It is now well recognized (see, for example, Kaplan 1984, Meredith 1985b, or Rosenthal 1984) that the major roadblocks to automating our factories are not engineering shortcomings in the equipment or manufacturing processes but rather managerial attitudes and policies. Foremost among such roadblocks is "the justification problem," as identified by Curtin (1984), Meredith et al. (1986), Michael and Millen (1984), and others.
The basic problem is that many of the advantages of these new manufacturing technologies lie not in the area of cost reduction but rather in more nebulous, "strategic" areas such as shorter lead times, simpler scheduling, and more consistent quality. Yet, since these manufacturing systems are largely equipment based, and manufacturing equipment has his torically been justified on the basis of cost reduction or capacity expansion (for example, see Grud 1984, McDonald and Hastings 1983, Meyer 1982, Muir 1984), these systems are typically expected to be justified on these same measures. In some cases that we identify later, this expectation is reasonable but in others it is not.
Our aim here is to identify those situations where economic justification policies are suitable and those where other justification procedures are more appropriate, according to a conceptual scheme developed (Meredith and Hill 1985) by matching the range of justification procedures observed with the intended use of the technology. In the process, we describe some new justification approaches that have been used by firms and give examples to illustrate their utility and methodology. First, however, we describe the automation technologies to which we are referring.
As described in Meredith and Hill (1985), new manufacturing technologies can be considered to span a continuum (see Figure 1) in terms of level of integration from stand-alone equipment to full computer-integrated manufacturing (CIM). Robots and numerically controlled (NC) machine tools are often in the stand-alone category, although they can obviously be computer integrated into other systems and equipment also, such as material handling systems of manufacturing cells. The purpose of such equipment acquisitions is often to replace worn out or obsolete existing equipment.
When the stand-alone systems are linked together into cells, such as in group technology (GT) lines or flexible manufacturing systems (FMS), or more loosely, such as computer-aided design (CAD) with computer-aided process planning (CAPP), then an intermediate level of integration is achieved that exhibits a synergy between the independent systems. Other examples of such linked islands are automated storage/retrieval systems (AS/RS) with automated guided vehicle systems (AGVS) and manufacturing resource planning (MRP II) where the individual computer information systems are linked together.
When the design, planning, materials handling, manufacturing, and support systems (e.g., order entry, cost accounting, purchasing) are all linked together through computer control the factory is considered to be fully integrated, commonly known as CIM.
Two characteristics of all these advanced manufacturing technologies make their justification process more complex than such equipment has required in the past. First, these technologies are much more flexible, in most cases reprogrammable, than equipment has ever been before. As Gold (1982) points out, this flexibility maintains the value of the equipment over the long run, rather than letting its value depreciate. Fotsch (1983) reinforces this argument with the observation that companies are buying such equipment now because they believe they won't be spending for more equipment later. But the advantages of this flex ibility are not easily captured in simple economic justification procedures.
The second characteristic of these new technologies that requires special consideration in the justification process was referred to earlier, their synergy when linked together. Users consistently report qualitative benefits from such linked systems, such as faster response to customer requests, that are deemed far more important than the normal cost savings. As Meredith (1985a) has shown, when such synergy is properly accounted for in the economic justification formulae, a significant increase in the calculated return on investment can be demonstrated.
Such outstanding benefits are not attained without risk however, and the risk involved in the acquisition of these enormously expensive systems is substantial. The risk is not only financial, but organizational as well since the entire company infrastructure (see Meredith 1986) must often be changed to obtain the benefits these systems offer. Consistent quality of input materials, new costing and payroll systems, and altered managerial structures are only a few of the many changes in the core fabric of the firm that are commonly required. The result is that the risks, as well as the benefits, are also inadequately considered in the economic justification procedures.
Corresponding to the three categories of new manufacturing technologies in Figure 1, three separate approaches to the justification issue seem to exist. For stand-alone systems where the purpose is the straightforward replacement of old equipment, even if some economic benefits not usually considered (such as inventory or space reductions) are obtained, the standard economic justification approaches can be used with an allowance for the additional economic benefits or costs.
When synergy, flexibility, risk, and non-economic benefits are expected, as with the linked systems, more analytical procedures are needed. In some cases, subjective estimates of probability distribu-
Stand-alone Linked Integrated
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