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Calculating investments for integrated manufacturing:looking at the overall costs and benefitsDIETER BOELZING a & HERBERT SCHULZ aa Department of Mechanical Engineering, Technical University of Darmstadt, Institutefor Cutting Technologies and Machine Tools, Petersenstrasse 30, Darmstadt, D-6100, F.R.GermanyVersion of record first published: 24 Oct 2007.

To cite this article: DIETER BOELZING & HERBERT SCHULZ (1989): Calculating investments for integrated manufacturing:looking at the overall costs and benefits, International Journal of Computer Integrated Manufacturing, 2:6, 329-338

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INT.J. COMPUTER INTEGRATED MANUFACTURING, VOL. 2, NO.6, 329-338

Calculating investments for integratedmanufacturing: looking at the overall costs andbenefits

DIETER BOELZING and HERBERT SCHULZ

Abstract. Traditional investment calculations focus on singularaspects and functions of the investment. Integrated informationtechnologies affect more than the small area of the actualinvestment; most of their real positive economic effects aregenerated in other areas of the enterprise by using primarilygenerated data, and giving a higher reliability to the informa-tion basis. This leads to a justification method, which includesthe overall aspects of these kinds of investment, by sys-tematically analysing the cost and benefit impacts on major costcategories in every functional unit of the enterprise. The resultis the potential for cost reduction, since it shows the mostefficient amount of investment to be made.

1. Why traditional methods have to fail inevaluating integrated manufacturing

Investments in computerized manufacturing automa-tion are looked at differently by technical and by businessinvestment planners. Engineers tend to focus on thetechnical advantages and necessities of these technologies;business people tend to prefer a short payback period tojustify the high cost, which is usually not realistic for theseinvestments. The necessity to act is often recognized,but-and this is the point-there are major stumblingblocks: which systems to choose, in which to extendautomation, and with which systems to start. The varietyis wide: for design there are computer aided designsystems (CAD), process planning might be supported bycomputer aided planning systems (CAP), in manufactur-ing the computerized controlled machines and devices ofcomputer aided manufacturing (CAM) promise to bemuch more effective than the old, conventional machinesand practices. Computer based systems for productionplanning and scheduling (PPS, MRP) are used in some

Authors: Dieter Boelzing and Professor Dr.-Ing. Herbert Schulz, Tech-nical University of Darmstadt, Department of Mechanical Engineering,Institute for Cutting Technologies and Machine Tools, Petersenstrasse30, D-6IOO Darmstadt, F.R. Germany.

companies, but are often driven by organizational necess-ities to harness the otherwise inevitable chaos, and with-out estimating the real benefits.The major feature of these investments is the long-term

nature of the introduction process and economic advan-tages. The strategic character of the decisions and invest-ments is no longer a point of discussion (Wildemann1988, Hayes et at. 1988, Gerelle and Stark 1988, Kaplan1986). This creates the need to USe hurdles other than justthe payback-period to evaluate investments in computerbased factory automation (CBFA). In common economicevaluation calculations the future costs of a system ormachine might be quite well known (Cooper and Kaplan1988). But the flow of revenues caused by this investmentis always based on estimates. The assumed accuracy ofthese methods usually suggests that one should not investin high-risk, high-technology investments with longpayback periods.But all these methods have in common that they are

oriented towards financial flows and financial issues whichare based on single technical features of the investment(see, for example, Gupta etat. (1988), and Baudin (1985)).versus the existing one, the focus is on higher output perunit time, or lower costs per unit. But the impact on otherfunctional units, the changed interaction with the sur-rounding machines, and the future capabilities for ahigher integrated concept are not included in thosecalculations. Engineers could argue with those aspects byusing cost-benefIt matrices, but these are often neglectedby 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 oftenenough to concentrate on the functional area in which theinvestment is placed. Effects on other functional units ofthe enterprise are not look at (see, for example, Herroelenet al. (1986) and Lederer and Singhal (1988)). But-and

0951.192X/S9 53.00 ©1989 Taylor & Francis Ltd.

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this IS the major difference of the 'new' invest-ments-most computer based systems are aimed at anintegration of functions, of information flows, and of datageneration and storage. It is therefore not enough to takeonly the 'direct' effects into consideration; the 'indirect'effects are usually much more important. Savage (1988)pointed out that about 80% of the tasks and challengesconnccted with the introduction of CIM are organiza-tional. Perhaps the difference between the two effectsshould be explained briefly. Direct effects are generatedinside the functional unit where the investment is placed.For example, when purchasing and installing a CADsystem, the direct effects are within the design depart-ment. Indirect effeas are generated in other functionalunits, which can benefit from the former digitalization ofdata, from higher accuracy of transmitted data, fromfaster receiving of data, or by avoiding multiple data-entry. In our example, the process planning departmentcan benefit from CAD data by directly taking the geomet-ric information in the form of the CAD data-set forgenerating the NC program, or by using the drawinginformation to create an explosion chart which shows theorder of assembly for the production workers. By avoid-ing the new data entry, this department benefits from theinvestment placed in another department and thereforereceives an indirect benefit. Comparable take placein other departments, when drawings are received earlier,or with higher accuracy, or cost information can be givenfaster to the accounting department.New approaches for justifying new manufacturing

technologies usually focus on just one point: to justify theenormous expense of the investment it is suggested thatmore and more of the qualitative aspects be taken intoconsideration, which often means that the financial risksarc neglected (see for example Meredith (1986, 1987),Sullivan and Liggett (1988), Canada and Sullivan (1988).Or, as Fine (1988) shows, one can concentrate on anarrow, model based analysis (Lederer and Singhal t988,Gupta et al. 1988, Fine and Freund 1988) and neglect toview the company holistically, which is absolutely neces-sary when stan ing to evaluate manufacturing technol-ogies.The method discussed in the next section enables one to

take these integrating effects of advanced manufacturingtechnologies explicitly into consideration on a monetarybasis, and so to integrate the direct and the indirect effectsof investments in CBFA with the economic analysis inorder to justify-or cancel-the investment.

2. Cost reduction and performance enhancementdominate the evaluation process

The basic principle of the method presented is that all

cost, benefit, and performance effects are translated intotheir impact on the total costs of the company, here calledthe overall cost. This also means it is easier to show theimpact on the profitability of the company. The overallcost is focused on costs for generating products; costs forfinancial transactions or other 'non-relevant'. costs areexcluded. This will be explained later.Costs and output can each be described by a volume

component and a value component. A cost reductiontherefore might be reached by a reduction in consump-tion of a raw material (for constant ouput), or by anenhancement in output to higher volume (while costs areconstant). So the fundamental effects can be described by

(a1) same output for less input volume(a2) same output for less input value

(b t) same input for higher output volume(b2) same input for higher output value

Usually it is quite difficult to distinguish these effectsclearly when analysing a factory. They are recognized assuperimposed on four major categories:

(eI) higher output value for less input volume;(c2) higher output value for less input value;(c3) higher output volume for less input volume; and(c4) higher output volume for less input value.

It is very important consciously to realize these differenttypes of effects when evaluating the effects of the analysedsystems. For this analysis cases (a1)-(b2) are most relev-ant for showing the impacts of investments in integratedtechnologies more clearly. But in practical use, cases(eI)-(e4) can also be used to evaluate the investment'simpact.As shown in Table 1, most cost and performance effects

of CBFA can be broken down into four major categories:productivity, quality, flexibility, and capacity utilization.Productivity is defined by the relation of productionoutput to the necessary input. This input might be humanwork time, capital, or material, with related forms ofproductivity (productivity of work, capital, or material).Flexibility is described by the capability of the productionsystem to adapt to a change in input variables per unit oftime. This includes the costs of the adaption measure,and the speed of reaction measured in throughput time.Quality can refer to the product-quality (quality in usingthe product), and the manufacturing quality (costs forscrap, rework, and quality prevention). Capacity utiliza-tion uses the time-based utilization of machines andproduction equipment for manufacturing the products; itis calculated by the machine cost per produced unit.For the evaluation of the overall costs and benefits of

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Investments for integrated manufacturing 331

Table 1. Cost and performance implications of computer based factory automation (CBFA), (separated for the impact on the volumeand the value components of cost and performance).

Change incost/benefit

Volume/valuecomponent Measure of computer based factory automation Main effect Group of effect

Flexibility

quality

Flexibility

qualityquality

ProductivityProductivityFlexibility, throughput timeProductivity

Quality

Productivity}Productivity productivity

ProductivityProductivity

ProductiVity}Productivity throughput timeProductivity,

Productivity

Less used labour time through CAD, CAP, CAM, PPS:CAD: Faster drawings, faster changesCAP: Faster process planning and NC programming

Volume < 0 CAM: Less set-up time in manufacturing 1Less double work/multiple fixturesLess rework and scrap

PPS: Less planning time, higher transparency )Higher accuracy of planning

{

Better use of values by CAD, CAP, CAM, PPS:CAD: Less material input by optimized design

Value < 0 CAP: Less material input by more accurate process plans andbetter NC programs

CAM: Less material input by optimized use of machineryPPS: Less bound capital, less loss by over-maturity of material

{

Higher volume output by CAD, CAP, CAM, PPS:CAD: More drawings by same staff volume

Volume> 0 CAP: More process plans/NC programs by same staff volumeCAM: Higher capacity utilization, more produced goods by

same capacityPf'S: More orders to be planned by same staff volumeHigher value output by CAD, CAP, CAM, PPS:CAD: More accurate and unequivocal drawings

Value> 0 CAP: More accurate process plans, NC programs with fewermistakes

CAM: Higher manufacturing quality, less rework, JHigher on-time delivery rate, and therefore higher prices

PPS: Execution of short-term changes possible

Benefit> 0Cost =0

Benefit 0

Cost < 0

integrated manufacturing technologies it is sufficient toconcentrate on the four major cost categories: directlabour, material, manufacturing equipment cost (i.e.depreciation) and interest (for work-in-process, etc.), andother costs (Schulz and Boelzing 1989). All are effected byCBFA investments, but in different ways, according tothe special kind of investment.

3. Overall perception of the company

As pointed out before, it is not only the cost and benefitimpacts within the investing unit which are of impor-tance. Much more important is the impact on all theother functional units in the company. A functional unit isdefined as one which fulfils a complete task in the creationprocess of the products, and which can be analysed forcost independently of the others. Functional units are, forexample, the design department, the process planningdepartment, finance and administration, mechanical pro-cessing, Or assembly. In more detailed analysis the mech-anical processing department can be further divided intoa drilling, a turning, and a milling unit (in companies

with shop-oriented layouts) or into product-oriented cells.A major distinguishing feature is the orientation of this

method to the targets of factory automation, but not onlyin cost categories. It is the performance which is enhancedby application of the technologies to which these calcula-tions are directed, and therefore the impacts of anenhanced peformance according to the special targets ofthe factory automation project are the centre of interest.Thus some costs may fall while others may rise. It is notsingle aspects but the overall balance which provides thebasis for the fmal decision process.The steps one must go through in the evaluation

process are, in short, the following:

1. Determine the cost structure of the company forfunctional units, and for the major cost elements(those affected by automation, see above).

2. Define the targets for the investment, according tothe overall strategy of the company.

3. Investigate the tasks which might be supported by acomputer based system (CBS), in every functionalunit. If possible, distinguish between tasks whichcan be fulfilled with the CBS, and those resultingfrom the use of the system.

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332 D. Botlzing and H. Schulz

overall cost x L; (cost share; x RFij) (5);

overall cost = L; (cost share factor; x overall cost) (2);

or, when the single cost categories relevant to the autom-ation project (indexed by 'k') are analysed, by

applying this methodology, an estimate of this factor canbe made for easier application. The overall costs of theenterprise can be summed up by the costs of everyfunctional unit:

(3)

(4)

cost effect., = cost; x RFij

cost effect;jk = costijk x RFijk

Thus the overall cost effect is given by

overall cost effect, =

The effect of the cost of a particular investment within afunctional unit can be a cost reduction or a cost increase.By recognizing this effect, the main characteristic ofinvestments in CBFA can be taken into consideration:often some costs within the functional unit, where theinvestment is placed, might rise, i.e. when the definingtime for a CAD-drawing for a new design is longer thanwith conventional means. But all following functionalunits can use the generated data set and other conse-quences, and their costs might be reduced. When onlyfocusing on the design department, the investment wouldnot promise to have an adequate payback period, but bytaking all effects systematically into consideration it ispossible to determine the real benefits, and a betterpayback determination.So the total cost effect of a functional unit is not

necessarily directed towards a cost reduction, and there-fore can be described according to the real causes:

This more formal explanation is quite 'easy to apply bymaking a chart, such as Table 2, which guides one alongthe targets of factory automation via all the relevantpoints. This follows three basic steps. In the first step theoverall costs of the enterprise are to be ascertained. As ina cost centre analysis, the cost share of every singlefunctional unit in the overall cost is determined. This isdone first for the functional unit as a whole, and later, ifmore detail should be necessary, for the relevant types ofcost. These shares of the functional units appear at the topof Table 2. In this company with about 500 employeesand with revenues of $45 million, the design departmenthas a cost share of 9% of the overall cost, the operationsscheduling and process planning 5%, production 37%,assembly 14%, and so on. 17% of the overall cost is dueto other activities of-the company, i.e. finance transactionswhich are not linked to the manufacturing activities.In the second step the evaluation criteria for the

RFij = (influenceable cost share)ijx (change of cost share);j (1)

This is the more theoretically correct description. When

4. Determine the number of tasks which should bedone by application of the CBS.

5. Take an assumption of a possible configuration ofthe CBS, to make a mental model on which toorientate the following estimates.

6. Revise the targets for the factor automation project,and then analyse the impacts of enhanced perform-ance and different costs in every functional unit ofthe company for the four major cost categories,according to every target of the project.

7. Sum up the cost effects, once for every automationtarget, and once for every functional unit, and theoverall sum.

8. Compare the overall sum with the necessary invest-ment, and perform a break-even-analysis to get theimpact on the fixed and variable costs, and thus anindicator for the risk structure.

This leads to thinking in terms of overall cost, as inlogistics, which is a cross-sectional function, and affectsvarious other functions.Most of these steps do not need further explanations,

and will 'become obvious with the further descriptions andpictures. But the heart of this method, the calculation ofthe profitability of the investment, deserves some furtherdescription. It is based on the arithmetical connection ofoverall costs, cost share in the functional unit, and thefactor for reduction of the functional unit. This reductionfactor (RF) is given for a certain period of time in whichthe investment should be implemented, settled, and beput to its intended use (i.e. 5 years).To figure out the potential for cost reduction, and its

cost impacts, we use a trick: all costs are regarded asvariable. The reason is simple: although many costs arefixed (even labour costs become more and more fixed, insome cases only 5% of the labour costs are reallyvariable), we want to concentrate on the productivityeffects. This means, for example, that more things can bedone in the same time, or the same things can be done inshorter time, although the worker's wage is fixed anddoesn't vary with the output achieved. But in ourmethodology it is necessary to grasp this importantdifference, and therefore all costs are virtually assumed tobe variable. The real impact on fixed and variable cost isdetermined later by performing a break-even analysis,where fixed and variable costs are explicitly considered.Let 'i' represent the functional unit, and 'j' the

technology. The reduction factor for the functional unit isthen given by the cost share, which is inlluenced by themeasure and its impact on this cost share:

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Investments for integrated manufacturing 333

Table 2. Estimates of cost and benefit impacts, given by functional units and targets of factory automation, shown by the example ofCAD in a company with 500 employees and annual revenues of $45 million.

CAD Status: 0% Plan: 40%

Target of factory automationPlanning and

Design scheduling Production AssemblyQualitycontrol

Offeringdepartment

Material Cost impact ofplanning Accounting target (J 000 $)

Share of overall cost

Shorter through-put timeReduced material costHigher on-time deliveryReduced expense for changesHigher quality, reduced scrapHigher standardizationOne-time data entryOptimized use of materialHigher transparency of processes

Cost impact withinfunctional unit

Overall cost impact

9% 5% 37% 14% 2% 6% 5%

- 2.80% - 1.20% -0.10% -0.10% - 2.00% - 0.50%- 1.50% - 0.10%

- 0.20% - 2.00% - 0.50% - 0.70% - 0.90% -0.15%- 2.50% - 1.30% - 0.30% - 0.26% - 0.25% - 0.03%

- 0.03% - 0.90% - 0.20% - 2.60%-0.80% - 1.20% - 0.30% -0.20% - 0.40% - 2.30% -0.18%3.00% - 0.90% -0.08% -0.13%

- 0.70%- 0.02% 0.05%

- $134k - $150k - $716k - S86k - $31k - $143k - $22k-33% -6.7% -4.3% - 1.4% -3.4% -5.3% - 1.0%

-$1298k- 2.88%

5%

- 0.80%

- $18k-0.8%

45000

- 223- 252- 208- 200- 187- 19279

- 1171

- $1298- 2.88%

cost category effect 1\ / cost category I effectlabour -2.30% labour -0.25%material -0.20% leAD I / ISiiii material 0machinery 0 ..lop. - - machinery -0.20%interest 0 .... \ / '" interest 0.05%

\ / .-/ :.-- sum: -0.50%--higIw_. ,cost category effect--...... +a'"-- ".-",.

=unIt \ labour +3.0%material 0--- \ machinery 0\ interest 0

I sum: +3.0%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-handcolumn of the table. Here the targets of factory autom-ation or other specific targets can appear. According tothe impacts of the technology shown in Table 1, for everytarget the impact in every functional unit has to beestimated for the regarded period of time. This can becalculated for each of the four types of cost (direct labour,material, machine cost, interest), or globally for thefunctional unit. Every result is fixed in the matrix.Therefore the impact on a percentage of cost effect isfixed; this might be a cost reduction (' - '), or a costincrease (' + '). The investment itself is not included inthis analysis! This is done later when comparing theamount of the investment with the potential for cost

reduction. Only the effects of the desired measure aresought.For instance, a higher on-time delivery rate of draw-

ings and manufacturing data by use of CAD leads to costreductions of 0.5% of the cost in the manufacturingdepartment (Fig. 1). This is the result of a 0.25% reduc-tion in labour cost, because of less waiting or trouble-shooting time, a 0.2% reduction of machine cost, due toless idle time while waiting for orders, and a 0.05 %reduction in interest cost because of less work-in-process(WIP) and less bound capital. For this example, materialcosts are not affected.Reduced effort in changes leads in this example to a

2.5% reduced cost in the design department; nearly all

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from less labour cost (- 2.3%), but also less material cost( - 0.2%). The higher efforts and longer time for the firstdata entry, or data generation, leads to 3% higher costs inthe 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 theappropriate functional unit. The sum along the lines isused to figure out the contribution of every target of theautomation project, and the sum of the columns is used toget the cost effect for every functional unit. Thus themajor and the minor targets become obvious; respectivelytheir contribution to the project, and the structure of costand benefit implications in all functions of the enterprisebecome apparent. This shows, in supplement to the basicanalysis of the company for the investment, which areasto focus on, or where other means can or should be takeninto consideration, along with the investment. This mighteven 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 toan overall cost reduction of $200 000, or - 0.44%. Thetotal cost effect inside the design department adds up to-$134 000, which is 3.3% of the total cost of the designdepartment, and 0.30% of the overall cost. The improve-ments for the manufacturing department add up to-$716000 (-4.3% of their total cost), 1.6% of theoverall cost.When comparing the direct cost impacts within the

CAD-using design department with the total cost effects,the difference between direct and indirect effects becomeobvious. The overall effects add up to- $1 298 OOO-only 15% are within the design depart-ment, and the other 85% are results from improvedperformance in the other areas of the company. Themajor impact can be seen in the manufacturing depart-ment: 55% of thc overall cost effect is generated there.Ilut that is no wonder, because the quality of planningfunctions is gauged by the quality with which the follow-ing departments can perform by using the informationobtained.

4. Which investments?

The last step described above supplies the grosspotential for cost reduction of the analysed technology ormeasure. The economically determined investment canbe found by subtracting the risk premium, special inter-est, or desired profit that results from the net potential orthe economically maximum investment budget. As shownlater in the break-even analysis, only the net potentialshould be considered for the investment, the influence of

the changed fixed costs on the break-even point andtherefore on the risk structure of the investment.The financing of the payments, which mostly occur

during the beginning of the project, must be assured forlong-term. The positive cost effects will be set free onlyslowly and long-term, and with an additional demand forextra costs in the starting phase. So a restriction onfiguring out an investment from the potential is given bythe possibly fmanceable amount:

feasibility, = financeable arnountj/investment, (6)

Small businesses in particular often don't know where tofocus their investment activities. On one hand there arevarious technical necessities or opportunities, on the otherhand there are rapid changes in price and performance ofthe new computer based systems. Small companiescannot test different technologies in small units like bigcompanies can. Therefore they have to guide their smallinvestment budgets into the most efficient areas. Byapplying the described method for basic investments indesign, planning or manufacturing the potential for singleinvestments can be found and compared with the neces-sary investment, or even a kind of return on investmentcan be figured out:

prioriry, = net potentialjj investmen tj (7)

So it is quite easy to determine the most lucrativeinvestment by the best ratio of potential to investment. Byranking the measures according to this index, the tech-nical presuppositions and peculiarities also have to betaken into consideration. That is, before generating anNC program using the CAD/CAM system, it is necessaryto gain experience with CNC machines. Therefore thefinancial hierarchy has to be superimposed on the tech-nical hierarchy, to develop a long term investment plan toguide the way for the 'factory with a future'.This comparison of overall potential for cost reduction

with the necessary investments yields a new way ofevaluation for this investment. The more traditionalexplicit cost comparison of old and new technology isremoved. That standard of comparison would only biasthe evaluation process, because the basis for judging theinvestment is not known, or is significantly different.Investments for CBFA have a much higher sphere ofimpact than 'traditional' investments.Another remarkable sign of CBFA is the impact on

revenues. Many authors claim automatically higherrevenues and profits by introducing and applying thesetechnologies. But that is often simple minded or evendangerous (as will be shown later). When comparing thelong term potential for cost reduction with revenues,those should be considered as constant (if desired,adapted by inflation rate). One reason is that increasingrevenues caused by the investment would imply a growth

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Investments jar integrated manufacturing 335

that mayor may not occur. Some technological leadersmight take advantage of this to increase their marketshare, or to participate on an overall market growth. Butfor most users of these technologies they are not to gain ahigher relative market power, but to keep up with an

overall increase in performance capabilities, and to main-tain the relative market power. Implying higher revenuesor higher profits might turn out to be quite dangerouswhen the expectations are not fulfilled. One major reasonfor this effect is the influence of CBFA on the fixed cost.

BEP(1)=BEP(2) xr(0)

BEP(2) BEP(1) xr(e)

Figure 2. Course of cost functions before (1) and after (2) theinvestment. (0) 'Optimized' investment budget: the potentialfor cost reduction is not scooped by the investment and thebreak-even point doesn't change. (b) Investment at the sameamount as the potential for cost reduction; the break-even pointmoves towards higher volumes, dangerous when sales or pro-duction volume diminishes. (e) The potential for cost reductionis much higher than the necessary investment, the break-evenpoints moves towards lower volumes, and lower volumes can beproduced at economic cost. eRP is the cost reduction potential,I the investment, Cf the fixed cost, Ct the total cost, S the sales(revenue), BEP the break-even point and xT the volume forplanning. The index '1' indicates before investing and '2'indicates' after investing' .

While performing the calculation method presentedhere, all costs were considered as variable in order to get aquantitative index for the possible overall productivityenhancements. But for the fmal investment decisionprocess, the real influence of this investment on fixed andvariable cost must become clear. First, the investment inCBFA tends to increase the share of fixed cost of thecompany. This results from purchasing hardware andsoftware, installation and adaptation of the software, andeducation of the users. In addition to this increase there isa significant remanence of cost: when increasing thecapacities to produce higher volumes, the costs rise. Butthey do not fall by the same amount when these additionalcapacities are utilized less, following reductions in theproduction volume. But, on the other hand, within acertain boundary these technologies have a high degree offlexibility to adapt to changing production tasks. So in thelong run short-term adaptations to production needs canbe fulfilled with lower costs than with traditional equip-ment. Therefore it is extremely important to differentiatebetween the quantitative and the qualitative advantagesand risks in regard to the flexibility of the computer basedequipment.Further aspects of designing the optimized investment

policy and budget are shown by an analysis of the costfunctions. With the higher fixed costs of introducing anintegrated computer based structure the gradient of themarginal cost function is smaller (Fig. 2), and one resultis the creeping break-even point phenomenon.In case when the break-even point should not move

5 _ Influence of fixed cost on strategic investmentplanning

BEP(1) BEP(2) xr(b)

Cost

Cost

Cost

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336 D. Boelzing and H. Schulz

towards higher cost at the planning volume, the invest-ment has to be of a kind to reduce the variable cost whileoperating within the amount of the potential for costreduction. If the production volume, which is the basis forthe evaluation, is higher than the break-even point, theinvestment 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 isonly advisable to invest in the case of certain expectationsfor a constant or increasing sales volume, caused by amore straightforward total cost function (Fig. 2(b». Thebreak-even point moves towards higher volumes.Another example explains the reason for the capability

to produce in smaller lot sizes by use of Oexible produc-tion equipment. If the ratio between the potential for costreduction and the necessary investment can be modelledas shown in Fig. 2(c), there is no need to step up thevolume, because the break-even point moves towardssmaller volumes.Most of the evaluated investments will be of type 2(a)

or 2(b). These cases provide the chance for higherproduction volumes with the same total cost, caused bylower variable cost. The average cost per piece starts todiminish when the break-even point is passed. Thereforeinvestments in CBFA only have a manageable risk if size,steps, and timing of the investment can be harmonizedwith the requirements of the market. To perform theseinvestments in periods of low demand (and thus lowvolumes) can lead to. severe fmancing problems, especi-ally concerning the short-term liquidity (the major causeof bankruptcy). On the other hand, making sensible useof the potential by investing into CBFA provides thecapability to operate on a constant, or even higher level ofcustomer-oriented performance in stagnant markets.Additionally, Fig. 4(b) shows clearly why early inves-

tors could stand the high investments for CBFA when thistechnology was starting to emerge: although the neces-

sary investments were much higher than the expectedsavings, there is a profitable use of these systems. Onereason is that the actual potential was higher thananalysed, because the total extent of the indirect benefitswas not appreciated. The other reason results from thegeneral way these companies are managed. They usuallyoperate highly successfully in growing markets or withgrowing market shares-even without the use of CBFA.In adding the powers of CBFA systems to their basiccapabilities they could realize a higher sales volume,higher revenues, and thus take those advantages whichare usually claimed by new production technologies.Only due to this increase in the relative market positionand the combined enhancement in sales were the highercosts fmanceable, while with deteriorating revenues theseprojects, and the whole enterprise, would have beenbound to fail.

6. System integration influences types andstructure of cost

The change in fixed and variable cost is the result ofchanging the types of cost. These are due to the individualintroduced systems; generalizations about the size arevery difficult to make. For the German machines andequipment building industry a recent analysis (Schulzand Boelzing 1989) has shown overall cost reductions byCAD of about 2.5%, by CAP of about 2%, by CAM ofabout 3%, and by PPS of about 2.8% The contributionof technologies to the targets of factory automation andthe direction of changes in cost types, according to thisin-depth analysis are shown in Tables 3-6. These resultsmight help to analyse and estimate the individual impactsofCBFA.One of the major reasons why shortening throughput

time or product development time cannot be explicitly

Table 3. Types of cost which are influenced by CBFA.

Direct functional cost influence by

Type of cost

Wages and salaryAuxiliary wagesFringe benefitsMaterialTools and devicesMaintenanceEnergy, heatingTaxes, fees, insuranceCalculated depreciationCalculated interestOther indirect expenses

CAD

o+oo++o

CAP

o+oo++o

CAM

o

++ ++++ +

o

PPS

ooooo+

o

Integration

o

oooo+

o

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Investments for integrated manufacturing 337

Table 4. Types of cost which are influenced by integrating computer based technologies.

CIM linking

Type of cost CAD-NC CAM/DNC CAD-PPS CAP-PPS CAM-PDA

Calculated depreciation + /- t + /- t 0 0 0Calculated interest + /- t + /- t 0 0 0

Material 0 0 0

Labour cost:Direct wages 0 0 0Assembly 0 0 0 0Indirect wagesDesign 0 0 0 0 0Administration and sales 0 0 0 0 0

Cost for capital (WIP) - (TPT) - (TPT) - (Parts) - (TPT) - (Info)

'[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 (+ + , intensivecost-jperforrnance increase; +, moderate cost-jperformance-increase; 0, no or small cost -Ipc rformancc- increase; - , moderate

cosc-fperformance-decrease ; - - , intensive cost-/performance-decrease).

Shorter Higher Reduced Higher One-lime Better Optimizedthroughput Reduced on-time cost for quality, data capacity Changing usc of

Type of COSI time material delivery changes Jess scrap Standardization entry utilization flexibility equipment

C p C p C p C P C P C P C P C P C P C P

Direct labour cost 0 + 0 0 - + - - + 0 0 0 0 + + 0 0 0Material 0 0 + 0 0 0 0 + 0 0 0 0 0 0 0 +Calculated depreciation, interest 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 + 0 + 0 0Bound capital (WIP) 0 + - 0 0 + 0 + + 0 0 0 0 + 0 0Tools and devices 0 + 0 0 0 0 0 0 0 0 0 + 0 0 0 +Indirect labour cost + + 0 0 - + + 0 0 + + + 0 + 0 0

Table 6. Contribution of CIM technologies and their integration for reaching the targets of factory automation (+ + , intensivepositive contribution; + , moderate positive contribution; 0, no or small contribution; - , moderate negative contribution; - -

intensive negative contribution).

Shorter Higher Reduced Higher One-time Better Optimizedthroughput Reduced on-time cost for quality, data capacity Changing use of

Technology time material delivery changes less scrap Standardization entry utilization flexibility equipment

CAD + + + + + + + + + 0 +CAP + + 0 + + + + + 0 +CAM + + 0 0 + + 0 0 + + 0 0PPS + + + + + + 0 + 0 + + + + 0CAQ 0 + + 0 + + + + 0 0 +CAD-NC + + 0 + + 0 + + + 0 + 0DNC + 0 0 0 0 0 + + + + 0CAD-PPS + + 0 + 0 + + 0 0 0CAP-PPS + 0 0 + + + + 0 + 0CAM-PDA + 0 + 0 0 0 + + + + 0CAM-CAQ 0 + 0 0 + 0 + 0 0 +CAD-CAQ + + 0 0 + + + 0 0 +

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338 D. Boelzing and H. Schulz

included into this scheme is that 'Delays in commercializ-ing innovative products not only increase the expen-ditures for research and development, but simultaneouslythey often shorten the yield potential, especially if there isa decay in prices during the remaining product life cycle'(Somrnerlaue 1988). The method presented here isa method for the evaluation and decision process for newmanufacturing technologies. With the holistic view of thecompany, in regards to the overall costs and benefits,major economic and technical effects can be shown, but itcan't replace long-term oriented entrepreneurialdecisions.

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