Investment justification in flexible manufacturing systems

Abstract

When a company installs flexible manufacturing systems (FMS), the results can be truly startling; e.g. a substantial reduction in the number of machines, number of employees, floor space, inventory level, throughput and lead time and also higher quality products, greater flexibility to respond to the market needs etc. But when one comes to financial analysis through the traditional evaluation approach, the results are really disappointing. This is so because of the inability of traditional modes of financial analysis, like discounted cash flow, to incorporate most of the strategic benefits of FMS in its analysis. FMS investments are strategic investments and their full impact on the firm is not estimable in terms of cash flows. What is required in investment evaluation procedure to truly justify investments in FMS is the combination of both strategic and financial methods. The paper aims at evolving a new investment evaluation procedure which will integrate strategic planning with financial method.