Flexible Manufacturing and it's Benefits for
the Financial Situation of an Enterprise
- A System-Dynamics—Assessment on Investment Calculation ~
Thomas Klaue, Michael Veitinger
System Dynamics group
Industrieseminar der Universitat Mannheim
D-6800 Mannheim, .West-Germany
Introduction
Over the past decade, as a result of world-wide stagnation
- combined with the entrance of low wage competitors to
the market - the situation of the manufacturing industries
in the industrialized economies became more competitive.
Although it is not accompanied by an _ increasing output,
the application of flexible manufacturing as a new _ process
technology seems to enable the enterprise to gain produc—
tivity and to push up it's competitive strength.
Therefore, the necessity to introduce these technologies
is emphasized in numerous discussions. On the other hand
these technologies require capital-intensive investments,
So the capacity of reducing costs seems to be a decisive
measure of the economic advantage.
120
1. Flexibility — an economic necessitity for industrial
enterprises
For todays industrial enterprises, investment in flexible
manufacturing technologies are of crucial importance.
Succesful installation increases the competitive strength
significantly. On the other hand, capital-intensive invest—
ments in these technologies involve - particulary in face
of an uncertain future - financial risks. Above all, an
acceptable demonstration of the flexible technologie's
economic efficiency is not available.
The wellknown calculation methods, such as the capital value
method, the. internal rate of return method or the annuity
method of preinvestment analysis cannot prove an _ economic
advantage of the flexible manufaction. This is due to the
fact, that these methods assess only the rationalization
effects. But the essential goal of the investment oppor-
tunity, to push up flexibility as well, is not considerated.
The dilemma is, that there is no value X or Y of the flexi-
bility, which could be directly calculated. Flexibility
cannot be bought. Flexibility grows out of a network, deter-
mined by the combination of technology within an adequate
organization, leaded by welltrained staff members.
So, the way to assess the flexibilities value is it's con-
sideration within a holistic view of the "System Enter-
prise". The enterprise has to be seen in _ it's technical,
economical, political and social framework. The investment
planning system has to pay attention to short-term effects
such as rationalization effects as well as to long-range
goals of the flexibility, particulary the guarantee of the
enterprises competitive strength, as shown in VIEW .o
121
VIEW 1:
Floxi-
bility
LB
Long Range
Planning
Market-Position
and Competitive
Strengin
Market
Situation
Technolo —
gies
Resources of Enterprises
Capabilities
Technical Know —How
Statt Know-How
Financial Capacity
Bussiness Organization
Range at Products
Calculation Inflows and Outtiows of Casal
Results
Social and Political Influences
2. The model
2.1. Components of the model
The model that is constructed to quantify the benefits of
Flexible | Manufacturing, contains all relevant sectors a
real enterprise is composed of; only the price and _ the
quantity of the sales are exogenously fixed by the market.
The enterprise manufactures four different products by
turns on the same unit. In the beginning the enterprise
has an equipment which is rather inflexible and causes
high costs for retooling. This equipment will be replaced
by a Flexible Manufacturing System (FMS), realized by a
three-step-investment,which is distributed over one and
a half year (VIEW 2).
122
The investment calculation shall examine the profitableness
of the investment in FMS.
VIEW 2: General map of the enterprise
4
Protit and Loss Elaeectel:, center.
Pracucion rl stecks 1
f Personnel
en
oe fe
y Ee
2.2. Important loops of the model
I. Batch size and change over time
This sector determines the space of time that one product
type will be manufactured on the unit. The equation of the
batch size (according to Andler) is:
2 * requirements per period * Fixed costs per bs
Dsopt = 10 *
variable unit costs * interest rate
This equation results in a feet-back-loop designed in
VIEW 3.
123
VIEW 3:
Batch Size )
2 laterest fate |
i oe 2
\ Capacity
Gnange over
—
Ii. Capital recovery
To examine the profitableness of the investment all equi-
ty resources which are surplus and unnecessary for the
enterprise are recovered and accumulated (VIEW 4).
VIEW 4:
y
equity
pius
equity ‘thdrawar
resources of capital
equity capttar
minus recovery
cup
total
decision ¥
Hquiaiiy expenditure
124
This sector represents the investment calculation - the
“money-box" ~ of the model. Opposed to the "money-box" of
an identical enterprise without Flexible Manufacturing
Systems it quantifies the monetary benefits of this in-
vestment.
3. Simulation
9.1. Implementing of the simulation
The present model realizes - in contrary to the . usual
System-Dynamic view of processes - a more microeconomic
contemplation, which leads to a very disaggregated struc-
ture of the model. The advantage of this variation is,
that also short-term processes can be included in the
model. Therefore the model contains 21 level, 39 rates,
88 auxiliarys, 20 constants, 5 tables, 26 clip- and 3
switch-functions; the length of one simulation period
represents in reality only one week, and the total simu-
lation covers a space of four years (=200 periods).
Because of the extreme stability, the model can also be
simulated for 20 years or more (=1000 periods or more),
but =‘ there is no remarkable change in the results.
3.2. Results of the simulation
The important outcomes of the model with FMS will be com—
pared to those of the model without FMS, listed below in
tabular form, and = only the most important results are
presented more detailed.
125
Tabular of results
with FMS : without FMS
fixed assets + 30 %
current assets ~ 15%
return on
investment + 280 %&
years net
earnings + 375 %
costs per unit ~ 5%
finnished pro-
duct stocks - 15 %
delivery
incapacity (*) - 90 %
(*) Orders which can't be performed at once
Besides.
be quantified,
The liquid funds,
FMS, are
to a more reliable
utilized for a
created by
these results
another
effect is
revenue. And the
the enterprise with FMS
although
leads to to a
Generally can be
ordered products
finnished goods which
intermediate financing.
FMS effects an
which were
unexpected
largely
nearly constant in the model
planning of the
reduction
turnover
appeasement of the
effect
oscillating in the
could
of the
More regular
liquid
turnover
is also’ nearly
is able to deliver
it has to keep lower
activities of the enterprise (VIEW 5).
expected and only
model
with FMS. This
finnacing and can be
constant,
faster the
diminution
declared,
oscillation of the
had to
noticed.
without
leads
resources. This
respectively
because
stocks of
of the
that
126
VIEW 5:
as
“
"ae
t
tas
1
. 30
a
2.8
> eo
“
1.8
Finally the investment calculation, The introduction of
FMS increases the capital recovery for about 300 % (VIEW 6).
VIEW 6:
This fact elucidates the profitableness of FMS and in com~
bination with the other results it corroborates the suppo-
sition, that this technologie is unalterable to preserve
in future the enterprises competitive strength.
127
A holistic view will be developed describing an _ enterprise
with a certain number of products. The model analyzes the
impacts of modern process technologies, such as flexibi-
lity, quality, stock-level and return on investment, on
the financial situation of an enterprise.
The System—Dynamics model represents the reduction of
costs, the shifting of financial funds in the balance from
current to fixed assets and the return on investment rea-
lized by the ‘installation of flexible production equipment
in an industrial enterprise.
CC BY-NC-SA 4.0