Economic justification of advanced manufacturing technology

Abstract

Despite the far reaching implications of the advanced manufacturing technologies (AMT) for the maintenance and enhancement of a firm's competitive position, the financial justification of investments in AMT has not been easy. Recent research in manufacturing strategy, financial theory, management accounting and organization decision making suggests that the AMT-justification process should involve (i) a strategic analysis to ascertain the strategic fit and the competitive advantage of AMT, (ii) an economic analysis to ascertain the financial viability of AMT and (iii) an understanding of the dynamics of organizational decision making to overcome the barriers to the adoption of AMT. Focusing on the economic analysis we present a concise review of the state of the art and propose a four-level justification framework for investment in AMT. At Level 1 of this framework, we analyze the easily quantifiable benefits and costs using the traditional discounted cash flow (DCF) models. We examine the limitations of the traditional DCF analysis and discuss some refinements suggested in the literature. At Level 2, we develop and illustrate with a numerical example, a stochastic mathematical programming model to quantify the strategic benefits such as flexibility and quality. At Level 3, we quantify the benefits of the time series linkages between the project currently being justified and a related future project using a learning curve model. Finally, at Level 4 we focus on a qualitative assessment of the benefits which were not included in the evaluation at the first three levels.