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How to justify the cost of an FMS.

Assuming management has decided to take substantial steps to improve the production process in a metalworking company, the task of analyzing the cost of various alternatives must begin. When analyzing the complete processing of a part or family of parts, in some respects the task is easier to qualify when considering a flexible system than a single stand-alone machine tool. This is due primarily to the discrete nature of the system's production.

In general, a part is completely processed in the system, allowing the system to be analyzed as a separate entity. A single stand-alone machine tool typically does not perform the total operations necessary to complete a part, and may process parts at random, complicating the ability to extract clear-cut cost data on which to base a cost analysis. When analyzing an FMS from a total system standpoint, the advantages of NC equipment and a transportation system controlled by an executive computer become much more apparent. In many cases, the inherent efficiency of the FMS makes a compelling case for justification.

Let's analyze an existing production system designed to manufacture a family of six large parts, after which we will analyze two alternatives designed to improve production efficiency: An FMS and stand-alone NC equipment. Other alternatives such as a transfer-line system or a hybrid design containing elements of each alternative could easily be evaluated using similar techniques.

The cost data shown here may be more or less similar to any individual application, as evidenced by the treatment of factory space in the analysis. Cost savings due to more effective utilization of existing factory space, or the possibility of building a new, more efficient facility, have not been included in the analysis, but may be relevant in individual cases.

Other factors such as number of spindles required, manpower replaced and capital required will vary, based on the individual application, but the concepts of presenting the relevant cost data in a comparable format remain valid. All cost data shown here are based on actual costs of a successfully installed flexible manufacturing system and the alternatives considered in the actual decision process.

In each case, we are evaluating the cost of equipment to manufacture 5200pcs/yr of a cube-shaped workpiece, measuring 48" x 36" x 36", with a finished value of $5000. Table 1 is an analysis of the cost of using existing equipment. Table 2 shows an analysis of producing the same parts using stand-alone NC equipment. The figures in Table 3 are based on using a flexible manufacturing system. The chart in Figure 1 makes a graphic comparison of the alternatives.

The next step in the evaluation of feasible alternatives is to construct a cash-flow diagram of relevant costs and perform a discounted cash-flow analysis. Costs for each alternative are constructed incorporating relevant modifications to the cash flows. The basic assumptions behind these modifications are as follows:

* Market interest rate of 10 percent.

* Annual inflation rate of 8 percent.

* Corporate tax rate of 50 percent.

* Invest tax credit of 10 percent.

* 1983 five-year depreciation schedule of: 15 percent, year 1 22 percent, year 2 21 percent, years 3, 4, and 5

Depreciation results in a tax savings at the corporate tax rate of 50 percent, assuming the corporation has an overall positive cash flow with which to utilize the tax savings.

once the relevant cash-flow diagrams have been constructed, the evaluation proceeds to the incremental cash-flow analysis and the discounted cash-flow calculation. See Tables 4 and 5. Each alternative is compared against the existing equipment section for each period; the resulting difference in cash flows is then used to performed the discounted cash-flow analysis.

Discounting acknowledges that the value of a dollar today is greater than the value of a dollar in the future, due to the compounding of interest. Several methods of analyzing the discounted cash flow exist. The net present value method assumes a constant rate of return, some minimum hurdle rate, and determines the worth of the investment in present dollars. The internal rate of return method calculates the interest rate that would set the present value of the investment at zero. Calculation of the internal rate of return method becomes rather complex when period cash flows vary, as in the example shown. Financially oriented calculators available have the capacity to perform either operation.

The next step in choosing among feasible alternative solutions is the systematic presentation of decision-relevant information through some form of usable decision model. The model most applicable in this decision situation is the multiattribute utility model. It attempts to include all relevant data and weight the data based on the perceived importance of each attribute to the decision makers. The model requires three areas of information identified as follows:

Basic information. 1) Identify feasible alternatives. 2) Identify relevant future conditions. 3) Identify the criteria to be used in evaluating each alternative.

Elaborating information. 4) Probabilities of the future conditions. 5) Importance of the criteria.

Performance information 6) Payoffs/costs. 7) Relevant constraints.

Not alld decision models will utilize all of the information categories described, but it is important to include all relevant information. When this simplified model of the decision situation does not contain an element of information whose inclusion would increase the chances of making a higher quality decision, it is an inadequate model.

The steps in constructing the multiattribute utility model are straightforward and easy to follow. 1) Identify and list the decision relevant criteria and constraints. 2) Identify and list the relevant attributes. 3) Determine the utilities for the various levels of each attribute. 4) Determine the correct proportion weights of the attributes. 5) Identify constraints and screen out unacceptable alternatives. 6) Apply the multiattribute utility model. 7) Consider both the criteria not included in the analysis and possible adverse consequences and then make the decision.

The first decision situation that must be addressed is the direction and type of technology that is most suitable to company goals and objectives. A decision matrix is constructed following the steps previously described. Assignment of the relative utilities and the proportion weights is a judgment factor that will change in each decision situation. The utilities are an attempt to assign a number to the actual values of the attributes (if any) and are typically assigned to a scale of 0-100 to eliminate any scaling problems that would tend to distort the data. Proportion weights are then assigned to each attribute to reflect their relative importance to the decision makers.

The resulting matrix, as seen in Tables 6 and 7, provides a total score to assist in the evaluation of each alternative. Once the type of manufacturing alternative has been selected, the process is repeated in order to properly evaluate the specific proposals dealing with the selected alternative. The decision models of course, can be greatly expanded to consider additional attributes or alternatives, and provide a method to include intangibles such as flexibility and quality considerations in the decision-making process.

Additional considerations

When purchasing a large integrated production system, many factors, in addition to purchase price, must be considered. In reality, the system will be custom tailored to suit the customer's needs for production equipment. As such, the production system is a custom-designed piece of equipment whether it consists of a transfer line or standard NC machine tools.

A large and extremely important part of a manufacturing system is the custom-engineering component. This effort, which applies custom and standard components to suit customer requirement, determines how usable the system will eventually be. A low-priced proposal may turn out to be poorly applicated, poorly designed, and poorly executed, and as a result be of little value to the customer.

Another factor of high importance is the vendor's ability to successfully complete the contract. This means more than simply delivering equipment. Design oversights and technical problems may require extensive modifications to the original concept. The willingness of the vendor to stay with the project in face of extended debug requirements is probably as crucial a factor in an analysis as the initial cost. When buying custom-designed and applicated equipment, good decisions are not based on cost alone. Vendor reliability, reputation, and technical competence should be weighed heavily in any complete decision model. For more information, circle E11.
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Title Annotation:flexible manufacturing system
Author:Sloggy, John E.
Publication:Tooling & Production
Date:Dec 1, 1984
Previous Article:Simulating manufacturing.
Next Article:What happened to the art of manufacturing?

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