5.6 Technology decisions

	Technology decisions involve large sums of money and have a tremendous impact on the cost, speed, quality, and flexibility of operations.
	More importantly, they define the future capabilities of a firm and set the stage for competitive interactions.
	Thus, it is dangerous to delegate technology decisions to technical experts or financial analysts.
	A manager's ability to ask questions and understand the basic thrust of proposed technology is invaluable in making wise technology choices.
	In this section we discuss the financial justification of new technology, followed by a brief technology primer.

Financial justification of technology

	After it is decided that a part will be produced or service produced in-house, specific technology decisions can be made.
	Alternatives include using, replacing, or upgrading existing equipment, adding additional capacity, or purchasing new equipment.
	Any alternative that involves an outlay of funds is considered a capital investment.
	Capital investment involves the commitment of funds in the present with an expectation of returns over some future time period.

5.6 Technology decisions

	The expenditures are usually large and can have a significant effect on the profitability of a firm.
	These decisions are analyzed carefully and typically require top management approval.
	The most effective quantitative techniques for capital investment consider the time value of money as well as the risks associated with benefits that will not accrue until the future.
	These techniques, known collectively as capital budgeting techniques, include payback period, net present value, and internal rate of return.
	Detailed description can be found in any basic finance text.
	Although capital budgeting techniques are beyond the scope of this topic, we do need to comment on several factors that are often overlooked in the financial analysis of technology.
	Purchase cost:

		The initial investment in equipment consists of more than its basic purchase price.
		The cost of special tools and fixtures, installation, training, maintenance, and engineering or programming adjustments can represent an significant investment.
		Operating costs are often underestimated as well.

5.6 Technology decisions

Operating costs:

To assess more accurately the requirements of the new technology, it is useful to consider, step-by-step, how the equipment will be operated, started, stopped, loaded, unloaded, changed over, upgraded, networked, maintained, repaired, cleaned up, and slowed down.

Annual savings:

		Most new technology is justified based on direct labor savings.
		However, other savings can actually be more important.
		For example, a more efficient process may be able to use less material and required less machine time or fewer repairs, so the downtime is reduced.
		A process that produces a better-quality product can result in fewer inspections and less scrap and rework.
		New processes (especially those that are automated) may significantly reduce safety costs, in terms of compliance with required regulations, as well as fines or compensation for safety violations.

5.6 Technology decisions

Revenue enhancement:

		Increases in revenue due to technology upgrades or new-equipment purchases are often ignored in financial analysis because they are difficult to predict.
		Improvements in product quality, price reductions due to decreased costs, and more rapid or dependable delivery can increase market share and, thus, revenue.
		Flexibility of equipment can also be important to the changing needs of the customer.

Replacement analysis:

		As existing equipments ages, it may become slower, less reliable, and obsolete.
		The decision to replace old equipment with state-of-the-art equipment depends in large measure on the competitive environment.
		If a major competitor upgrades to a newer technology that improve quality, cost, or flexibility and you do not, your ability to compete will be severely damaged.
		In some industries, technology changes so rapidly that a replacement decision also involves determining whether this generation of equipment should be purchased or if it would be better to wait for the next generation.

5.6 Technology decisions

Replacement analysis maps out different schedules for equipment purchases over a two to five year period and selects a replacement cycle that will minimize cost.

Risk and uncertainty:

		Investment in new technology can be risky.
		Estimates of equipment capabilities, length of life, and operating cost may be uncertain.
		Because of the risk involved, financial analysts tend to assign higher hurdle rates (i.e. required rates of return) to technology investments, making it difficult to gain approval for them.

Placement analysis:

		Investment in equipment and new technology is also expensive.
		This has led to the proposal and evaluation of equipment purchases in a piecemeal fashion, resulting in pieces of technology that don't fit into existing system and fail to deliver returns.

5.6 Technology decisions

A technology primer

	Technology is important in both manufacturing and service operations.
	Cars now have hundreds of embedded systems performing thousands of computerized functions.
	Pacemakers, vending machines, Xerox copiers, and store shelves notify the manufacturer when repairs or restocking are needed.
	Coming soon are clothes that measure the wearer's vital statistics and notify a physician or change medication regimes when necessary, and refrigerators that pre-order ingredients to match weekly menus or order milk when the supply is low.
	In this section, we present a brief overview of technology advances in manufacturing systems.
	Technology in manufacturing includes computer aided design, robots, automated guided vehicles, computer numerically controlled machines, automated storage and retrieval systems, and flexible manufacturing systems.
	Automated manufacturing systems integrated through computer technology are aptly called computer-integrated manufacturing (CIM).
	With the advent of the Internet and the increased globalization of both markets and production, CIM has evolved into a Web-centric collaborative venture known as e-manufacturing (eM).

5.6 Technology decisions

	E-manufacturing involves sharing real-time data with trading partners and customers and making collaborative decisions about production based on that data.
	In order to collaborate, information must be converted onto electronic form, protocols for communication must be established, and infrastructure must be in place for connectivity with customers, suppliers, and partners.
	Rather than making huge volumes of standard products in anticipation of demand, e-manufacturing uses real [time information on customer orders and productive capacity across the supply chain to speed customized products directly to the consumer.
	Figure 5.13 shows the components of e-manufacturing categorized by product, process, manufacturing, and information technologies.
	Table 5.5 serves as a technology primer, briefly defining the terms listed in the figure.