EMTM 695 University of Pennsylvania 1 Kaplan, Robert S. “Must CIM be justified by faith alone?” Harvard Business Review (March-April 1986), pp. 100-101

EMTM 695

University of Pennsylvania

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Kaplan, Robert S. “Must CIM be justified by faith alone?” Harvard Business Review (March-April 1986), pp. 100-101.

Factors that may not be incorporated but should be accounted for using DCF analysis

Limitations (poor assumptions) underlying DCF analysis

Factors that cannot be quantified using accounting techniques

Appropriate use of DCF

Problem 1

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DCF Analysis

Factors that should be accounted for but are easy to overlook

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DCF Analysis

Factors that should be accounted for but are easy to overlook

Taxes, depreciation etc. straightforward to incorporate in the DCF analysis

Inventory savings, reduction in floor space, less waste/rework, less WIP difficult to predict, but in principle can be factored in

Accounts receivable reductions fraction of customers deferring payment is smaller due to improvement in

quality

Automation lends itself to information management and control (in addition to high throughput, productivity)

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DCF Analysis

Limitations and poor assumptions

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DCF AnalysisLimitations and poor assumptions

Same rate of return is used in all cash flow streams adequate for inflation in current costs, but cannot account for possible decline in costs of new technologies

Income is not adjusted for inflation although costs are Cash flow five years downstream do contribute significantly

Accounting ROI figure may be larger than the real cost of capital Cost of automation is often underestimated

The equipment cost is often a small fraction of the total cost accessories, interfaces training

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DCF Analysis

Factors that cannot be quantified using accounting techniques

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DCF Analysis

Factors that cannot be quantified using accounting techniques Goodwill, customer satisfaction, better quality Improved work conditions (e.g. ergonomics) lead to direct and indirect

benefits Agility

response to changing market conditions can quickly improve quality of products

Increase in market share, increased productivity Greater utilization because greater product variety is possible Possible loss in productivity because of “inflexible” work force Acquire expertise in CIM, learn it for the future

(have faith in CIM?)

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DCF Analysis

Key issues - The bottom line

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Appropriate use of DCF methods

Opportunity cost versus hurdle rate opportunity cost is a good discount rate for projects with security automation projects with high risk may deserve a different discount rate

Status quo may not be the appropriate baseline Status quo should reflect a negative return, thus a DCF prediction of zero

return should be viewed favorably

Incremental investments are not subject to DCF many incremental investments may be inferior to one substantial

investment but DCF analysis is only applied to the later

How do you account for intangibles? Use DCF analysis for the tangible benefits, then ask manager to weigh

the intangible benefits with the profit gap

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DCF Analysis

What should the hurdle rate be? Time value of capital

Net Present Worth versus Rate of Return

Manufacturing accounting is generally based on direct labor costs [PFD 90]

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Manufacturing cost accounting

Traditional methods Emphasize labor costs (today direct labor accounts for less than 15% of

the total cost) Ignore the costs of non operation time Finished products in inventory are viewed as assets; instead they absorb

money, time, storage space The benefits of automation (improve the quality of products, reduce

down time and improve responsiveness) are not captured

Drucker argues for time as the new unit of measuring cost. There are no variable (and fixed costs) - all costs are fixed. The only variable is time.

Limitations intangibles: e.g., cost/risk of not investing in automation integration of business decision with factory operation and automation

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Ayers, R. U. and Butcher, D. C. “The Flexible Factory Revisited,” American Scientist, vol. 81 (Sept-October 1993), pp. 448-459.

History of production and automation Limitations of the mass production model Taylorism Human-integrated manufacturing American versus Japanese culture

Problem 2

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History of production/markets

American market became saturated Product features (customization) became key to market

differentiation Design/production cycles became shorter Products became more complex and more varied

New needs Need for producing a wide variety of complex products in a short time with

little waste profitably Cater to narrow demographic segments in scattered regional markets

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Mass production model

Mass production Taylorism

Fixed automation

Need to lower cost per unit product is the driving force for Taylorism

Large volume fixed automation

Mass production Taylorism

Fixed automation

Need to lower cost per unit product is the driving force for Taylorism

Large volume fixed automation

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History: Mechanical Assembly Eli Whitney, pioneer of mass production

Contracted to make 10,000 muskets in 28 months (1798, factory at New Haven). Machines for producing interchangeable parts Reduced skills required of operators, increased production rates Assembly work was simplified

Oliver Evans, automated “conveying” (1793) Automated flour mill

Elihu Root

Colt six-shooters (1849) Divide the work and multiply the output Assembly was reduced to short and simple unit operations which required very

little worker training and high efficiencies could be obtained.

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Mechanical Assembly (continued) Fredrick Winslow Taylor

Methods of time and motion study Save operator’s time and energy Allow operator to operate at his/her optimum speed

Henry Ford

Three principles of assembly Place tools and workers in the sequence of the operations so that each part shall

travel the least distance while being finished. Use work slides or work carriers so that the workman, after finishing the

operation, places the part in same place, and if possible, have gravity carry the work carrier to the next station.

Use sliding assembly lines by which parts to be assembled are delivered at appropriate intervals.

The assembly time on a flywheel magneto was reduced from 20 mins to 5 mins.

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TaylorismHierarchical organization, specialization of tasks, subtasks, and establishment of work rules

Problems opposition from organized labor hierarchical organizations are cumbersome, impede flow of information and limit autonomy hierarchical structure is inflexible and unable to accommodate frequent changes in product

design Taylorism minimizes labor costs, but many costs are not related to labor costs. Optimization of individual processes does not necessarily optimize the entire production

system

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Limitations of the mass production model

mass production Taylorism

fixed automation

mass production Taylorism

fixed automation

Limitations Productivity paradox

- standardization (lowers cost) versus customization (market demands)

Quality- better products

- facilitated by automation, also a prerequisite to automation

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The Japanese model for production

Harmony (stable, cooperative relationship with suppliers, distributors)

Quality control Flat organizational structure Sophisticated (adaptable) workforce Integration of product design, planning and manufacturing

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Relationship with Suppliers

Two models for “outsourcing”

System Design

Manufacturing of Parts

Information

Sub-system

A

Sub-system

C

Make

OutsourceMakeMake

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American versus Japanese culture

Stereotypical American manager labor is a costly (and temporary) input CIM eliminates labor - lights out factory

Japanese culture trained workforce is the only “permanent” asset computer integration begins and ends with people CIM increases labor costs but also improves productivity of invested capital

and labor productivity

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Drucker, Peter F. “The emerging theory of manufacturing.” Harvard Business Review, May-June 1990.

SQC (statistical quality control) New approach to manufacturing cost accounting Modular (loosely coupled) factory organization A systems approach to treating manufacturing

business

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Statistical Quality ControlApplication of statistical techniques to determine whether the output of a process conforms to the product or service design. rigorous measures of quality and productivity diagnostic tool for detecting problems and the source of the problems impact of the changes in the process or assembly line can be determined

Implications machine operators are also “inspectors” more responsibility with the operators (Andrew Carnegie’s human resources paradigm) SQC increases the number of machine operators, even with automation. But reduces the number of

people involved with non operation activity. kaizen (continuous improvement)

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Manufacturing cost accounting

Traditional methods Emphasize labor costs (today direct labor accounts for less than 15% of

the total cost) Ignore the costs of non operation time Finished products in inventory are viewed as assets; instead they absorb

money, time, storage space The benefits of automation (improve the quality of products, reduce

down time and improve responsiveness) are not captured

Drucker argues for time as the new unit of measuring cost. There are no variable (and fixed costs) - all costs are fixed. The only variable is time.

Limitations intangibles: e.g., cost/risk of not investing in automation integration of business decision with factory operation and automation

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Modular Organization

Automated to autonomous Loosely coupled autonomous modules Standardization within modules promotes efficiency; loose coupling

between modules allows for flexibility

This “new organization structure” will require managers to develop and communicate specifications for their module learn specifications for other modules balance each module (as opposed to the entire plant) develop buffers between modules

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Systems approach to manufacturing

Flexibility in manufacturing, automation in production is not enough agility can leave you vulnerable to upstream fluctuations in supply downstream marketing, distribution and service is linked to

manufacturing

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Robot Gas Station Attendant

Advantages Inclement weather, bad neighborhoods Accessible to the handicapped Unmanned service stations Higher throughput (3-5 times more) Potentially safer, better vapor recovery systems Less waste

Problem 3

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Disadvantages Added cost - will the customer pay more? Reliability

think brand new Porsche! Loss of other business

full service stations food marts, convenience stores

Is it technically feasible?

Is it commercially viable?

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Is it viable? Mercedes has a system for commercial fueling (trucks) Volvo developed a prototype system for cars Shell has a functioning station in California Tokheim has developed a prototype

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Essential components of a robot attendant

ATM-like machine for ordering and paying for the gas

Driver needs to position the car reasonably accurately

Robot system must Detect the location of the gas tank flap Open the flap Detect the location of the gas tank cap Fuel Screw the cap back on, and close the flap

Safety system multiple sensors and switches

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Possible Solution

Boundary conditions No visible changes to the car design (no modifications to the car) VIN and other identification information is not available

can’t simply pull up vehicle info from a database to determine where the flap/cap are located

What kind of a robot system would be appropriate? No. of degrees of freedom Payload Sensors needed Control Actuation

Electric, hydraulic, pneumatic

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Robotics: Japan versus USA

References: [SN 99] Chapter 2 Ayers, R. U. and Butcher, D. C. “The Flexible Factory Revisited,” American Scientist, vol. 81 (Sept-October 1993), pp. 448-459.

Problem 5

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Japanese Industry

Culture True value of a company is its people More operators - decision making at the lower levels - flat organization Consensus building Corporate-centric view of robotics works in this culture

Production Limited workforce (aging, cultural bias against manual labor) Tradition (at least in 70’s and 80’s) of investing in research and

development Investment in training workforce

Why robotics? Aging workforce Focus on batch production, smaller lot sizes (away from Taylorism)

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American Industry

Culture Dynamic environment: Workforce turnover is very high

Production Decision making is more hierarchical - operators have no ownership and

decision making is slow More non operational time, effort (People stand around waiting for

decisions to be made) Intangibles are ignored because they don’t lend themselves to DCF Labor unions fight automation

Why robotics? Lower labor costs Higher quality (at least this is the perception) Worker safety

Documents

EMTM 695 University of Pennsylvania 1 Kaplan, Robert S. “Must CIM be justified by faith alone?” Harvard Business Review (March-April 1986), pp. 100-101