Strategic Justification Approaches

The strategic approaches tend to be less technical than the two previous categories, though they are frequently used in combination with them. The advantage of the strategic approaches is their direct tie to the goals of the firm. A disadvantage is the possibility of overlooking the economic and tactical impacts of the projects, myopically focusing entirely on the strategic impacts. Economic justification calculations will commonly be made in combination with strategic considerations, but analytic evaluations are rarely included (usually due to their time and trouble). However, if a strategic approach is used, the economic and analytic implications should also be checked, simply for a clear understanding of all the impacts of the project.

Four main approaches are commonly used at this level.

Technical Importance From a strategic viewpoint, a desired end cannot be attained unless this project is undertaken first. That is, justification under the concept of technical importance implies that the project is a prerequisite for an important follow-on activity. Its return may be negligible, or even disadvantageous, but later, more desirable work cannot be attempted without implementing this activity first. It is common for activities such as these to be grouped with the desired follow-on project in a "package" that is approved en masse by the approval board.

Net present value, X ($) figure 4: NPV cumulative distribution functions.

Many examples of such activities exist among advanced manufacturing technologies. Firms planning to use cellular manufacturing usually find it necessary to conduct a part-family classification and coding analysis first, though the analysis itself may appear to have no value to them. And it is commonly stated that inventory and bill of material records must be 95 percent accurate before implementing material requirements planning (MRP) systems. And finally, it is often stated as a truism, though it is not necessarily true at all, that a firm must quickly start somewhere in the factory automation process in order to get onto the automation learning curve before the competition gets so far ahead of the firm it can never catch up.

Business Objectives Justification of a project because It directly achieves the firm's business objectives is a clearly strategic approach. "Key indicators" or surrogate measures of this achievement are often used to verify the attainment of these objectives, and to measure when the firm is losing control in these areas and needs to intensify its efforts.

Examples in automation abound. For instance, just by employing the most sophisticated computerized production processes, firms give the impression to customers, vendors, visitors, and the media that they are progressive, advanced, and an up-and-coming organization. (Of course, this may not be true at all.) As another example, automation may allow the consistent attainment of uniform product quality, a top business objective in many firms these days. Or again, automation may drastically reduce lead times and allow significantly better customer service, perhaps a strategic business objective of a company that is fighting foreign price competition.

Competitive Advantage In the competitive advantage justification approach an opportunity may exist for the firm to gain a significant advantage over its competitors by implementing this project. The advantage may not have been one of the strategic business objectives of the firm but it is too important for the company to pass up. The opportunity may have arisen from a unique set of circumstances or may be an outgrowth of a slight competitive advantage the firm already holds.

This situation occurs frequently in all areas of technology. A firm may hold a crucial patent that allows It to build on an existing base for a significant advantage over its competition. Also, many cases of automation in today's factories are raising opportunities for competitive advantages due to totally unexpected benefits such as reduced space requirements, better processing quality, higher performance capability, shorter design times, and so on.

A subcategory of this approach is "the competitive necessity." Here, the project is mandatory if the firm wishes to remain competitive in a particular market. This is the message so frequently spoken regarding all forms of automation these days and captured in the cliche "automate, emigrate, or evaporate."

Figure 5: Utilization cumulative distribution functions.

Research and Development Treating a project as an R 6- D investment admits that it may fail but it holds sufficient strategic promise to justify the investment. The point is that one of many such projects will eventually come through and provide returns to the firm to reimburse all the failures. Without risk, nothing is gained.

A clear example of the R&D approach is the first stage of the value analysis approach described earlier, the pilot project. Another example is setting up one group technology line, or one manufacturing cell, to see how well it works, its costs, its problems, and its benefits. Firms often try to use this approach for promising automation ideas, but because of the risk, minimize the resources provided to the pilot project, whereupon it fails and the second stage of full implementation is abandoned. Companies must be careful not to pre-ordain failure by withholding needed resources at the pilot stage.

Comment on Data Requirements

With all these justification techniques, data acquisition can be a major problem since the technologies are so new. One solution is the pilot stage approach to data collection, as described in the section on value analysis. Another solution is to use the data re-Ported in the literature (e.g., Rosenthal 1984, Meyer 1982), though caution must be advised. For example, some articles are relatively unspecific about not only the conditions under which benefits have been attained but even the technology employed that gave the benefits, calling every technology "C1M." In many of the justification approaches, such as risk analysis, goal programming, portfolio analysis, and economic analysis, management's own subjective estimates are required concerning importance ratings, limitations on resources, goals, and probable effects of the automation on existing operations.

Although it may be true that the justification of these new technologies is difficult only because of the lack of data, as was originally also the case with office automation, numerical control, and even computers, we believe that there is a larger issue here because of the extensive interrelationships required for these technologies. When successfully used for strategic purposes, they may well alter the entire infrastructure of the organization, and even the organizational structure itself. Such extensive impacts have rarely been experienced with past technologies, thus the difficulty in assessing their benefits and justifying their use.


Historically, economic justification techniques have been used to gain approval for capital equipment expenditures. However, this approach cannot cope with the nature of the benefits offered, such as flexibility and synergy, and the risks inherent in today's advanced manufacturing technologies. Faced with this inadequacy, some firms have developed new justification approaches, the range of which has largely been identified here. The approaches were categorized as

1. economic—appropriate primarily for stand-alone replacement equipment with strictly economic benefits.

2. analytic—appropriate for systems with both economic and non-economic benefits and risks, particularly if the probability distributions can be subjectively estimated, and

3. strategic—appropriate for systems that contribute directly to the firm's business objectives.

When higher level (more stategic) approaches are employed, the lower level methods should also be used to reveal the full impacts of the decision. For example, a large machine tool manufacturer justified an FMS investment with a strategic level approach (business objectives) but nevertheless also conducted a risk and economic analysis of the investment to better understand its expected results. Obviously, standalone investments for economic reasons that have limited local impact need not be augmented with higher level justification analyses, since there are not expected to be any higher level impacts.

By recognizing the nature and purpose of the manufacturing systems they are contemplating and then using appropriate justification techniques, we hope that firms may be better able to justify the new manufacturing systems available to them today. By doing so, they may then be able to avoid the pitfall of failing to "economically justify" new manufacturing systems that might well determine whether they will become a competitive force in the market or disappear from it.


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