 2. Course of cost functions before (1) and after (2) the
investment. (0) 'Optimized' investment budget: the potential
for cost reduction is not scooped by the investment and the
BEP(2) BEP(1)
(e)
xr
I the investment, Cf the fixed cost, Ct the total cost, S the sales
(revenue), BEP the break-even point and xT the volume for
planning. The index '1' indicates before investing and '2'
indicates' after investing' .
336
towards higher cost at the planning volume, the investment has to be of a kind to reduce the variable cost while
operating within the amount of the potential for cost
reduction. If the production volume, which is the basis for
the evaluation, is higher than the break-even point, the
investment must be smaller than the potential (Fig. 2( a.
I f the technological and/or organizational necessary
investment is at, or even higher than, the potential, it is
only advisable to invest in the case of certain expectations
for a constant or increasing sales volume, caused by a
more straightforward total cost function (Fig. 2(
The
break-even point moves towards higher volumes.
Another example explains the reason for the capability
to produce in smaller lot sizes by use of Oexible production equipment. If the ratio between the potential for cost
reduction and the necessary investment can be modelled
as shown in Fig. 2(c), there is no need to step up the
volume, because the break-even point moves towards
smaller volumes.
Most of the evaluated investments will be of type 2( a)
or 2( b). These cases provide the chance for higher
production volumes with the same total cost, caused by
lower variable cost. The average cost per piece starts to
diminish when the break-even point is passed. Therefore
investments in CBFA only have a manageable risk if size,
steps, and timing of the investment can be harmonized
with the requirements of the market. To perform these
investments in periods of low demand (and thus low
volumes) can lead to. severe fmancing problems, especially concerning the short-term liquidity (the major cause
of bankruptcy). On the other hand, making sensible use
of the potential by investing into CBFA provides the
capability to operate on a constant, or even higher level of
customer-oriented performance in stagnant markets.
Additionally, Fig. 4( b) shows clearly why early investors could stand the high investments for CBFA when this
technology was starting to emerge: although the neces-
b.
Type of cost
Wages and salary
Auxiliary wages
Fringe benefits
Material
Tools and devices
Maintenance
Energy, heating
Taxes, fees, insurance
Calculated depreciation
Calculated interest
Other indirect expenses
CAD
CAP
CAM
PPS
o
o
+
+
o
o
+
+ +
+
+
+ +
o
o
o
o
o
o
o
o
o
o
o
Integration
337
Table 4. Types of cost which are influenced by integrating computer based technologies.
CIM linking
CAD-NC
Type of cost
Calculated depreciation
+ /+ /-
Calculated interest
Material
CAM/DNC
CAP-PPS
CAM-PDA
0
0
0
0
0
0
t
t
+ /+ /-
CAD-PPS
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
- (TPT)
- (TPT)
- (Parts)
- (TPT)
- (Info)
Labour cost:
Direct wages
Assembly
Indirect wages
Design
Administration and sales
'[Cost increase for additional equipment, cost reduction via better capacity utilization (no additional capacity necessary).
Table 5. Cost (C) and performance (P) impact of the targets of factory automation on the relevant types of cost (+ + , intensive
cost-jperforrnance increase; +, moderate cost-jperformance-increase; 0, no or small cost -I pc rformancc- increase; - , moderate
cosc-fperformance-decrease ; - - , intensive cost-/performance-decrease).
Shorter
Type of
Higher
throughput
time
COSI
Changing
material
flexibility
0
0
0
Reduced
Higher
One-lime
Better
quality,
cost for
data
capacity
delivery changes Jess scrap Standardization
entry
utilization
Reduced on-time
0
0
0
+
+
0
0
C p
C P
0
0
0
--
0
0
0
0
0
0
0
0
0
0
-
0
0
+
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
+
+
+
0
0
0
0
0
0
Optimized
usc of
equipment
0
0
+
+
0
0
0
0
+
Table 6. Contribution of CIM technologies and their integration for reaching the targets of factory automation (+ + , intensive
positive contribution; + , moderate positive contribution; 0, no or small contribution; - , moderate negative contribution; - intensive negative contribution).
Shorter
throughput
Higher
Reduced
Reduced
on-time
cost for
Higher
quality,
Technology
time
material
delivery
changes
less scrap
Standardization
entry
CAD
CAP
CAM
PPS
CAQ
CAD-NC
DNC
CAD-PPS
CAP-PPS
CAM-PDA
CAM-CAQ
CAD-CAQ
+
+
+
+
+
+
+
+
0
0
+
0
0
+
+
+
0
0
+
+
0
+
0
+
0
+
+
0
0
0
+
+
+ +
+
0
+
+
+
0
+
+
0
0
+
+
+
0
0
+
+ +
0
+ +
+
+
+
+
0
+
+ +
+
+
0
0
0
+
0
0
+ +
0
+ +
0
0
0
+
0
+
+
One-time
data
+ +
+
+
+
+ +
+
+
Better
capacity
utilization
+
+
+ +
+ +
0
0
+ +
0
0
+
0
0
Optimized
Changing
use of
flexibility equipment
0
0
0
+ +
0
+
+
0
+
+
0
0
+
+
0
0
+
0
0
0
0
0
+
+
338
included into this scheme is that 'Delays in commercializing innovative products not only increase the expenditures for research and development, but simultaneously
they often shorten the yield potential, especially if there is
a decay in prices during the remaining product life cycle'
(Somrnerlaue 1988). The method presented here is
a method for the evaluation and decision process for new
manufacturing technologies. With the holistic view of the
company, in regards to the overall costs and benefits,
major economic and technical effects can be shown, but it
can't
replace long-term
oriented entrepreneurial
decisions.
References
BAUDIN, M., 1985, Experience curve theory: a technique for
quantifying CIM benefits. CIM Review, Summer, 51-58.
CANADA, J. R., and SULLIVAN, W. G., 1989, Economic and
Multiattribute
96-103.
FINE, C. 1-1., and FREUND, R. M., 1988, Optimal Investment
in Product-Flexible Manufacturing Capacity. Working
papcr, Sloan School of Managcmcnt , MIT, Cambridge MA.
FINE, C., 1989, Developments in Manufacturing Technology
nnd Economic Evaluation Models. Working paper, Sloan
School of Management, M IT, Cambridge MA.
GERELLE, 1'. G. R., and STARK, J., 1988, IntegratedManufactur-
Main: Maschinenbau-Verlag).
SOMMERLATTE, T., 1988, Inncvationsfahigkeit und betriebswirtschaftliche Steuerung-Hisst sich das vereinbaren?
Die Betriebswirtschafi, 48, (2), 161-169.
SULLIVAN, W. G., and LIGGETT, H. R., 1988, A decision
support system for evaluation investments in manufacturing
local area networks. Manufacturing Review, 1, (3),151-157,
WILDEMANN, H., 1988, Strategische lnvestitionsplanung-Methoden
zur Bewertung neuer Produktionstechnologien (Wiesbaden: Gabler
Verlag).