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Calculating investments for integrated manufacturing:

looking at the overall costs and benefits
a

DIETER BOELZING & HERBERT SCHULZ

Department of Mechanical Engineering, Technical University of Darmstadt, Institute

for Cutting Technologies and Machine Tools, Petersenstrasse 30, Darmstadt, D-6100, F.R.
Germany
Version 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
To link to this article: http://dx.doi.org/10.1080/09511928908944421

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

Calculating investments for integrated

manufacturing: looking at the overall costs and
benefits

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DIETER BOELZING and HERBERT SCHULZ

Abstract. Traditional investment calculations focus on singular

aspects and functions of the investment. Integrated information

technologies affect more than the small area of the actual

investment; most of their real positive economic effects are

generated in other areas of the enterprise by using primarily

generated data, and giving a higher reliability to the information basis. This leads to a justification method, which includes
the overall aspects of these kinds of investment, by systematically analysing the cost and benefit impacts on major cost
categories in every functional unit of the enterprise. The result
is the potential for cost reduction, since it shows the most
efficient amount of investment to be made.

1. Why traditional methods have to fail in

evaluating integrated manufacturing
Investments in computerized manufacturing automation are looked at differently by technical and by business
investment planners. Engineers tend to focus on the
technical advantages and necessities of these technologies;
business people tend to prefer a short payback period to
justify the high cost, which is usually not realistic for these
investments. The necessity to act is often recognized,
but-and this is the point-there are major stumbling
blocks: which systems to choose, in which to extend
automation, and with which systems to start. The variety
is wide: for design there are computer aided design
systems (CAD), process planning might be supported by
computer aided planning systems (CAP), in manufacturing the computerized controlled machines and devices of
computer aided manufacturing (CAM) promise to be
much more effective than the old, conventional machines
and practices. Computer based systems for production
planning and scheduling (PPS, MRP) are used in some
Authors: Dieter Boelzing and Professor Dr.-Ing. Herbert Schulz, Technical University of Darmstadt, Department of Mechanical Engineering,
Institute for Cutting Technologies and Machine Tools, Petersenstrasse
30, D-6IOO Darmstadt, F.R. Germany.

companies, but are often driven by organizational necess-

ities to harness the otherwise inevitable chaos, and without estimating the real benefits.
The major feature of these investments is the long-term
nature of the introduction process and economic advantages. The strategic character of the decisions and investments is no longer a point of discussion (Wildemann
1988, Hayes et at. 1988, Gerelle and Stark 1988, Kaplan
1986). This creates the need to USe hurdles other than just
the payback-period to evaluate investments in computer
based factory automation (CBFA). In common economic
evaluation calculations the future costs of a system or
machine might be quite well known (Cooper and Kaplan
1988). But the flow of revenues caused by this investment
is always based on estimates. The assumed accuracy of
these methods usually suggests that one should not invest
in high-risk, high-technology investments with long
payback periods.
But all these methods have in common that they are
oriented towards financial flows and financial issues which
are based on single technical features of the investment
(see, for example, Gupta et at. (1988), and Baudin (1985)).
versus the existing one, the focus is on higher output per
unit time, or lower costs per unit. But the impact on other
functional units, the changed interaction with the surrounding machines, and the future capabilities for a
higher integrated concept are not included in those
calculations. Engineers could argue with those aspects by
using cost-benefIt matrices, but these are often neglected
by 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 often
enough to concentrate on the functional area in which the
investment is placed. Effects on other functional units of
the enterprise are not look at (see, for example, Herroelen
et al. (1986) and Lederer and Singhal (1988)). But-and

0951.192X/S9 53.00 1989 Taylor & Francis Ltd.

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330

D. Boelzing and H. Schulz

this IS the major difference of the 'new' investments-most computer based systems are aimed at an
integration of functions, of information flows, and of data
generation and storage. It is therefore not enough to take
only the 'direct' effects into consideration; the 'indirect'
effects are usually much more important. Savage (1988)
pointed out that about 80% of the tasks and challenges
connccted with the introduction of CIM are organizational. Perhaps the difference between the two effects
should be explained briefly. Direct effects are generated
inside the functional unit where the investment is placed.
For example, when purchasing and installing a CAD
system, the direct effects are within the design department. Indirect effeas are generated in other functional
units, which can benefit from the former digitalization of
data, from higher accuracy of transmitted data, from
faster receiving of data, or by avoiding multiple dataentry. In our example, the process planning department
can benefit from CAD data by directly taking the geometric information in the form of the CAD data-set for
generating the NC program, or by using the drawing
information to create an explosion chart which shows the
order of assembly for the production workers. By avoiding the new data entry, this department benefits from the
investment placed in another department and therefore
take place
receives an indirect benefit. Comparable
in other departments, when drawings are received earlier,
or with higher accuracy, or cost information can be given
faster to the accounting department.
New approaches for justifying new manufacturing
technologies usually focus on just one point: to justify the
enormous expense of the investment it is suggested that
more and more of the qualitative aspects be taken into
consideration, which often means that the financial risks
arc neglected (see for example Meredith (1986, 1987),
Sullivan and Liggett (1988), Canada and Sullivan (1988).
Or, as Fine (1988) shows, one can concentrate on a
narrow, model based analysis (Lederer and Singhal t 988,
Gupta et al. 1988, Fine and Freund 1988) and neglect to
view the company holistically, which is absolutely necessary when stan ing to evaluate manufacturing technologies.
The method discussed in the next section enables one to
take these integrating effects of advanced manufacturing
technologies explicitly into consideration on a monetary
basis, and so to integrate the direct and the indirect effects
of investments in CBFA with the economic analysis in
order to justify-or cancel-the investment.

2. Cost reduction and performance enhancement

dominate the evaluation process
The basic principle of the method presented is that all

cost, benefit, and performance effects are translated into

their impact on the total costs of the company, here called
the overall cost. This also means it is easier to show the
impact on the profitability of the company. The overall
cost is focused on costs for generating products; costs for
financial transactions or other 'non-relevant'. costs are
excluded. This will be explained later.
Costs and output can each be described by a volume
component and a value component. A cost reduction
therefore might be reached by a reduction in consumption of a raw material (for constant ouput), or by an
enhancement in output to higher volume (while costs are
constant). 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 effects
clearly when analysing a factory. They are recognized as
superimposed on four major categories:

(eI)
(c2)
(c3)
(c4)

higher
higher
higher
higher

output value for less input volume;

output value for less input value;
output volume for less input volume; and
output volume for less input value.

It is very important consciously to realize these different

types of effects when evaluating the effects of the analysed
systems. For this analysis cases (a1)-(b2) are most relevant for showing the impacts of investments in integrated
technologies more clearly. But in practical use, cases
(eI)-(e4) can also be used to evaluate the investment's
impact.
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 production
output to the necessary input. This input might be human
work time, capital, or material, with related forms of
productivity (productivity of work, capital, or material).
Flexibility is described by the capability of the production
system to adapt to a change in input variables per unit of
time. 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 using
the product), and the manufacturing quality (costs for
scrap, rework, and quality prevention). Capacity utilization uses the time-based utilization of machines and
production equipment for manufacturing the products; it
is calculated by the machine cost per produced unit.
For the evaluation of the overall costs and benefits of

331

Investments for integrated manufacturing

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

Change in
cost/benefit

Volume/value
component

Volume

<0

Measure of computer based factory automation

Main effect

Less used labour time through CAD, CAP, CAM, PPS:

CAD: Faster drawings, faster changes
CAP: Faster process planning and NC programming
CAM: Less set-up time in manufacturing

Productivity
Productivity

Less double work/multiple fixtures

Less rework and scrap

PPS:

Benefit

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Cost < 0

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
CAP: Less material input by more accurate process plans and
Value < 0
better NC programs
{ CAM: Less material input by optimized use of machinery
PPS:

Flexibility,

Group of

effect

throughput time

Productivity

Flexibility
Productivity}

Productivity

productivity

Productivity
Productivity

Less bound capital, less loss by over-maturity of material

H igher volume output by CAD, CAP, CAM, PPS:

CAD:

Volume> 0
{
Benefit> 0
Cost = 0
Value> 0

More drawings by same staff volume

ProductiVity}
Productivity
throughput time

CAP: More process plans/NC programs by same staff volume

CAM: Higher capacity utilization, more produced goods by

Productivity,

same capacity
More orders to be planned by same staff volume

Pf'S:
Higher value output by CAD, CAP, CAM, PPS:

Productivity

CAD:

More accurate and unequivocal drawings

CAP:

More accurate process plans, NC programs with fewer

quality
quality

mistakes
CAM: Higher manufacturing quality, less rework,

Higher on-time delivery rate, and therefore higher prices

PPS:

Execution of short-term changes possible

integrated manufacturing technologies it is sufficient to

concentrate on the four major cost categories: direct
labour, material, manufacturing equipment cost (i.e.
depreciation) and interest (for work-in-process, etc.), and
other costs (Schulz and Boelzing 1989). All are effected by
CBFA investments, but in different ways, according to
the special kind of investment.

3. Overall perception of the company

As pointed out before, it is not only the cost and benefit
impacts within the investing unit which are of importance. Much more important is the impact on all the
other functional units in the company. A functional unit is
defined as one which fulfils a complete task in the creation
process of the products, and which can be analysed for
cost independently of the others. Functional units are, for
example, the design department, the process planning
department, finance and administration, mechanical processing, Or assembly. In more detailed analysis the mechanical processing department can be further divided into
a drilling, a turning, and a milling unit (in companies

quality

Quality
Flexibility

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 only
in cost categories. It is the performance which is enhanced
by application of the technologies to which these calculations are directed, and therefore the impacts of an
enhanced peformance according to the special targets of
the factory automation project are the centre of interest.
Thus some costs may fall while others may rise. It is not
single aspects but the overall balance which provides the
basis 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 for
functional units, and for the major cost elements
(those affected by automation, see above).
2. Define the targets for the investment, according to
the overall strategy of the company.
3. Investigate the tasks which might be supported by a
computer based system (CBS), in every functional
unit. If possible, distinguish between tasks which
can be fulfilled with the CBS, and those resulting
from the use of the system.

Downloaded by [University Aut Ciudad Juarez] at 03:25 02 April 2013

332

D. Botlzing and H. Schulz

4. Determine the number of tasks which should be

done by application of the CBS.
5. Take an assumption of a possible configuration of
the CBS, to make a mental model on which to
orientate the following estimates.
6. Revise the targets for the factor automation project,
and then analyse the impacts of enhanced performance and different costs in every functional unit of
the company for the four major cost categories,
according to every target of the project.
7. Sum up the cost effects, once for every automation
target, and once for every functional unit, and the
overall sum.
8. Compare the overall sum with the necessary investment, and perform a break-even-analysis to get the
impact on the fixed and variable costs, and thus an
indicator for the risk structure.
This leads to thinking in terms of overall cost, as in
logistics, which is a cross-sectional function, and affects
various other functions.
Most of these steps do not need further explanations,
and will 'become obvious with the further descriptions and
pictures. But the heart of this method, the calculation of
the profitability of the investment, deserves some further
description. It is based on the arithmetical connection of
overall costs, cost share in the functional unit, and the
factor for reduction of the functional unit. This reduction
factor (RF) is given for a certain period of time in which
the investment should be implemented, settled, and be
put 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 as
variable. The reason is simple: although many costs are
fixed (even labour costs become more and more fixed, in
some cases only 5 % of the labour costs are really
variable), we want to concentrate on the productivity
effects. This means, for example, that more things can be
done in the same time, or the same things can be done in
shorter time, although the worker's wage is fixed and
doesn't vary with the output achieved. But in our
methodology it is necessary to grasp this important
difference, and therefore all costs are virtually assumed to
be variable. The real impact on fixed and variable cost is
determined 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 is
then given by the cost share, which is inlluenced by the
measure and its impact on this cost share:
RFij = (influenceable cost share)ij

x (change of cost share );j

(1)

This is the more theoretically correct description. When

applying this methodology, an estimate of this factor can

be made for easier application. The overall costs of the
enterprise can be summed up by the costs of every
functional unit:
overall cost

L; (cost
;

share factor; x overall cost) (2)

The effect of the cost of a particular investment within a

functional unit can be a cost reduction or a cost increase.
By recognizing this effect, the main characteristic of
investments in CBFA can be taken into consideration:
often some costs within the functional unit, where the
investment is placed, might rise, i.e. when the defining
time for a CAD-drawing for a new design is longer than
with conventional means. But all following functional
units can use the generated data set and other consequences, and their costs might be reduced. When only
focusing on the design department, the investment would
not promise to have an adequate payback period, but by
taking all effects systematically into consideration it is
possible to determine the real benefits, and a better
payback determination.
So the total cost effect of a functional unit is not
necessarily directed towards a cost reduction, and therefore can be described according to the real causes:
cost effect., = cost; x RFij

(3)

or, when the single cost categories relevant to the automation project (indexed by 'k') are analysed, by
cost effect;jk = costijk x RFijk

(4)

Thus the overall cost effect is given by

overall cost effect, =
overall cost x

L; (cost
;

share; x RFij)

(5)

This more formal explanation is quite 'easy to apply by

making a chart, such as Table 2, which guides one along
the targets of factory automation via all the relevant
points. This follows three basic steps. In the first step the
overall costs of the enterprise are to be ascertained. As in
a cost centre analysis, the cost share of every single
functional unit in the overall cost is determined. This is
done first for the functional unit as a whole, and later, if
more detail should be necessary, for the relevant types of
cost. These shares of the functional units appear at the top
of Table 2. In this company with about 500 employees
and with revenues of $45 million, the design department
has a cost share of 9 % of the overall cost, the operations
scheduling and process planning 5 %, production 37 %,
assembly 14%, and so on. 17 % of the overall cost is due
to other activities of-the company, i.e. finance transactions
which are not linked to the manufacturing activities.
In the second step the evaluation criteria for the

333

Investments for integrated manufacturing

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

Target of factory automation

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Share of overall cost

Design

Planning and
scheduling

9%

Plan: 40%

Status: 0%

Production

Assembly

37%

5%

Shorter through-put time

Reduced material cost
Higher on-time delivery
Reduced expense for changes
Higher quality, reduced scrap

- 2.80%

- 1.20%

- 0.20%
- 2.50%

Higher standardization
One-time data entry
Optimized use of material
Higher transparency of processes

-0.80%
3.00%

Cost impact within

functional unit

- $134k
-33%

Offering

control

department

Material
planning

Accounting

Cost impact of
target (J 000 $)

2%

6%

5%

5%

45000

14%

-0.10%
- 1.50%
- 0.50%
- 0.30%
- 0.90%
- 0.30%

2.00%
1.30%
0.03%
1.20%
0.90%

Quality

- 2.00%

-0.10%
- 0.70%
- 0.26%
- 0.20%
-0.20%

- 0.90%
- 0.25%
- 2.60%
- 0.40%
-0.08%

- 2.30%
-0.13%

- 0.50%
- 0.10%
-0.15%
- 0.03%
-0.18%
- 0.80%

- 0.70%
- 0.02%

0.05%

- $150k
-6.7%

- $716k
-4.3%

- S86k
- 1.4%

- $31k
-3.4%

- $143k
-5.3%

223
252
208
200
187
192
79
- 117
1

- $22k
- 1.0%

- $18k
-0.8%

- $1298
- 2.88%

-$1298k
- 2.88%

Overall cost impact

cost category
labour
material
machinery
interest

effect

1\

-2.30%
-0.20% leAD I
0
..lop.
.... \
0

---=unIt
higIw_.

--......

---

,
+a'"

/
/

.-/

labour
ISiiii material
machinery
interest
:.-sum:

'"

cost category

effect

labour
material
machinery
interest
I sum:

+3.0%
0
0
0
+3.0%

effect

-0.25%
0
-0.20%
0.05%
-0.5 0%

".-",.

\
\

cost category

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-hand
column of the table. Here the targets of factory automation or other specific targets can appear. According to
the impacts of the technology shown in Table 1, for every
target the impact in every functional unit has to be
estimated for the regarded period of time. This can be
calculated for each of the four types of cost (direct labour,
material, machine cost, interest), or globally for the
functional unit. Every result is fixed in the matrix.
Therefore the impact on a percentage of cost effect is
fixed; this might be a cost reduction (' - '), or a cost
increase (' + '). The investment itself is not included in
this analysis! This is done later when comparing the
amount of the investment with the potential for cost

reduction. Only the effects of the desired measure are

sought.
For instance, a higher on-time delivery rate of drawings and manufacturing data by use of CAD leads to cost
reductions of 0.5% of the cost in the manufacturing
department (Fig. 1). This is the result of a 0.25% reduction in labour cost, because of less waiting or troubleshooting time, a 0.2% reduction of machine cost, due to
less 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, material
costs are not affected.
Reduced effort in changes leads in this example to a
2.5% reduced cost in the design department; nearly all

:n4

D. Baelzing and H. Schulz

from less labour cost (- 2.3%), but also less material cost

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( - 0.2 %). The higher efforts and longer time for the first
data entry, or data generation, leads to 3% higher costs in
the 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 the
appropriate functional unit. The sum along the lines is
used to figure out the contribution of every target of the
automation project, and the sum of the columns is used to
get the cost effect for every functional unit. Thus the
major and the minor targets become obvious; respectively
their contribution to the project, and the structure of cost
and benefit implications in all functions of the enterprise
become apparent. This shows, in supplement to the basic
analysis of the company for the investment, which areas
to focus on, or where other means can or should be taken
into consideration, along with the investment. This might
even 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 to
an overall cost reduction of $200 000, or - 0.44%. The
total cost effect inside the design department adds up to
-$134 000, which is 3.3% of the total cost of the design
department, and 0.30% of the overall cost. The improvements for the manufacturing department add up to
-$716000 (-4.3% of their total cost), 1.6% of the
overall 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 become
obvious.
The
overall
effects
add
up
to
- $1 298 OOO-only 15 % are within the design department, and the other 85% are results from improved
performance in the other areas of the company. The
major impact can be seen in the manufacturing department: 55 % of thc overall cost effect is generated there.
Ilut that is no wonder, because the quality of planning
functions is gauged by the quality with which the following departments can perform by using the information
obtained.

4. Which investments?
The last step described above supplies the gross
potential for cost reduction of the analysed technology or
measure. The economically determined investment can
be found by subtracting the risk premium, special interest, or desired profit that results from the net potential or
the economically maximum investment budget. As shown
later in the break-even analysis, only the net potential
should be considered for the investment, the influence of

the changed fixed costs on the break-even point and

therefore on the risk structure of the investment.
The financing of the payments, which mostly occur
during the beginning of the project, must be assured for
long-term. The positive cost effects will be set free only
slowly and long-term, and with an additional demand for
extra costs in the starting phase. So a restriction on
figuring out an investment from the potential is given by
the possibly fmanceable amount:
feasibility, = financeable arnountj/investment,

(6)

Small businesses in particular often don't know where to

focus their investment activities. On one hand there are
various technical necessities or opportunities, on the other
hand there are rapid changes in price and performance of
the new computer based systems. Small companies
cannot test different technologies in small units like big
companies can. Therefore they have to guide their small
investment budgets into the most efficient areas. By
applying the described method for basic investments in
design, planning or manufacturing the potential for single
investments can be found and compared with the necessary investment, or even a kind of return on investment
can be figured out:
prioriry, = net pote ntialjj investmen tj

(7)

So it is quite easy to determine the most lucrative

investment by the best ratio of potential to investment. By
ranking the measures according to this index, the technical presuppositions and peculiarities also have to be
taken into consideration. That is, before generating an
NC program using the CAD/CAM system, it is necessary
to gain experience with CNC machines. Therefore the
financial hierarchy has to be superimposed on the technical hierarchy, to develop a long term investment plan to
guide the way for the 'factory with a future'.
This comparison of overall potential for cost reduction
with the necessary investments yields a new way of
evaluation for this investment. The more traditional
explicit cost comparison of old and new technology is
removed. That standard of comparison would only bias
the evaluation process, because the basis for judging the
investment is not known, or is significantly different.
Investments for CBFA have a much higher sphere of
impact than 'traditional' investments.
Another remarkable sign of CBFA is the impact on
revenues. Many authors claim automatically higher
revenues and profits by introducing and applying these
technologies. But that is often simple minded or even
dangerous (as will be shown later). When comparing the
long term potential for cost reduction with revenues,
those should be considered as constant (if desired,
adapted by inflation rate). One reason is that increasing
revenues caused by the investment would imply a growth

Investments jar integrated manufacturing

that mayor may not occur. Some technological leaders

might take advantage of this to increase their market
share, or to participate on an overall market growth. But
for most users of these technologies they are not to gain a
higher relative market power, but to keep up with an

335

overall increase in performance capabilities, and to maintain the relative market power. Implying higher revenues
or higher profits might turn out to be quite dangerous
when the expectations are not fulfilled. One major reason
for this effect is the influence of CBFA on the fixed cost.

Cost

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5 _ Influence of fixed cost on strategic investment

planning

BEP(1)=BEP(2)

xr

(0)
Cost

BEP(1) BEP(2)

xr

(b)

Cost

While performing the calculation method presented

here, all costs were considered as variable in order to get a
quantitative index for the possible overall productivity
enhancements. But for the fmal investment decision
process, the real influence of this investment on fixed and
variable cost must become clear. First, the investment in
CBFA tends to increase the share of fixed cost of the
company. This results from purchasing hardware and
software, installation and adaptation of the software, and
education of the users. In addition to this increase there is
a significant remanence of cost: when increasing the
capacities to produce higher volumes, the costs rise. But
they do not fall by the same amount when these additional
capacities are utilized less, following reductions in the
production volume. But, on the other hand, within a
certain boundary these technologies have a high degree of
flexibility to adapt to changing production tasks. So in the
long run short-term adaptations to production needs can
be fulfilled with lower costs than with traditional equipment. Therefore it is extremely important to differentiate
between the quantitative and the qualitative advantages
and risks in regard to the flexibility of the computer based
equipment.
Further aspects of designing the optimized investment
policy and budget are shown by an analysis of the cost
functions. With the higher fixed costs of introducing an
integrated computer based structure the gradient of the
marginal cost function is smaller (Fig. 2), and one result
is the creeping break-even point phenomenon.
In case when the break-even point should not move

Figure 2. Course of cost functions before (1) and after (2) the
investment. (0) 'Optimized' investment budget: the potential
for cost reduction is not scooped by the investment and the

break-even point doesn't change. (b) Investment at the same

amount as the potential for cost reduction; the break-even point
moves towards higher volumes, dangerous when sales or pro-

duction volume diminishes. (e) The potential for cost reduction

is much higher than the necessary investment, the break-even
points moves towards lower volumes, and lower volumes can be
produced at economic cost. eRP is the cost reduction potential,

BEP(2) BEP(1)
(e)

xr

I the investment, Cf the fixed cost, Ct the total cost, S the sales
(revenue), BEP the break-even point and xT the volume for
planning. The index '1' indicates before investing and '2'
indicates' after investing' .

D. Boelzing and H. Schulz

336

towards higher cost at the planning volume, the investment has to be of a kind to reduce the variable cost while
operating within the amount of the potential for cost
reduction. If the production volume, which is the basis for
the evaluation, is higher than the break-even point, the
investment 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 is
only advisable to invest in the case of certain expectations
for a constant or increasing sales volume, caused by a
more straightforward total cost function (Fig. 2(
The
break-even point moves towards higher volumes.
Another example explains the reason for the capability
to produce in smaller lot sizes by use of Oexible production equipment. If the ratio between the potential for cost
reduction and the necessary investment can be modelled
as shown in Fig. 2(c), there is no need to step up the
volume, because the break-even point moves towards
smaller volumes.
Most of the evaluated investments will be of type 2( a)
or 2( b). These cases provide the chance for higher
production volumes with the same total cost, caused by
lower variable cost. The average cost per piece starts to
diminish when the break-even point is passed. Therefore
investments in CBFA only have a manageable risk if size,
steps, and timing of the investment can be harmonized
with the requirements of the market. To perform these
investments in periods of low demand (and thus low
volumes) can lead to. severe fmancing problems, especially concerning the short-term liquidity (the major cause
of bankruptcy). On the other hand, making sensible use
of the potential by investing into CBFA provides the
capability to operate on a constant, or even higher level of
customer-oriented performance in stagnant markets.
Additionally, Fig. 4( b) shows clearly why early investors could stand the high investments for CBFA when this
technology was starting to emerge: although the neces-

sary investments were much higher than the expected

savings, there is a profitable use of these systems. One
reason is that the actual potential was higher than
analysed, because the total extent of the indirect benefits
was not appreciated. The other reason results from the
general way these companies are managed. They usually
operate highly successfully in growing markets or with
growing market shares-even without the use of CBFA.
In adding the powers of CBFA systems to their basic
capabilities they could realize a higher sales volume,
higher revenues, and thus take those advantages which
are usually claimed by new production technologies.
Only due to this increase in the relative market position
and the combined enhancement in sales were the higher
costs fmanceable, while with deteriorating revenues these
projects, and the whole enterprise, would have been
bound to fail.

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b.

6. System integration influences types and

structure of cost
The change in fixed and variable cost is the result of
changing the types of cost. These are due to the individual
introduced systems; generalizations about the size are
very difficult to make. For the German machines and
equipment building industry a recent analysis (Schulz
and Boelzing 1989) has shown overall cost reductions by
CAD of about 2.5%, by CAP of about 2%, by CAM of
about 3%, and by PPS of about 2.8% The contribution
of technologies to the targets of factory automation and
the direction of changes in cost types, according to this
in-depth analysis are shown in Tables 3-6. These results
might help to analyse and estimate the individual impacts
ofCBFA.
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 salary
Auxiliary wages
Fringe benefits
Material
Tools and devices
Maintenance
Energy, heating
Taxes, fees, insurance

Calculated depreciation
Calculated interest
Other indirect expenses

CAD

CAP

CAM

PPS

o
o

+
+

o
o

+
+ +
+
+
+ +

o
o
o
o
o

o
o
o
o

o
o

Integration

Investments for integrated manufacturing

337

Table 4. Types of cost which are influenced by integrating computer based technologies.
CIM linking
CAD-NC

Type of cost
Calculated depreciation

+ /+ /-

Calculated interest

Material

CAM/DNC

CAP-PPS

CAM-PDA

0
0

0
0

0
0

t
t

+ /+ /-

CAD-PPS

0
0

0
0

0
0

0
0

0
0

0
0

0
0

0
0

- (TPT)

- (TPT)

- (Parts)

- (TPT)

- (Info)

Labour cost:
Direct wages

Assembly
Indirect wages

Design
Administration and sales

Cost for capital (WIP)

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'[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 (+ + , intensive
cost-jperforrnance increase; +, moderate cost-jperformance-increase; 0, no or small cost -I pc rformancc- increase; - , moderate
cosc-fperformance-decrease ; - - , intensive cost-/performance-decrease).
Shorter
Type of

Higher

throughput
time

COSI

Direct labour cost

Material
Calculated depreciation, interest
Tools and devices
Indirect labour cost

Changing

material

flexibility

0
0
0

Bound capital (WIP)

0

Reduced
Higher
One-lime
Better
quality,
cost for
data
capacity
delivery changes Jess scrap Standardization
entry
utilization

Reduced on-time

0
0
0

+
+

0
0

C p

C P

0
0
0

--

0
0
0
0

0
0
0

0
0

0
-

0
0

+
0

0
0

0
0

0
0

0
0
0
0
0

0
0
0
0

0
0
0

+
+

+
0
0
0

0
0
0

Optimized
usc of
equipment

0
0

+
+

0
0

0
0
+

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

Shorter
throughput

Higher

Reduced

Reduced

on-time

cost for

Higher
quality,

Technology

time

material

delivery

changes

less scrap

Standardization

entry

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

+
+
+

+
+
+
+
+
0
0
+
0
0
+
+

+
0
0

+
+
0
+
0
+
0
+
+
0
0
0

+
+

+ +
+
0
+
+
+
0
+
+
0
0
+

+
+
0
0
+

+ +
0
+ +
+
+
+
+
0
+

+ +
+
+
0
0
0
+
0
0

+ +
0
+ +
0
0
0
+
0
+
+

One-time

data

+ +
+
+
+
+ +
+
+

Better
capacity
utilization

+
+
+ +
+ +
0
0
+ +
0
0
+
0
0

Optimized
Changing
use of
flexibility equipment
0
0
0
+ +
0
+
+
0
+
+
0
0

+
+
0
0
+
0
0
0
0
0
+
+

338

D. Boelzing and H. Schulz

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included into this scheme is that 'Delays in commercializing innovative products not only increase the expenditures for research and development, but simultaneously
they often shorten the yield potential, especially if there is
a decay in prices during the remaining product life cycle'
(Somrnerlaue 1988). The method presented here is
a method for the evaluation and decision process for new
manufacturing technologies. With the holistic view of the
company, in regards to the overall costs and benefits,
major economic and technical effects can be shown, but it
can't
replace long-term
oriented entrepreneurial
decisions.

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