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Investments in Industrial Automation - A Decision Aid Methodology
Copyright © IFAC Intelligent Manufacturing Systems. Gramado - RS , Brazil. 1998
INVESTMENTS IN INDUSTRIAL AUTOMA nON - A DECISION AID METHODOLOGY
Jose Lamartine Tavora Junior Francisco S. Ramos
PlMES - Programa de P6s-Graduar;ao em Economia / Universidade Federal de Pernambuco Av. dos Economistas, SIN, Cidade Universitaria - 50.670-100 - Recife - PE - Brazil Phone/Fax: +55812718378 / 2718381 E-mail: [email protected] E-mail:[email protected]
Abstract: The investments in industrial automation, CIM, or other technologies does not always allow a company to increase its levels of competitiveness. It has been observed that those companies which invest more in new technologies without more detailed analysis, tends to reduce its competitiveness. This article tries to avoid this distortion by proposing a decision aid methodology. This methodology starts with a strategic analysis. Then, a processes reengineering is done in order to verify the investments necessities. Thus, a investment analysis takes place. Finally, is possible to do a investment analysis comparison against the company's strategy, by means of game theory. Copyright © 1998 IFAC Keywords: Automation; Financial systems; Game theory; Industry automation; Process automation; Productivity; Production costs; Profile; Project management; Project selection;
1. INTRODUCTION:
showing that not always the most automated companies, or those that invest more in new technologies, are the most productive and competitive.
One of the main problems, nowadays, for a company that decides to invest in new technologies such as those necessary to promote industrial automation, refers to the choice of this technology. What equipment, software, etc. is most suitable for that company? Are the investments accomplished those what will bring the largest increments of the company competitiveness? And will the investments have a positive return?
2. PROPOSITION OF A METHODOLOGY: In order to solve these difficulties, a methodology proposal that allows the companies to define, in a more precise way, the investments to accomplish in automation or new technologies had developed.
None of these questions has a simple answer. Checking this statement, there are works published in the USA, Europe and Brazil
It is important to understand, initially, that most of the companies invest in automation seeking a
305
consequent increment on its levels of competitiveness. Those increments of competitiveness can be reached through investments in competitive dimensions.
2.3 Investments Analysis:
Having defined the investments in equipments, etc., the third stage of the methodology takes place: the investments analysis. In this stage, it is verified if the expected future gains will promote the investments return. Here, the techniques of the Net Present Value (NPV), and of the Internal Rates of Return (IRR) can be used. Like this:
For competitive dimensions, the five most mentioned in texts on the subject are considered: reliability; costs; flexibility; productivity; and quality. The development of the competitive dimensions can be acted through tools of competitiveness. These are, for example, showing in Table 1 below:
L
n
NPV=-I+L~
Table 1: Competitive Dimensions x Factors of Competitiveness
(I)
JUt-l
1=1
and, when: Competitive Dimensions Reliability Costs Flexibility Productivity Quality
Factors of Competitiveness CIM Just-in-Time CIM Automation ISO-9.000
NPV = 0 => i = IRR
(2)
where: I = investment; Lt = liquid greetings in the t periods; i = market interest rate, or alternative. Considering the five competitive dimensions mentioned above and considering that there are several alternatives, in terms of tools of competitiveness (automation, CIM, etc.) for each one those dimensions, there are a group of alternatives of possible investments that can be implemented. Supposing there is capital and other resources restrictions, models of linear programming in order to find the best investments composition would be used. Then, the problem would consist of finding the maximum of the function bellow:
A methodology that analyzes the increment of competitiveness should be composed of 3 phases: strategic analysis; processes reengineering; and investments analysis.
2.1 Strategic Analysis:
In the first phase, a strategic analysis is done. Here, the market in which the company acts, and its potentialities are studied, to verify which would be the best positioning against the consumers and competitors.
MaxZ=
m
L
j=1
§
+
n
L
t=1
qtI L
(i1 i
.
(3)
J
2.2 Processes Reengineering:
subject to the following restrictions:
Once the first phase of the methodology is concluded, there comes the stage of the processes reengineering. Here, the needs of the company would be analyzed: how it can becomes more competitive in terms of new equipment, administration technologies, personnel training, etc. In this stage, a careful analysis should be made to define the real needs of the company, if it is the case of equipment acquisition, etc. The several alternatives that the vendors offer should be examined carefully.
m
;L
J=1
ah ,xJ' ~ bh (h = 1,2, ... , k) !j
(4)
Xj
~
(5)
and: 0 (j = 1,2, ... , m)
Thus, after the methodology application, where and how the company should invest in industrial automation, with certainty, can be indicated.
306
2.4 Investments Analysis x Strategy:
3. CONCLUSION:
It is possible that it has to undertake additional
As it is saw in this article, the investment in industrial automation, CIM, or other technologies does not always allow a company to increase its levels of competitiveness. It has been observed that those companies which invest more in new technologies without more detailed analysis, tends to reduce its competitiveness. However, there are alternatives to avoid these distortions. One of those alternatives is the methodology here presented, that allows the companies to define with safety which technology is more adapted for its case, how to optimize its gains, and that additional strategic considerations should be adopted.
points concerning the strategy that should be adopted by the companies. That is to say: as it lives in a world in constant technological development, a company should to accompany its competitors researches. Following that logic, it can happen that a new technology appears. In a first moment this new technology can seems not feasible to be adopted by a certain company, when analyzed from the economic/financial point of view. If that company doesn't come to use that technology, it can lose competitiveness in the future and, maybe, close its doors. In that way, that possibility should take into account. Doing those kinds of considerations, it has to extract methods from game theory. The fundamental result in game theory, in the case of mixed strategies (defined by the vector of probability X for the player I and Y for the player 11), the payment of II is aleatory variable with the following expected value:
REFERENCES Contador,1. C. (1996). Modelo para Aumentar a Competitividade Industrial. FundaS;ao Vanzolini / Editora Edgardg Blucher Ltda., Sao Paulo, Brazil. Gibbons, R. (1992). Game Theory for Applied Economists. Princeton University Press, Princeton, New Jersey, USA. Hawkins, R., Mansell, R and Skea, J. (Ed.. ) (1995). Standards, Innovation and Competitiveness. Edward Elgar Editors, Aldershot, England. Shtub, A., Bard., J. and Globerson, S. (1995). Project Management - Engineering, Technology and Implementation. Prentice Hall International Editions. Englewood Cliffs, New Jersey, USA. Tavora Jr., J. L., Albuquerque, P. and Neves, M. (1997). Automas;ao Industrial - 0 Estligio de Pernambuco. In: Ensaios de Economia (Galvao, O. (Ed.», 217-230, Recife Grlifica e Editora, Recife, Brazil. Tavora Jr., J. L., Barbosa, C. Z. and Guimaraes, L. (1998). Incremento da A. Competitividade das Empresas por Investimentos em DimensOes Competitivas. In: I Er. ENEGEP Anals. ABEPRO, Rio de Janeiro, Brazil.
(6) where:
M I == player I espected minimum gain maximum value -
==maxmnE~Y X Fl Y
(7)
M II == player 11 espected maximum lost minimum value ==
m yptx E~Y
==min
(8)
X
being X and Y vectors with k-dimensional and m-dimensional probabilities, respectively. Then, for any game matrix, exists optimal strategies that:
•
•
Ea ,Y
*
(9)
This way the company's best strategy can be defined, in terms of investments in technology.
307
INVESTMENTS IN INDUSTRIAL AUTOMA nON - A DECISION AID METHODOLOGY
Jose Lamartine Tavora Junior Francisco S. Ramos
PlMES - Programa de P6s-Graduar;ao em Economia / Universidade Federal de Pernambuco Av. dos Economistas, SIN, Cidade Universitaria - 50.670-100 - Recife - PE - Brazil Phone/Fax: +55812718378 / 2718381 E-mail: [email protected] E-mail:[email protected]
Abstract: The investments in industrial automation, CIM, or other technologies does not always allow a company to increase its levels of competitiveness. It has been observed that those companies which invest more in new technologies without more detailed analysis, tends to reduce its competitiveness. This article tries to avoid this distortion by proposing a decision aid methodology. This methodology starts with a strategic analysis. Then, a processes reengineering is done in order to verify the investments necessities. Thus, a investment analysis takes place. Finally, is possible to do a investment analysis comparison against the company's strategy, by means of game theory. Copyright © 1998 IFAC Keywords: Automation; Financial systems; Game theory; Industry automation; Process automation; Productivity; Production costs; Profile; Project management; Project selection;
1. INTRODUCTION:
showing that not always the most automated companies, or those that invest more in new technologies, are the most productive and competitive.
One of the main problems, nowadays, for a company that decides to invest in new technologies such as those necessary to promote industrial automation, refers to the choice of this technology. What equipment, software, etc. is most suitable for that company? Are the investments accomplished those what will bring the largest increments of the company competitiveness? And will the investments have a positive return?
2. PROPOSITION OF A METHODOLOGY: In order to solve these difficulties, a methodology proposal that allows the companies to define, in a more precise way, the investments to accomplish in automation or new technologies had developed.
None of these questions has a simple answer. Checking this statement, there are works published in the USA, Europe and Brazil
It is important to understand, initially, that most of the companies invest in automation seeking a
305
consequent increment on its levels of competitiveness. Those increments of competitiveness can be reached through investments in competitive dimensions.
2.3 Investments Analysis:
Having defined the investments in equipments, etc., the third stage of the methodology takes place: the investments analysis. In this stage, it is verified if the expected future gains will promote the investments return. Here, the techniques of the Net Present Value (NPV), and of the Internal Rates of Return (IRR) can be used. Like this:
For competitive dimensions, the five most mentioned in texts on the subject are considered: reliability; costs; flexibility; productivity; and quality. The development of the competitive dimensions can be acted through tools of competitiveness. These are, for example, showing in Table 1 below:
L
n
NPV=-I+L~
Table 1: Competitive Dimensions x Factors of Competitiveness
(I)
JUt-l
1=1
and, when: Competitive Dimensions Reliability Costs Flexibility Productivity Quality
Factors of Competitiveness CIM Just-in-Time CIM Automation ISO-9.000
NPV = 0 => i = IRR
(2)
where: I = investment; Lt = liquid greetings in the t periods; i = market interest rate, or alternative. Considering the five competitive dimensions mentioned above and considering that there are several alternatives, in terms of tools of competitiveness (automation, CIM, etc.) for each one those dimensions, there are a group of alternatives of possible investments that can be implemented. Supposing there is capital and other resources restrictions, models of linear programming in order to find the best investments composition would be used. Then, the problem would consist of finding the maximum of the function bellow:
A methodology that analyzes the increment of competitiveness should be composed of 3 phases: strategic analysis; processes reengineering; and investments analysis.
2.1 Strategic Analysis:
In the first phase, a strategic analysis is done. Here, the market in which the company acts, and its potentialities are studied, to verify which would be the best positioning against the consumers and competitors.
MaxZ=
m
L
j=1
§
+
n
L
t=1
qtI L
(i1 i
.
(3)
J
2.2 Processes Reengineering:
subject to the following restrictions:
Once the first phase of the methodology is concluded, there comes the stage of the processes reengineering. Here, the needs of the company would be analyzed: how it can becomes more competitive in terms of new equipment, administration technologies, personnel training, etc. In this stage, a careful analysis should be made to define the real needs of the company, if it is the case of equipment acquisition, etc. The several alternatives that the vendors offer should be examined carefully.
m
;L
J=1
ah ,xJ' ~ bh (h = 1,2, ... , k) !j
(4)
Xj
~
(5)
and: 0 (j = 1,2, ... , m)
Thus, after the methodology application, where and how the company should invest in industrial automation, with certainty, can be indicated.
306
2.4 Investments Analysis x Strategy:
3. CONCLUSION:
It is possible that it has to undertake additional
As it is saw in this article, the investment in industrial automation, CIM, or other technologies does not always allow a company to increase its levels of competitiveness. It has been observed that those companies which invest more in new technologies without more detailed analysis, tends to reduce its competitiveness. However, there are alternatives to avoid these distortions. One of those alternatives is the methodology here presented, that allows the companies to define with safety which technology is more adapted for its case, how to optimize its gains, and that additional strategic considerations should be adopted.
points concerning the strategy that should be adopted by the companies. That is to say: as it lives in a world in constant technological development, a company should to accompany its competitors researches. Following that logic, it can happen that a new technology appears. In a first moment this new technology can seems not feasible to be adopted by a certain company, when analyzed from the economic/financial point of view. If that company doesn't come to use that technology, it can lose competitiveness in the future and, maybe, close its doors. In that way, that possibility should take into account. Doing those kinds of considerations, it has to extract methods from game theory. The fundamental result in game theory, in the case of mixed strategies (defined by the vector of probability X for the player I and Y for the player 11), the payment of II is aleatory variable with the following expected value:
REFERENCES Contador,1. C. (1996). Modelo para Aumentar a Competitividade Industrial. FundaS;ao Vanzolini / Editora Edgardg Blucher Ltda., Sao Paulo, Brazil. Gibbons, R. (1992). Game Theory for Applied Economists. Princeton University Press, Princeton, New Jersey, USA. Hawkins, R., Mansell, R and Skea, J. (Ed.. ) (1995). Standards, Innovation and Competitiveness. Edward Elgar Editors, Aldershot, England. Shtub, A., Bard., J. and Globerson, S. (1995). Project Management - Engineering, Technology and Implementation. Prentice Hall International Editions. Englewood Cliffs, New Jersey, USA. Tavora Jr., J. L., Albuquerque, P. and Neves, M. (1997). Automas;ao Industrial - 0 Estligio de Pernambuco. In: Ensaios de Economia (Galvao, O. (Ed.», 217-230, Recife Grlifica e Editora, Recife, Brazil. Tavora Jr., J. L., Barbosa, C. Z. and Guimaraes, L. (1998). Incremento da A. Competitividade das Empresas por Investimentos em DimensOes Competitivas. In: I Er. ENEGEP Anals. ABEPRO, Rio de Janeiro, Brazil.
(6) where:
M I == player I espected minimum gain maximum value -
==maxmnE~Y X Fl Y
(7)
M II == player 11 espected maximum lost minimum value ==
m yptx E~Y
==min
(8)
X
being X and Y vectors with k-dimensional and m-dimensional probabilities, respectively. Then, for any game matrix, exists optimal strategies that:
•
•
Ea ,Y
*
(9)
This way the company's best strategy can be defined, in terms of investments in technology.
307