Advanced Manufacturing Technology Projects Justiication

19X

Advanced Manufacturing
Technology Projects Justification
Josef Hynek and Vclav
Janeek
University of Hradec Krlov, Faculty of Informatics and
Manageme
nt Czech
Republic
1. Introduction
Manufacturing companies worldwide are pressurized to undergo a
transformation processes in order to compete more effectively and under
these circumstances advanced manufacturing technology (AMT) is
considered to be a very important tool improving their ability to succeed
with their products on extremely competitive international markets. It is
widely believed that AMT has a great potential to provide the respective
companies by a whole variety of tangible as well as intangible benefits and
the reduction of production cost, increased volume of production, improved
quality as well as better safety at work are usually amongst the most
mentioned ones. On the other hand it is also generally understood that the
adoption of AMT requires a high level of initial investment and also the
level of risk associated with the implementation of the AMT project is
higher especially when the particular company lacks relevant experience.
Moreover the payback period of advanced manufacturing technology
investment is as a rule longer than the payback period of rather traditional
and usually less expensive technology. That is why the process of adoption
and utilization of advanced manufacturing technology has been carefully
studied and examined in last two decades and numerous studies were
published in order to provide some guidelines for managers of
manufacturing companies with the view of helping them to make good and
well-founded decisions.
We also strongly believe that it is important to study the respective
processes when the crucial decisions about AMT projects justification
resulting into their practical implementation or on the contrary their
rejection are made. The deep comprehension of the fundamentals of these
processes allows us to derive the appropriate pieces of knowledge that
could turn out to be helpful to technology specialists. We will present
selected results of two extensive surveys targeted on adoption and
utilization of advanced manufacturing technology that were carried out
recently in the Czech Republic in this chapter. We will focus on the phase of
advanced manufacturing technology project economic justification and
findings ascertained in the Czech Republic will be compared with the
outcomes of analogous surveys that were carried out earlier in the United
Kingdom and the United States of America. We will demonstrate there are

many problems of advanced manufacturing technology projects justification

that we have in common in all the above

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mentioned countries and we believe that technology specialists as well

as managers worldwide could learn from issues presented and
discussed here.
Based on our results we suppose that technology specialists
empowered in advance by broader insight of what kind of difficulties to
anticipate they should be able to prepare their AMT projects
accordingly and to improve their chance to get the management
approval for the project financing and its implementation.

2. Problem definition
We have already pointed out that advanced manufacturing technology is
rather expensive and the relevant project is associated with a higher
degree of risk. Therefore the proper and sound justification of the
investment decision is required. If the project is incorrectly undervalued
and it does not get through the justification process, the company will miss
the opportunity to derive potential benefits and its competitiveness might
be jeopardized. On contrary, if the project is overvalued because of
technology enthusiasm or because of the other reasons, it will be
implemented and then it is likely that it will not meet the initial
expectations. It will cause a disappointment and furthermore, it will
complicate the justification process for further AMT projects that will be
perceived through biased lens as the former experience was not a positive
one. Whatever the motives are, we can see that the both problems,
underestimation as well as overestimation of AMT projects, are terribly
wrong and unfortunate. That is why the appropriate methods used for AMT
projects justification and their proper utilization are extremely important.

It is widely accepted that there are three general groups of investment

appraisal techniques - economic approach, analytic approach and the
strategic approach. The economic justification approach seems to be
very natural and straightforward one and perhaps that is why it is so
wide-spread in relevant companies worldwide. AMT investment has to
be financially sound and viable because such a project competes for
limited resources with many other projects. Therefore various financial
and accounting justification techniques such as payback period (PP),
return on investment (ROI), net present value (NPV), and internal rate
of return (IRR) are frequently used by managers in order to assess the
economic aspects of the project. However, many researchers argue that
these methods support decisions that are sensible when viewed in
isolation and they do not always indicate the best action when we take
into account the whole organizational context (Chan et al., 2001).
Furthermore, these methods could be misleading when employing too
short payback periods or too high discount rates, neglecting various
benefits of the new AMT system or being unable to quantify them
properly in financial terms. To overcome the problems inherent in using
purely economic appraisal techniques, analytic and strategic appraisal
approaches have been promoted.
The analytic justification approaches are predominantly quantitative but
more complex than the economic techniques. It is believed that especially
when intangible benefits are taken into account, these techniques can be
far more appropriate by being more realistic, offering better reflection of
reality and taking more factors into consideration (Meredith & Suresh,
1986). Various scoring and ranking models could be used including some
traditional optimization techniques as well as risk analysis approaches. It is

clear that the transformation process from the decision problem to the
particular model involves a great deal of simplification and many important
factors could be easily overlooked. Furthermore,

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models involving various weights of individual factors are rather

vulnerable to bias brought along with subjective judgments.
The strategic justification approaches tend to be less technical that
economic and analytic methods, but it should be stressed that they are
quite often used in combination with them. The main advantage of the
strategic approaches is their direct linkage to the goals of the company.
Criteria such as meeting the business objectives, comparison with
competitors, the retention or attainment of competitive advantage and
industry leadership might be utilized as suitable factors for the relevant
decision making processes where AMT projects are scrutinized. Of course, it
would be unwise to assign too much importance to strategic justification
methods and to overlook the economic and tactical impact of the project.
That is why recent studies have promoted hybrid approaches based on
suitable combination of economic, analytic and strategic appraisal
techniques (see (Raafat, 2002)).
We will focus on the economic justification techniques in the rest of this
chapter. These techniques seem to be widely used in manufacturing
companies worldwide when the decision concerning AMT investments
should be made. It is quite natural because the cost of such project is
usually well known (although it could be very easily underestimated too)
and it is necessary to cover the cost by relevant revenues and various
benefits. We will show some typical problems related to the utilization of
economic justification techniques and we would like to stress that some
researchers have even claimed that these techniques are inappropriate for
evaluating AMT projects (Bucher & Lee, 2000).

3. Literature review
There are many interesting papers describing various issues of AMT
projects justification from different points of view. Perhaps the easiest
way to get quickly oriented in the field is to start with a comprehensive
bibliography on justification of AMT (Raafat, 2002) that cites over two
hundred articles from a variety of published sources. Chan et al. (2001)
concisely reviewed various approaches used in the process of
investment appraisal of AMT and concluded that improved approach
that would integrate the currently used evaluation approaches was
needed. Abdel-Kader & Dugdale (1998) wrote an interesting paper
reporting the results of a survey investigation into the investment
decision making practices of large UK companies and their study
focused especially on investments in AMT. On the other hand, Ariss,
Raghunathan & Kunnathar (2000) published their findings concerned
factors affecting the adoption of AMT in small manufacturing firms in
the United States. Hofmann & Orr (2005) presented the results of their
postal survey that was conducted amongst German manufactures and
one part of their questionnaire was devoted to the assessment of AMT
proposal too. Finally, we have decided to put forward the paper written

by Small (2006) that summarizes the results of investigation on the

justification of investments in AMT at US manufacturing plants.
We proudly acknowledge that the biggest motivation to start our own
investigations in the field of AMT in the Czech Republic came from the work
of Lefley & Wharton (1993), Lefley (1994), and Lefley & Sarkis (1997). These
authors examined carefully the investment appraisal processes in the
United Kingdom and the United States of America. They carried out
extensive surveys both in the UK and the USA in order to learn more about
current practices in respect of capital investment in AMT projects, to
identify if there were perceived difficulties in appraising these projects and
to elicit the opinions of senior executives on the

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various issues related to AMT projects evaluation. Among other things

they found out that AMT projects were evaluated by the simplest
financial criteria that seem to be unsuitable in this respect. Moreover,
they realized that financial directors do have many difficulties when
assessing various benefits of AMT projects, and finally, that investment
into AMT could be easily influenced by business culture where
managers are under pressure to produce short-term results.
The first study in this field in the Czech Republic (Lefley et al., 2004)
revealed that despite of many differences ascertained especially in the
extent as well as the level of evaluated and implemented technology,
where Czech manufacturing companies lagged behind their western
competitors, there were many problems that were common for
managers from all the three surveyed countries. These results fostered
our interest to conduct the second survey in the Czech Republic in 2005
in order to identify the relevant changes in the results that were
expected due to the quickly transforming Czech economy and its
openness. And finally, we undertook the last survey in the Czech
Republic in 2008 and we were interested in evaluation of AMT benefits
this time. The results of this investigation are being carefully analyzed,
processed statistically and we plan that we will be able to publish them
later this year. However, the survey results described below have been
derived from the first and the second survey only.

4. Survey methodology
To keep in line with the earlier UK and US surveys which were used as a
basis for comparison we have decided to employ the same questionnaire as
Lefley & Wharton (1993) utilized earlier for their investigations. We
translated their original English questionnaire into Czech language and
verified its localization by means of a pilot survey.

The original questionnaire comprised of three sections. Questions in

the first part were intended to establish the level of implementation of
AMT that had been achieved to date. Three levels of AMT were
identified which correspond to the levels of sophistication proposed by
Dornan (1987) and Meredith & Suresh (1986). Level 1 systems cover
stand-alone projects e.g. robots, NC machines, CAD etc. Level 2
systems are linked systems e.g. linking together of a number of CNC
machines, CAD/CAM etc., and Level 3 systems are fully integrated
systems including computer integrated manufacturing (CIM) and
flexible manufacturing systems (FMS).
In part number two of the survey the respondents were asked which
techniques and criteria were used in capital project appraisal and what
methods, if any, were used to measure and take into account project
risk. Information was obtained about the measures used to assess the
performance of senior executives as it appears that management in
general is reluctant to make long-term risky investments (such as those
in AMT) and prefers to invest in short-term projects that show early
profits and low risk (Lefley, 1994).
The third part of the survey was designed to explore opinions about the
need for AMT investment, the efficacy of the investment criteria used
and the extent to which other factors and considerations had a bearing
on capital investment decisions.
We added one more additional section to the questionnaire that was used
in the Czech Republic in 2005. It was devoted to the utilization of EVA

(economic value added) indicator in our companies as there were some

suggestions that there might be a relationship between utilization of this
concept and investment behavior of manufacturing companies.

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To assure a straightforward comparison of collected data in different

countries we carefully followed the methodology used by our predecessors.
The survey was aimed at those companies who, it was believed, would have
had some experience in the appraisal of AMT projects and that the person
who was asked to complete the questionnaire should have had a significant
contribution to make in final investment decision. A number of databases
were reviewed (with the main stress on data acquired from EDB and Czech
business register) to identify the largest manufacturing companies. As we
wanted to restrict the survey to 'large' Czech manufacturing organizations,
we finally chose sample size of 416 firms in 1999. Within our last survey we
have decided to include also the middle sized Czech manufacturing firms
and so we have increased the sample to 1030 in 2005.

Our first postal survey started at the end of 1998 and of the 416
questionnaires sent out 92 was returned giving a response rate of
22.12%. A usable sample of 79 completed questionnaires with a
response rate of 19.0% was considered to be reasonable under the
existing circumstances.
The second postal survey has been conducted from January till April
2005 and 1030 questionnaires were sent out and 135 have returned, 3
of them were unusable. We can see that the rate of response is 12.8%
only which is significantly lower rate that the one we achieved in 1999.
The reason that we did not reach comparable numbers with our former
survey could be explained by the fact that in our current survey the
middle sized firms were addressed too.
This article deals with the selected results derived from the first three
parts of our questionnaire only and due to limited space we cannot
dwell on the other issues here. Readers who are interested in further
details are advised to look at (Hynek & Janeek, 2007) or (Hynek &
Janeek, 2008).

5. Survey results and discussion

The main part of this section will be devoted to economic justification
of AMT projects, but we believe that the facts we will present here
should be perceived in a broader context. That is why we will outline
basic facts concerning the experience of Czech companies in the area of
AMT projects evaluation as well as the levels of implemented
technology that were achieved by surveyed companies. Furthermore,
selected personal opinions of managers will be put forward in order to
show some important problems and difficulties that could significantly
influence the chance of AMT projects to pass successfully through the
evaluation process.
5.1 Appraisal experience and level of AMT

First of all, from the point of view of further discussions concerning

AMT projects justification it could be worthwhile to learn more about
the experience of Czech manufacturing companies in the area of AMT
projects evaluation. We can see from table 1 that 82.3 % in year 1999
and 78.3 % in year 2005 of Czech manufacturing companies claimed
they had evaluated AMT projects. These numbers are significantly
lower than results described by Lefley and Sarkis (1997) who reported
that 99.3 % of UK and 96.7 of US companies stated that they had
evaluated AMT projects over the past ten years. It is clear that Czech
managers are less experienced in this respect. Moreover, we have to
take into account the time difference among the surveys.

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Furthermore, 84.8 % of Czech manufacturing companies in year 1999 and

92.3 % in year 2005 stated that they expect to consider such projects
within the next ten years. Once again, comparing these findings with 97.1
% of respondents in UK and 99.2 % in US (Lefley & Sarkis, 1997), there is a
significant difference here despite the fact that the latter result ascertained
in the Czech Republic might be considered as a positive signal evidencing
the raising awareness of the importance of AMT projects amongst Czech
managers.
AMT projects evaluated
Number of companies
Percentage
Total number of companies

Table 1. Companies that had evaluated AMT investment proposals

Secondly, we were interested in the level of manufacturing technology that
was taken into consideration and consequently the level of technology that
was actually implemented in the surveyed companies. There were some
thoughts that massive foreign investment into transforming and quickly
developing Czech economy during last two decades could accelerate the
processes of adoption of advanced technology in manufacturing companies.
The respective results are summarized in the table number 2 and 3 below.
% number of companies that
evaluated AMT project at:
Level 1
Level 2
Level 3

Table 2. Level of evaluation of AMT projects

% number of companies that
implemented AMT project at:
Level 1
Level 2
Level 3

Table 3. Level of implementation of AMT projects

It is clear that many projects that were originally planned on a higher

level were unable to reach the stage of practical implementation and
only the restricted version of the project (on a less sophisticated level
of technology) was carried out. There is an obvious positive tendency
that we can see in the table number 2 as the percentage of Czech
manufacturing companies that evaluated the higher level AMT project
proposals have been increased in 2005. The same is true for the
implementation stage but comparing these results internationally we
have to admit significant differences in respect of stages reached by
UK, US and Czech manufacturing companies in relation to the
evaluation and implementation of AMT projects. For example, taking
into account the results of British and US surveys (Lefley & Sarkis,
1997) it is unmistakable that significantly greater number of UK
(55.1%) and US companies (50.9 %) had evaluated the most
sophisticated projects (on the third level) while the Czech companies
have in majority only the first and the second level experience (we can
see from table 2 that only 18.3 % of companies reached the third level
technology evaluation experience).

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Moreover, based on the results shown in table number 3 it is evident

that Czech manufacturing companies are lagging behind their British
and American competitors in the adoption of advanced manufacturing
technology. The contrast is especially visible when focusing on the
most advanced fully integrated systems (only 18.0 % of Czech firms
implemented them comparing to the 43.0 % in the UK and 43.4 % in the
USA). Moreover, as we can see in table number 3 the situation in the
Czech Republic has not changed very much between 1999 and 2005 and
therefore the gap is still huge (Hynek & Janeek, 2007) . It is obvious
that the high level of foreign direct investment in the Czech Republic
did not fetch along anticipated acceleration of advanced technology
adoption in manufacturing companies and the achieved levels of AMT
implementations are lower than those previously observed in the UK
and USA. Unfortunately, as we will discuss below, we have found that
reasons for this unfavorable position of Czech manufacturing
companies does not lie with lack of investment money only but it might
be deeply rooted in management attitudes too.
5.2 AMT projects justification
Our findings that were described in the previous section clearly
demonstrated that the level of AMT evaluation as well as its utilization in
the Czech Republic is lower than the levels observed earlier in the UK and
the USA. Furthermore, we have indicated that the process of AMT adoption
might be influenced by management attitudes towards technology
investment in general and, of course, the particular evaluation and
justification approaches chosen by the relevant decision makers could be
seen as a direct and straightforward way of influencing the outcome of the
AMT projects evaluation processes. Some researchers and technology
promoters expressed their concerns over conventional appraisal techniques
such as payback, return on investment, or net present value, claiming that
these techniques are inadequate and biased against technological
investment in general (see, for example, Chan et al, 1999). Their criticism is
based on assumption that while the cost of the proposed AMT project is in
general easily quantifiable, there are many benefits that are very often
difficult to estimate. Moreover, as AMT projects tend to be of long-term
nature and sometimes even full deployment of particular AMT project
requires substantial time period, the profits cannot be expected in short
time and that is why the decisions on these projects require a long-term
perspective. Subsequently, if the chosen appraisal method is well known for
favoring short term profits, the relevant investment decision that is based
on such method is easily predictable.
Table 4 shows financial criteria used to assess AMT projects by financial
directors of Czech manufacturing companies. It is obvious that more than
60 % of Czech managers employ the simple non-discounted cash flow
payback period (non-DCF Payback) as the criterion to decide whether to
finance such a project or not (see table 4 for more details) and more than
70 % of them use discounted version of payback (DCF Payback). And it is
exactly payback criterion that is often criticized and attacked for its

inappropriateness regarding AMT projects. Naturally, this criterion

prioritizes projects capable of early repayment of initial expenses while as a
rule capital intensive AMT projects tend to be slow in generating positive
net cash flows. Indeed, many argue that the utilization of the payback
method virtually guarantees the rejection of projects such as AMT (Lefley et
al, 2004). On the other hand it has to be stressed, that the problem is not
caused by the criterion itself, but it arises when a short payback period is
requested by the company management. As we can see in

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(DeRuntz and Turner, 2003), while the western companies generally accept
a payback period of 1 to 5 years as a reasonable amount of time to recover
the initial cost, the Japanese companies are much more flexible in this
respect as they use the payback method more as a performance measure
than as a rigid financial criterion that must be met.

Financial appraisal criteria used

IRR/yield
NPV
DCF Payback
Other DCF
Non-DCF Payback
ARR
Other non-DCF

Table 4. Financial appraisal criteria

It has been anticipated that many companies would use more than one
criterion and that is why we have made inquiries regarding the number
of financial appraisal criteria being used and their importance. The
results are summarized in tables 5 and 6. It should be noted that
percentages given in table 6 below add up to more than 100 % because
some respondents gave equal first ranking to more than one technique.

Number of methods used

1
2
3
4 or more

Table 5. Number of different financial appraisal methods used

Criteria ranked first or first equal

IRR/yield
NPV
DCF Payback
Other DCF
Non-DCF Payback
ARR
Other non-DCF

Table 6. Percentage of companies ranking criteria first

It is definitely a positive ascertainment that more than 40 % of financial
directors use more than two financial criteria when assessing an AMT
project proposal. On the other hand it is evident that every fifth company
relies on single criterion only and here of course the important issue is

which criterion is employed in these cases. We can see from table 6 that
Czech managers without any doubt prefer both versions of payback
criterion. Moreover, within our last survey the above mentioned and
criticized simple non-discounted cash flow payback period (non-DCF PB) has
been ranked as the most important one in the Czech Republic (62.1 % in
2005) while discounted version of this criterion came second (58.1 %). It

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should be emphasized that there is a huge gap afterwards as the third

most important criterion (net present value) maintained its position
from 1999 but it was ranked as the most important criterion by 17.7 %
of Czech managers only in 2005.
Comparing these results with earlier ascertainments of Lefley and
Sarkis (1997) we could find out that non-discounted cash flow payback
period (non-DCF PB) was ranked as the number one criterion in the
United Kingdom (38.5 %). American managers inclined to use more
sophisticated methods that make allowance for the time value of money
and that is why DCF Payback (ranked first by 33.3 % of managers) was
closely followed by internal rate of return (IRR) that was preferred by
28.2 % of US managers. From this point of view it is quite interesting
that IRR is rather popular amongst British managers too (28.0 %), while
only 5.4 % of Czech managers in 1999 and 9.7 % in 2005 marked it as
the most important criterion.
It should be noted that the higher number of methods and techniques
used within AMT projects evaluation process should be facilitated by
various pieces of software. Therefore, companies were asked if
spreadsheet packages, dedicated software or other computer aids were
used in the process of evaluating advanced manufacturing technology
investment proposals and the results are shown in table 7. We can see
that a very high proportion of Czech companies use spreadsheet
software (75.7 % in 1999 and even 89.4 % in 2005). Approximately one
out of six managers employs some dedicated computer software, while
other computer aids were reported to be used semi-occasionally.

Computer aids
Spreadsheets
Dedicated software
Other computer aids

Table 7. Use of computer aids

Of course, it was anticipated that conventional criteria are widely used and
therefore the respondents were asked to indicate, based on their own
experience and judgment, whether or not they agreed with the statement
that, conventional appraisal methods such as Payback, NPV and IRR
favored short term projects. According to (Lefley & Sarkis, 1997) more
than 70 % of companies in the UK and USA agreed with the statement, while
significantly fewer in the Czech Republic (55.6 % in 1999 and 53.2 % in
2005) were of the same opinion. The relatively low proportion of Czech

managers who thought conventional techniques favor short term

investments seems to support the above mentioned views that conventional
financial appraisal methods do not automatically favor short-term projects
and that these criteria could be used for AMT project proposal evaluation
too. Of course, these techniques should be used wisely because when short
payback periods or unjustifiably high discount rates are used then a shortterm bias can easily occur.

In this respect it could be interesting to find out if there is a tendency

to set up some tight hurdle rates for AMT projects justification in
companies. The respondents were asked to express their level of
agreement with the relevant statement and their responses are
summarized in table 8.
We can see that nearly every second manager agreed with the statement
and admitted that there is a tendency to set up very tight hurdle rates
which could indicate rather disadvantageous starting position for AMT
projects. High hurdle rates in combination with

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the above mentioned traditional appraisal methods could easily result

in the AMT project rejection. On the other hand we have to say that in
many cases the high hurdle rates are used by managers in order to
make appropriate adjustment for a higher degree of risk and
uncertainty that relates to AMT projects and it is rather typical
approach taken by many companies worldwide when evaluating more
risky investment project. Hence such behavior should not be
automatically perceived as deliberate intention to discriminate against
AMT projects especially when the particular company lacks experience
with the project proposal that is under consideration.
There is a tendency to set too high
a hurdle rate for AMT projects.
Agree
Disagree

Table 8. There is a tendency to set too high hurdle rates for AMT
projects
Some researchers as well as practitioners advocate for exploitation of
non-financial criteria and rather strategically oriented criteria believing
that there is too much importance attached to conventional techniques.
That is why the respondents were asked to express, based on their own
experience and judgment, whether or not they agreed with the
statement that, too much importance is attached to conventional
techniques. Their responses are presented in table 9.
Too much importance is attached
to conventional techniques
Agree
Disagree

Table 9. Too much importance is attached to conventional techniques

It is clear that Czech managers do not feel like having a serious

problem with conventional appraisal techniques utilization and their
views are perfectly conformable with the opinions of British and US
managers where also slightly less than five out of ten managers agreed
with the above presented statement that too much importance is
attached to conventional appraisal techniques.
It was also noted (Hynek & Janeek, 2007) that a high proportion of
companies in all three countries (83.4 % on an average) referred back for
re-appraisal those proposals that had failed the initial financial appraisal
(the results concerning the situation in the Czech Republic are displayed at
table 10) . Of course, the introduction of a referral process into the
investment justification procedure creates further opportunity for
managers to examine the whole proposal carefully once more, to take into
account strategic considerations, re-assess and quantify potential benefits
or even adjust financial criteria that has to be fulfilled (for example, by
reduction of required payback period, or by lowering the pertinent discount
rates). On the other hand, it is the very same moment when exactly
opposite measures and actions could be taken and there is a large space in
which the accept/reject decision could be manipulated. It could be
anticipated that in these cases the formal appraisal procedure transforms
itself into a ritual where the final decision is based on other influences,
which might be of a political, rather than an economic nature. In this
context we should put and

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understand the interesting fact that more than eight out of ten
respondents confirmed the referral procedure.

Project proposals re-evaluated

Agree
Disagree

Table 10. Percentage of proposals re-appraised

Having admitted that there might be some political influence in the
referral procedure and in the projects evaluation process in general it
is natural to ask to which extent do senior executives use their
dominant role based on their formal as well as informal authority in
order to affect the relevant decisions related to AMT investment in both
directions. That is the reason why the respondents were asked to
express their level of agreement with the statement that more
importance is attached to the experienced judgment of senior
management than to financial indicators. The results are shown in table
11 and we can see that slightly over fifty percent of Czech respondents
agreed with the statement in 1999 (51.9 %) and their number declined
further in 2005 (45.7 %) . Nevertheless, it should be stressed that the
number of managers who agreed with the statement is relatively high
overall and it is clear the concerns expressed by some researchers as
well as practitioners seems to be legitimate.
More importance is attached to
the experienced judgment of
senior management than to
financial indicators
Agree
Disagree

Table 11. More importance is attached to the experienced judgment of

senior management than to financial indicators
To conclude this section we would like to stress that despite the mentioned
criticism the traditional financial appraisal techniques play important role in
the process of AMT projects evaluation and justification. We have shown
that managers prefer the simplest techniques like payback period that are
very easy to understood and interpret, but we have also mentioned that
there is a danger of bias towards projects delivering short-term profits
when these techniques are used mechanically, shortsightedly, and without
broader impact considerations. Furthermore, the risk that AMT projects
would be disadvantaged by utilization of these simple techniques could be
moderated by utilization of several methods and we have shown that more

than eight out of ten projects are re-evaluated if they failed to pass through
the initial financial evaluation process.

5.3 Personal opinions of managers

We have already mentioned that the process of AMT justification might be
seriously influenced by management attitudes towards technology
investment in general. AMT is often considered as one of critical factors
that plays important role in the process of acquiring competitive
advantage. It seems to be a widely accepted opinion but do managers

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really think so? We wanted to verify this ascertainment and the

respondents were asked to indicate based on their own experience and
judgment, whether or not they agreed with the statement that noninvestment in AMT was a high risk strategy. Responses to this
statement were summarized in table number 12 and we can
immediately see there that surprisingly large proportion of executives
in the Czech Republic (33.3% in 1999 and 30.7 % in 2005) disagreed
that non-investment in AMT is a high-risk strategy.
Non-investment in AMT
is a high-risk strategy
Agree
Disagree

Table 12. Non-investment in AMT is a high-risk strategy

Comparing these findings with the results of Lefley and Sarkis (1997)
who reported more than the decade ago than 74.8 % in the UK and 81.9
% in the US agreed with the statement that non-investment in AMT is a
high-risk strategy, it is clear that significantly higher proportion of
Czech managers do not consider AMT as strategically important
investment. It is a rather surprising ascertainment taking into account
that Czech manufacturing companies after transformation of our
economy had to find new market opportunities for their products. Many
of them oriented themselves mainly on strongly competitive markets in
Western Europe, many others were sold to foreign investors and it was
anticipated that new owners would bring new technologies too. It is
difficult to generalize, but as we concluded in (Hynek & Janeek, 2006a)
it is likely that many companies have apparently decided to rely on
skilful and relatively cheap labor force and that is why the relevant
companies seems to be somewhat slow in AMT adoption. Moreover, we
are afraid that in todays mutually interlinked and quickly changing
global world the exploitation of such strategy sounds like a rather
shortsighted decision.
Obviously it is not easy to change management attitudes towards AMT
investment and perception of its importance from day to day.
Fortunately enough, there are some other issues we should pay our
attention too and we think that there might be some space where
improvement of the current state of art is more feasible. Moreover, we
will show that while there are significant differences in perception of
the strategic importance of AMT investment in general between
managers working under conditions of transforming Central European
economy and managers representing two of the most developed
countries in the world, there are some problems they have in common
too. For example, we have learned that many AMT projects are likely to
be rejected just because the lack of understanding of what the
contribution of new technology really is.
We could see in table number 13 that more than 60 % of Czech
executives agree with the statement that it is difficult to assess all
potential benefits of AMT investments (67.1 % in 1999 and 60.3 % in
2005). The level of agreement with the relevant statement was even
higher in the UK (81.6 %) while 63.9 % of American managers shared
the view (Lefley & Sarkis, 1997).
Thinking about reasons that we can see three possible explanations of this
unfavorable situation. First of all, there are some benefits where managers
seems to be unable to foresee and to assess their impact and magnitude

there because of lack of experience, lack of relevant input data etc.

Secondly, the company is not sure whether some particular benefit will be
realized at all and thus the benefit falls into this category and stays there
without any

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Advanced Manufacturing Technology Projects Justiication

attempt to quantify it. And thirdly, it is often believed that brand new
technology will bring along some new benefits and completely
unexpected benefits that are impossible to predict before the
technology reach the stage of regular utilization. While the first
problem seems to be based on lack of experience and administrativetechnical reasons, the other two explanations seems to be much more
of a speculative nature.
AMT investments are difficult to
assess because they have
non-quantifiable benefits
Agree
Disagree

Table 13. AMT investments are difficult to assess

However, whatever reason applies it helps to create the feeling that
there are some non-quantifiable benefits that were not taken into
account. And we will demonstrate that there is a problem related to
proper assessment of non-quantifiable benefits and their expression in
financial terms which means that these benefits will not be taken into
relevant economic calculations.
We can see in table 14 that large majority of Czech managers (90.1 % in
1999 and 81.7 % in 2005) agreed with the statement that not all potential
benefits of AMT are taken into account because they are difficult to quantify
in financial terms. It should be noted that these numbers are in compliance
with the earlier findings of (Lefley & Sarkis, 1997) who reported that 80.9 %
of British managers agreed with the statetems and 81.2 % of American
managers did so. It is important to repeat here that the respondents of our
surveys were financial directors and decision makers of surveyed
manufacturing companies. Recalling back this fact we can see that the
situation is very serious and some measures should be taken in order to
make sure that AMT project proposals have a fair chance to get through the
justification process and to get the pertinent investment approval.
Not all potential benefits of AMT
are taken into account because
they are difficult
to quantify in financial terms
Agree
Disagree

Table 14. Not all benefits are taken into account

According to Primrose (1991) people advocating investment in AMT have

made considerable efforts to identify the company-wide benefits which it
can produce. The problem is that they describe these benefits always in
general terms, such as the following: increased flexibility of production,
better-quality products, improved documentation, ability to respond to
market needs, need to keep up with competition, improved company image,
better management control, obtaining experience of new technology, etc.
Managers usually start with the belief that a particular aspect of AMT could
be used in their department and they would select an application which was
aimed at improving operating efficiency. Having defined the required
specification, they try to justify the expenditure afterwards. And now it is
necessary to identify the benefits. The nature of intangible benefits is such
that they do not have to appear in the department where the investment is
made, but occur

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Mechatronic Systems, Applications

elsewhere in the company. In addition, the relationship between cause

and effect is indirect, so that their magnitude has to be estimated
rather than directly calculated. In fact there are two distinct problems
and these must be dealt with separately. First of all the form in which
the benefit is quantified, and secondly estimating the magnitude of the
benefit (see (Primrose, 1991) for more details).

6. Conclusions
The presented selected results of two AMT surveys focused on the
specific issues of advanced manufacturing technology justification that
were carried out in the Czech Republic demonstrate that the economic
justification of the relevant projects is definitely not an easy process.
Moreover, there are many problems that seem to be common for
managers in Central Europe who has to face the conditions of
transforming economy and managers from technologically most
developed economies in the world.
First of all, our results clearly demonstrate that Czech manufacturing
companies are lagging behind their British and American competitors in
the adoption of AMT and the optimistic prognoses that the high level of
foreign direct investment will bring along acceleration of AMT adoption
as well as the latest technology has not been proved yet.
We have also shown some pieces of evidence that AMT projects might be
very easily knowingly as well as unknowingly disadvantaged because of a
whole spectrum of reasons. Based on our results it is clear that managers
exploit rather unsuitable financial criteria, too much importance is given to
the simplest methods that clearly prioritize short-term outcomes and thus
short-term projects. British and American managers seem to be more aware
of this fact and perhaps it is the reason why they tend to utilize more
sophisticated criteria and greater number of criteria in general than
managers in the Czech Republic do. However, we have stressed that the
problems could be avoided if the criteria are used wisely and we have
mentioned as an example the difference between payback period utilization
in western companies on one side, and Japanese companies on the other
one.

We have seen that more than eight of out ten AMT projects are reevaluated if they failed the initial financial appraisal. As the result of
this phenomenon many projects are carried out only partially. It could
be the restricted version of the original project that lacks the originally
intended level of integration, or it could be done at the expense of the
originally planned level of technology used. In both cases there is a
danger that restricted version of the originally planned AMT project will
be unable to deliver originally planned benefits and the project will not
live up the expectations. Furthermore, we have pointed out that
introduction of the referral process establishes ground for various
influences that might be of a political rather than economic nature.
Finally, we have examined management attitudes towards AMT projects. We
have realized that comparing our results with the outcomes of earlier
survey conducted in the UK and USA, significantly higher proportion of
Czech managers do not consider AMT as strategically important investment.
On the other hand, there are some serious issues that significantly
influence the process of AMT adoption and these issues are common for the
managers from all three surveyed countries. First of all, two thirds of
managers agreed with the statement that AMT investments are difficult to

assess because they have non-quantifiable benefits. Secondly, over eighty

percent of respondents supported the view that not all potential benefits of
AMT are taken into account because they are difficult to quantify

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Advanced Manufacturing Technology Projects Justiication

in financial terms. Putting these ascertainments in other words we can see

that there is a clear lack of understanding of what the contribution of the
proposed AMT project really is. Moreover, managers are fully aware of the
fact that some benefits are not taken into their calculations because they
are unable to estimate them and express them in financial terms. We have
already expressed (Hynek & Janeek, 2006b) our view that there is an
important space and great opportunity right here that should be taken by
technology specialists. They should be able to identify, describe and
explain the complex benefits of a particular AMT project and hereby
prepare better background material for financial executives. Their
involvement in this phase could assure that various tangible as well as
intangible benefits will be taken into consideration, properly assessed and
consequently expressed in financial terms. Of course, this task could be
fulfilled only by technology experts who are able to see the particular
technology not simply from technological point of view. Their knowledge
and broader understanding of technology benefits for the company as a
whole could considerably improve the chances of AMT projects to get the
management approval.

Of course, it should be also accentuated that economic approach to

AMT projects justification is widely used but it is not the single
approach and we recommend employing strategic and analytical
approaches too. These approaches do have their own drawbacks too
and therefore wise combination of different approaches should be
encouraged in order to make sure that AMT project proposals are
assessed properly. This is the only way providing enough opportunities
to avoid later disappointment.

7. Acknowledgement
This research has been supported by the Grant Agency of the Czech
Republic project No. 402/07/1495.

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Mechatronic Systems Applications

Edited by Annalisa Milella Donato Di Paola and Grazia Cicirelli

ISBN 978-953-307-040-7
Hard cover, 352 pages
Publisher InTech
Published online 01, March, 2010
Published in print edition March, 2010
Mechatronics, the synergistic blend of mechanics, electronics, and computer science, has evolved over the past twenty five
years, leading to a novel stage of engineering design. By integrating the best design practices with the most advanced
technologies, mechatronics aims at realizing high -quality products, guaranteeing at the same time a substantial reduction of
time and costs of manufacturing. Mechatronic systems are manifold and range from machine components, motion
generators, and power producing machines to more complex devices, such as robotic systems and transportation vehicles.
With its twenty chapters, which collect contributions from many researchers worldwide, this book provides an excellent
survey of recent work in the field of mechatronics with applications in various fields, like robotics, medical and assistive
technology, human-machine interaction, unmanned vehicles, manufacturing, and education. We would like to thank all the
authors who have invested a great deal of time to write such interesting chapters, which we are sure will be valuable to the
readers. Chapters 1 to 6 deal with applications of mechatronics for the development of robotic systems. Medical and
assistive technologies and human-machine interaction systems are the topic of chapters 7 to 13.Chapters 14 and 15 concern
mechatronic systems for autonomous vehicles. Chapters 16-19 deal with mechatronics in manufacturing contexts. Chapter
20 concludes the book, describing a method for the installation of mechatronics education in schools.

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