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ITZHAK KRINSKY
Abstract: Many firms are considering Flexible Manufacturing Systems (FMS) as a means for increasing productivity,
quality and profitability. In this paper a methodology for properly comparing and evaluating FMS's is presented.
T h e appropriate financial criteria are presented. Mathematical models of different FMS's are presented. T h e important stochastic variables are determined. T h e principles of stochastic dominance, risk preference and the value
of information; and a decision analysis cycle are used to evaluate the FMS's.
222
0470-817X~85M600-01821$2200i0
O 1987 " I I E
cash
the present value of the after-tax cash outflows. O n the surface ZRR and NPV look the same. However, as pointed out
by Copeland and Weston 17, p. 551, only "the NPVmle avoids
all the problems which the IRR is heir to. It obeys the value
additivity principal, it correctly discounts at the opportunity
cost of funds, and, most importantly, it is precisely the same
thing as maximizing the shareholders' wealth." The payback
(PB) period of a project is found by counting the number of
periods it takes before the cumulative forecasted cashflows
equal the initial investment. (Some companies discount the
cashflows before they compute PB.) In any case, the PB and
the discounted P B rules depend on an arbitrary cutoff date,
beyond which the project will be rejected, and ignore all
cashflows after that date. We will concentrate on NPV and
A E although, for interest sake, we will also look at IRR and
PB.
The details of the specific financial model that is used are
described in Appendix 1.
a) MA
Manual Assembly
model for the Robot Assembly Cell and an illustrative example are given here. (In what follows the subscript 1 (year)
will be suppressed for clarity.)
b ) MAM
rn
c,d) SPW
i"s
VSi * TP;I
i=l
e) RW
. iransfer
f l RAC
2 * CR
NP
i=l
WS *
NP
(VS,
* TPjI
i=l
some of the assembly equipment must be changed--specif,cally the carriers (CC), partfeeders (CF), robot grippers
(CG), robot part magazines (CM), and the special purpose
workheads (CW). In addition, if some of the assemblies have
common parts (NT), the automatic feeding devices ( C F ) ,
robot grippers (CG) and robot part magazines (CM) can be
reused.
For the sake of analytical tractability we will use these
simple models. (The extension to more complex models is
left for future research.) For example, producing the entire
year's requirements in a single run, overlooks inventoq lot
sizing considerations, production scheduling, etc. Conceptually, it is a straightfonvard task to add more variables and
make other assumptions so that the models are more appropriate for a particular firm. This is suggested in the final
section.
The details of the models for all the assembly systems (except the Robot Assembly Cell) are given in Appendix 2. The
Example
Year, t
VSI,~
2
140250
168300
127500
153000
154275
185130
2869
2
1
3156
2
1
3471
2
1
169702
203643
119000
5008
3
1
186672
224007
130900
5509
3
1
205340
246408
143990
6060
2
2
225874
271049
158389
6666
2
2
Js
'29
vs3,t
X VS;,, * TPi13600
No. shifts, S H
No, cells
22A
i=l
Revenue
REV,
$182325
200557.5
220613.25
320024.58
352027.03
387229.74
425952.71
Labour Cost
LAB,
$60400
66442
73074
105432
115979
127579
140337
Investment
1,
$267800
6400
6400
27100
9600
298100
19200
Depreciation
DEP,
53560
44128
36582.4
34685.92
29668.74
83354.99
70523.99
634600
352504.04
i) Deterministic Phase
For the financial model and the assembly system models
discussed previously, the decision maker's specialists are
asked to provide estimates for the most likely values of all
the variables. For the sake of illustration, suppose they gave
the most likely values listed in Appendix 3 (Deterministic
Variables). Substituting these estimates into the models of
the previous sections, gives the results shown in Tables 1 and
2. Since the appropriate criterion is the Annuity Equivalent
(AE), a Free Transfer Line with Robot Workheads (RW)
would be the best manufacturing system. The second best
Methodology
The methodology takes the form of an iterative procedure
called the Decision Analysis Cycle (see Figure 2). The procedure is divided into three phases. In the first (deterministic)
phase, the variables affecting the decision are defined and a
model showing the relationships between the variables is developed. The impoltance of each variable is also determined.
In the next (probabilistic) phase uncertainties (that is, probabilities) are encoded on the more important variables. The
associated probability distribution of the outcome variable is
DETERMINISTIC
PRIOR
INFORMATION I
)
PHASE
PROBABILISTIC
PHASE
INFORMATIONAL
PHASE
INFORMATION
GATHERING
DECISION
I
)ACT
4
sworst
226
MAM
MAM
MA
SPW
RAC
SPW
PB
MA
RW
MAM
RA C
SPW
PB
3.4 years
>5
>6
5.06
6,16
To encode uncertainty in all of the important stochastic variables, cumulative density functions (cdf s) are estimated for
each of them, by asking appropriate questions of the experts
within the firm. By systematically substituting all possible
combinations of variable values into the models, the cdf for
AE for each of the five asembly systems can be calculated.
This procedure is depicted in Figure 3. Each path represents
one particular setting of all the variables. (Notice. that the
tree grows very rapidly when there are many important stochastic variables. If possible one should treat all stochastic
variables as important stochastic variables. Unfortunately
Limited time and computer resources usually force us to identify and focus our attention on the important stochastic variables.) Each important stochastic variable's cdf is then
approximated by a number of discrete values. As many values
as possible can be used. For illustrative purposes, three
branches are nsed for the annual demand MS, and two
branches are used for NP, NAP, MGROW, Project Lives,
k, TA, TM, TW, TR, PQ and ND. (The number of branches
depends upon the importance of the stochastic variable, the
nature of its distribution, and the available computer re-
MS
NP
= 3840
NAP
PROJECT
MGROWl
ASSEMBLY
I TIMES
pQ
ND
branches)
227
the assembly machine with robot workbeads, is the best system. Unfortunately, we cannot use SD to prove this. Since
SD does not exist for RW, M A , MAM and SPW we need to
estimate the risk preferences of the decision-maker. (For a
review of risk preference see, for example, Howard and
Matheson [Ill.) Suppose, for the sake of illustration, that
the decision-maker has the preference curve shown in Figure
5. Table 4 shows the certainty equivalents for the five assembly systems. The best assembly system is the assembly machine with robot workheads, followed by the robot assembly
cell, manual assembly, manual assembly with mechanical assistance and the assembly machine with special purpose workheads.
iii) Informational Phase
In this phase the uppermost question is; "Should more
information be gathered before the final decision is made?".
A special case is the case of perfect information-that is, the
value of an important stochastic variable will be known exactly after perfect information is gathered. The value of perfect information provides an upper limit on the amount of
resources that can be expended, in further studies and analysis, to reduce the uncertainty in a variable. The value of
information is the difference in the output variable between
the best decision without information and the best decision
with new information. The information has no value if it
results in the same decision as in the without information
case. (See Raiffa [IS].)
In the illustrative example the value of perfect information
is zero for all the important stochastic variables (considered
alone). Eliminating the uncertainty in any one stochastic variable does not change the decision. The best assembly system
Assembly
System
MA
MAM
SPW
RW
RAC
228
+ 10
10
+ 11
+ 11
3.650E
8.357E +
2.808E
3.696E
9.770E
10
0.5716
0.5705
0.3454
0.6673
0.5790
Certainty
Equivalent
Rank
361,982
356,459
-681,874
862,123
399,259
3
4
5
1
2
[4] Browne, J . , Dubois. D., Rathmill, K., Sethi, S., and K. E. Stecke,
"Classification of Flexible Manufacturine
T k FMS Moxarino,
- Systems",
.
114-117 (1984).
[S] Burstein, M. C, and M. Talbi, "Emnamic lustlflcation for the Introduction o f Flexible Manufarmring Technology: Traditional Procedures
Venus a DynamicrBased Approach", Proceedings of tkr First ORSAI
TIMS Conference on FMS, 1W-106 (1984).
161 Buzaeott, I. A,, "The Fundamental Principles of Flexibility in Manufa:l~rtng Sys~ernr",Proceed.ngr of rhr t 8 r r 6 fncemononal Conicrenrr on
F.V.+Orrohrr 1082 honh Holland Yuol,rhlng Co., Kru York
[7] Copeland, T. E. and 1. F. Weston, Fimncwl Theory and Corpomle
Policy, Addison-Wesley Publishing Co.. Reading, Masachusens,
(1984).
[8] Dod, R. C., Robots and Automared Mnnufmturvlg, Restan Pubbrhing
Co., Reston, Virginia (1983).
[9] Gitman, L. 1, and 1. R. Forrester, "A Survey of Capital Budgeting
Techniques Used by Major U.S. Arms", Fimnciol Mamgcmenr, 66-71
(1977).
[lo] Gold, B., "CAM Sets New Rules for Production", Howard Business
Review, 88-94 (1982).
[ l l ] Howard, R. A, and J. E. Matheson. Rcodings on the Principles and
Applications of Deckion Annfysis. Strategic Dceisionr Group, Menlo
Park, California (1983).
[I21 Kaplan, R., "Measuring ManufacturingPerformance: A new Challenge
for Managerial Accounting Rerearch", The Accounting Review, 686-705
(1983).
1
Knott. K. and R. D. Getto, "A Model For Evaluating Robot Syrtems
Under Uncertainty", Internotional lourno1 of Production Ruearch, 20,
155-165 (1982).
[14] Kulatilaka, N., "Financial, Economic and Strategic Issues Concerning
The Decision To Invest In Advanced Automation", I n r c r m t i o d l o u w l
of Produetion Research, 22, 949-968 (1984).
[IS] Michael, 0. I. and R. A. Millen, "Economic Justi6cation of Modem
Computer-Based Factory Automation Equipment: A Status Repon",
Proceedings of the Fin1 ORSAITIMS Conference on FMS, 30.35 (1984).
1161 Operations Research Saciety o f America, and The Institute of Management Sciences, Proceedings of the First ORSAITIMS Confernnee on
FMS-Operdonr Resenreh Models and Applicotionr-August 1984.
[I71 Proceedings of the Firstlntermtionol Confererne on FMS-October IW.
Nonh Holland Publishing Co., New York.
[IS] Raiffa, H., Deckion A d y s k , Addison-Wesley, Reading: Mass. (1968).
[I91 Schall, L. D., G. L. Sundemand W. R. Geusbeek, "Survey and Analysis
of Capital Budgeting Methods", The lourml of F i m n , 33, 281-287
(1978).
[20] Surerh, N. C. and 1. R. Meredith. "A Generic Approach to Jurtifying
Flexible Manufacturing Systems", Proceedings of the First ORSITIMS
Conference on FMS, 36-42 (1984).
[21] Suri, R. and C. K. Whitney, "Decision Suppon Requirements in Flexible
Manufacturing", Iournal of Mvwfocruring Systems, 3.61-69 (1984).
[22] Suri, R. and R. R. Hildebrant, "Modelling Flexible Manufacturing Syr
temr Using Mean-Value Analysis", lournnl of Monufacruring System,
3, 27-38 (1984).
Appendix 1-Financial
Model
MGR0W;-annual
1,-investment
in year t, t
1, 2, 3,
...
WT,-total
rate
vestment costs. (That is overhead costs are ignored.) Depreciation is calculated using the double declining balance
method (equation A2). Finally, notice that the last term in
the NPV and IRR equations is the discounted book value
(BV) of the project at the end of its useful life. This simple
model can be reduced or enriched (in terms of the number
of variables and relationships) to meet the needs of a particular firm.
Appendix 2-Mathematical
Endogeneous Variables
MSi,,-total market size for assembly i in year t
revenues in year t
DEP,-total
depreciation in year t
BVt-book
TR
2 VS,, SP,,,
('41)
,=I
DEP,
BVo
ATCF,
' I-'
2 I, -
i=o
,-I
j;o
DEP,)
+ I,
+ DEP,TX - 1,
ATCF,
('4-2)
REV, =
Exogenous Variables
(i) TIMES (seconds)
TA -time to assemble one part manually
BVN
NPV
AE =
1
I-(1 + k)N
CF-
(A3)
(A41
(A5)
cost of robot
PB satisfies
PB
(A7)
1, 2, . . . , NP.
1VS; * TP, s
SPW-MODEL FOR ROTARY AND IN-LINE INDEXING ASSEMBLY MACHINES (Figure 1-c)
These assembly machines are non-programmable. Therefore each assembly requires a dedicated machine with diferent special purpose workbeads, different work carriers and
different part feeders. Each station in the assembly machine
assembles one part only. (Obviously, for such "hard automation" to be profitable, the volumes must be very large.)
For each assembly i, (i = 1, 2, . . . , NP) select SHi, so
that there is sufficient capacity to meet the demand requirements. That is VS;'TP;I3600 s HRSPE*SHwhere TPj =
TW iNAj*PQ*TD. Each station in the assembly machime
consists of work carriers (CC), a feeding device (CF), and
a special purpose workhead (CW) (all of which must be
changed if a part is redesigned) and a transfer device (CT).
The initial investment required for assembly machine i is
Ii = NAja(CC + CF
CW CT). The labour wsts consist
of operator and supervisor costs. One operator runs 1INR
stations on the assembly machine and one supenisor monitors
llNOS assembly machines. The annual labour wst for machine i, is:
WT;
NP
WA
NSR*(NP*Z*CC + CB)
+ CF'
NP
1 NE.
,=I
NP
chines is I
NP
WT =
;=I
WT;.
i=l
SPW-MODEL FOR IN-LINE FREE TRANSFER (BUFFERED) ASSEMBLY MACHINES WITH SPECIAL PURPOSE WORKHEADS (Figure 1-d)
If the number of parts in assembly i (NA;) is large, downtime due to defective parts, can be excessive when rotary and
in-line indexing assembly machines are used. In this case an
in-line assembly machine with buffer inventories between the
stations will be used. Boothroyd [3] recommends the in-line
free transfer assembly machine be used whenever NAi 3 10
and that the size of the buffer inventories (BI) be approximately [O.S*TDITW]where [XIis the smallest integer greater
than or equal to X.He estimates that, on average, a good
assembly is produced every TW PQ'TD seconds. For each
assembly i, where NAi 3 10 (i = 1, 2, . . . ,NP), select the
required number of shifts SH; such that VSj*TPjB600 s
HR*PE*SH;, where TPi = TW + PQ'TD. The initial investment for assembly machine i is I; = NA;*(CC + CF +
CW + CT t BFCC), and the annual labour wst is WT; =
(NRXNA;*WA+ NOS*WS)*(VS;*TPjB600)/(HR*PE).
(If a
part is redesigned then a feeding device (CF) and a special
purpose workhead (CW) will have to he changed.)
1 N R VS, TP;
(NR*NAiYWA
t NOS*WS) *(VSjaTPjI%OO)/(HR'PE).
;=I
RW-MODEL FOR IN-LINE FREE TRANSFER (BUFFERED) ASSEMBLY MACHINE WITH ROBOT WORKHEADS (Figure I-e)
This assembly machine is the same as the in-line free transfer machine with special purpose workheads except that the
231
workheads are now programmable. That is, the robot workheads can be reprogrammed for different tasks. (In that sense
this assembly system is similar to manual assembly with mechanical assistance-model 2, because the human operators
can also do different tasks.) The cost of each robot is CR
where CR = C1
D F C 2 . C1 is the basic cost of a robot
and C2 is the additional cost per degree of freedom of the
robot. It is reasonable to assume that four degrees of freedom
are required for assembly Line robots.
Select the required number of shifts SH, and the number
of parts to be assembled at each station NS,, for each assembly
i, i = 1, 2, . . . , N P such that there is sufficient capacity
CB = $7000
C T = 16000
C C = 1500
C F = 7000
CM = 5000
CW = 10000
C1 = 50000
C2 = 10000
CG = 1700
WA = 40000
WS = 55000
HR = 2000
NR = 0.333
NOS = 0.25
D = 10
NP
VSi*TP;I
i-1
I,
NSR*(CR
+ CT) + C M * Z NT;
i=l
,VP
If design changes are made then the robot part feeders (CM)
and the robot grippers (CG) need to be changed. Labour
costs consist of operator and supervisor costs. (Notice that if
assembly i has NA; parts and NS, parts are assembled at each
station, then NAjINSi stations are required to complete the
assembly.) Therefore the annual labour costs are;
6 parts
6 parts
6
7
8
9
SP,, = $0.65 i = 1 , 2 , . . . , 9 r = 1 , 2 , . . . (For simplicity,
the selling price for all assemblies is the same.)
Stochastic Variables
Variable
NPI
t=2...I
t = 3 ...0
1 = 4 ...I
t = s . . .0
i = 1
i =2
i =3
i =4
i =5
i =6
750000
900000
700000
550000
300000
500000
300000
800000
750000
i = 7
i = 9
MGROWi
MSHARE;
0.10
0.17
Project Life
TX
k
Range
i = l , 2, . . . , 9
i = l , 2, . . . , 9
MA
MAM
SPW
RW
RAC
Tax Rate
= Risk free interest rate
6
7
8
0.40
0.10
TA
TM
7w
10 seconds
8
5
TR
TD
30
PE
PQ
NDi,
4 years
5
1'
0.95
0.05
i=1,2, ...,9
*Each assembly will have 1 pan design change every year, for 5 years, beginning in the next year after it is introduced.
Probability Distributionsi For Important Stochastic
Variables
Variable
(Value; Probability),
NPt
NAP,
MS,,I
(5; 0.6)
( 4 ; 0.4)
(1, 0, 1, 0; 0.6)
(2, 1, 1, 0;0.4)
(Most Likely Value from above; 0.5)
(Low Value; 0.3)
(High Value; 0.2)
(0.10; 0.50)
(0.07; 0.50)
(4, 5,6, 7 , 8; 0.5)
(7, 8, 9, 10, 12; 0.5)
(0.10; 0.60)
(0.12; 0.40)
(10, 8, 5,6; 0.6)
(9,7, 4,5; 0.4)
(0.05; 0.60)
(0.035; 0.4)
(1, 1 , . . . ; 0 . a )
(2, 2, . . ;0.40)
MGROWi
Project Life
k
TA, TM, 7W, TR
PQ
ND
(Value; Probability), . . .
Dr. G. John Miltenburg is Associate Profernor of Production and Managemen1 Science, in the Faculty of Business, at McMa~terUniversity, Hamilton,
233