Justifying Investments in Flexible Manufacturing Technology: Adding Strategic Analysis to Capital Budgeting Under Uncertainty

Abstract

Justifying new manufacturing technology is usually very difficult since the most important benefits are often strategic and difficult to quantify. Traditional capital budgeting procedures that rely on return measures based on direct cost savings and incremental future cash flows do not normally capture the strategic benefits of higher quality, faster responses to wider ranges of customer needs, and the options for future growth made available by flexible manufacturing technology. Adding to these limitations is the difficulty of using traditional cost accounting systems to generate the information necessary for justifying new manufacturing investments. This paper reviews these problems and recommends procedures useful for assessing investments in flexible manufacturing technology.