Ddh

Robots GT CIM

NC FMS

AS/RS CAD/CAPP

MRP N Figure I: Advanced manufacturing technology continuum.

tions, or at least point estimates, are obtainable and can be included in the analysis.

Last, with systems approaching full integration, clear competitive advantages and major increments toward the firm's business objectives are usually being obtained. Here, strategic approaches are needed that take these benefits into consideration, although tactical and economic benefits may be accruing as well.

Each of these three justification categories spans a number of approaches, as illustrated in Figure 2. In the remainder of this paper we will describe these approaches and discuss their pros and cons.

Economic Justiflcation Approaches

There exist a number of formulae and approaches that firms use for the economic justification of equipment. Examples include break-even analysis, MAPI (Machinery and Allied Products Institute) method, incremental rate of return, accounting rate of return, net present value, ROI (return on investment), and payback (or payout). All of these methods are well documented in the literature (e.g., Tombari 1978). Fotsch (1983) has determined, however, that the payback and ROI methods are used by the overwhelming majority (91%) of firms.

The advantages of the economic approaches are their simplicity, clarity, apparent "bottom-line" impact, and ease of data collection. But their disadvantages include their inability to capture non-economic and strategic benefits. The primary disadvantage, however, is their use of a single value for decision making—a complex decision simply cannot be reduced to a single number and still contain the essential information needed for the decision. To do so gives the impression that the problem itself is simple, but gaining the complex benefits of advanced manufacturing technologies is reported by Gold (1982), Rosenthal (1984) and others, to involve serious repercussions throughout the organization.

Analytic Justiflcation Approaches

The analytic techniques described in this section are again largely quantitative but more complex than the economic approaches. Also, they tend to capture more information and frequently consider uncertainty and multiple measures and effects. Their advantage is that they are more realistic, taking more factors and subjective judgments into account, and hence better reflect reality as understood by knowledgable managers. Their disadvantages are that more data are required and the analysis is considerably more complex and time-consuming, though the use of a computer can minimize this difficulty. (Comments about the data requirements for all the justification methods are made in a later section.) Nevertheless, the complexity of these methods is a deterrent to their use, both because of execution as well as understanding.

Three major approaches are typical of this category and we describe each in turn.

I Justification approaches

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