AMT brings with it benefits which can be quantified in monetary terms and benefits that are qualitative and strategic. For instance, in manufacturing automation, involving robotics and automated manufacturing systems, some of the benefits are listed below: 

I Quantitative

·          Increase in productivity

·          Reduction in manpower costs

·          Reduction in operating costs

·          Reduction in overhead costs  

II Qualitative

·          Process Improvement

·          Quality Improvement

·          Operator Comfort

·          Safety Improvement   

III Strategic

·          Competitive Advantage – resulting from quick scale-ups of production volumes, meeting delivery schedules

·          Operator dependence, long term liabilities and industrial relations issues

·          Technological –  ability of the organization to expand usage of new technology rapidly when it becomes the key driver

·          Risk Abetment – Mitigating risk of operator costs, availability, quality for the long term. 

Conventional capital investment justification budgeting techniques assign a zero value to qualitative and strategic benefits. But “there is no reason to value them at zero in a capital expenditure analysis. Zero is after all no less arbitrary than any other number. Conservative accountants who assign zero values to many intangible benefits prefer being precisely wrong to being vaguely right. Managers need not follow their example.”(Kaplan, 1986). 

Alternative methodologies have been presented earlier by Kaplan, Sinason and others; this paper proposes an easy to apply practitioner’s technique, based upon three established principles from these earlier studies:  

·          First principle - Investment in AMT is justified when the “Hurdle Rate” (expected benefit of investment) is equal to the cost of investment (financial + running cost). 

·          Second Principle - The present manufacturing process (without AMT) needs to be valued lower to factor in the currently absent qualitative benefits, when comparing with the future process under evaluation (with AMT). 

·          Third Principle - The strategic benefits provided in a future process (with AMT) need to be valued higher, when comparing with the present process (without AMT). 

The stumbling block while applying the last two principles is the inability to quantify the concepts of “valued higher or lower”. The proposed technique overcomes this by using three concepts from Behavioural Economics. 

1.       “Loss aversion” refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Quantification of the money value of a utility is possible when the decision maker views the loss or discount associated with not having the particular utility. E.g. looking at a qualitative feature which has no established market value, it is easier for a respondent to estimate the discount needed for a commodity without that feature, rather than to estimate the “additional” (premium) money he is willing to pay for that feature. 

2.       “Anchoring” – when faced with a situation where an unknown value is to be estimated, people take recourse to initial anchors as benchmarks. Assigning an abstract, absolute value is much more difficult and inaccurate than estimating value relative to a benchmark. E.g. “how much will you pay for air conditioned car (absolute value)”, as opposed to “how much more will you pay for an air conditioned car, compared to a non air conditioned car (relative value)?” 

3.       “Status quo bias” refers to the preference for individuals to remain at the ‘status quo’, because the disadvantages of leaving it loom larger than the advantages. Bias in judgment arising from pre-established positions should be removed.   

To demonstrate the practicability of the above technique for quantifying “qualitative” benefits, some experiments were conducted as a pilot testing project[1]. Respondents were manufacturing managers and purchasing managers, who typically face the task of justification. 

* To quantify “quality” benefit, two samples were shown - one manually welded part and one robotically welded. As respondents were not being faced with a decision of investment, the negative impact of status quo bias was eliminated. The question:How much lower price would justify your choice in favor of a machine that produces a part of this quality (the manual welded part) than this (robotically welded part) quality?Answers varied from 30% to 50%, (some even answered, “If I have an alternative of a machine producing good quality, I would not buy a machine producing substandard quality, no matter how much cheaper.”). These values represent the “discount” for qualitative benefit. 

* To quantify “predictability” in quality:How much discount would you need to justify a machine that produces 97% accurate parts, with 3% parts requiring rework or rejection as opposed to that producing 100% accurate parts?The answers varied from 20%-50%, contrasted with the premium of justification questions, where answers typically focused on “cost of rework / rejection”. 

* To quantify safety:How much discount would you need to justify a machine that is somewhat unsafe, with a possibility of one accident to worker each yearAs expected, the answer was “infinite”, “we would not accept an unsafe machine”, but yet with sufficient stimulation and lowering the perceived risk of the accident to a “minor” accident, estimates lay between 30 to 50%. Significantly again, for many manual processes, one or two minor accidents per annum is commonplace. 

No matter what the “qualitative benefit”, it is always possible to pose a question as above, to allow estimating a “discount” for not getting the benefit. The same technique can be adopted for strategic decisions, which are typically done at corporate management levels. Here, questions are presented in form of a premium for a “strategic value”. 

*To quantify competitive advantage:

How much higher overall capital investment will justify gaining an advantage that you can respond to a change in the market requirement 3 months before than your competitor?

Corporate decision makers attach a high value (10-30%) for first mover advantage. (Note that 3-6 months represents the typical difference in retooling, retraining and ramping up production when there is a significant product change between manual setups and flexible automation with robotics.) In today’s competitive world, this advantage can cause a severe impact on the organization, justifying a double digit percentage of perceived value. 

* To quantify operator dependence:

How much higher overall capital investment will justify having no uncertainty of human work force availability, skills and industrial relations issues?

Given the present scenario of increasing cost and attrition issues, corporate decision makers attach a value of over 20-30% to overcome manual process dependence. 

The proposed step-by-step approach is: 

Apply First Principle:

·          Tabulate Costs

·          Investment

·          Cost of Investment (finance cost – per annum)

·          Running costs – per annum

·          Compute the “Hurdle Rate” = (Finance Cost + Running Cost) / Investment

·          Tabulate the predicted benefits – quantifiable, qualitative & strategic

·          Compute quantitative benefits in the form of financial benefit. Compute ROI (benefit / investment).

·          If ROI exceeds the “hurdle rate”, investment is justified (even with conventional techniques) - no further analysis required.

·          If not, move to second step.

Apply Second Principle:

·          Estimate discount factors, for absence of Qualitative benefits as above. Use discount factors multiplicatively to arrive at cumulative discount factor (thus 10%, 15%, 6% discounts should be computed as 0.9 x 0.85 x 0.94 = 0.72 resulting in 28% cumulative discount)

·          Discount the AMT investment amount by this discount, and recalculate the hurdle rate. If the ROI is higher than hurdle rate, investment is justified.

·          If not, move to third step.

Apply Third Principle:

·          Perform strategic analysis. This is the last step, it requires corporate management involvement.

·          Estimate strategic value, by asking questions as given.

·          Discount the investment in AMT further by the strategic value premium, and recalculate the hurdle rate.

·          If the benefits are higher than hurdle costs, investment is justified. 

Whether as exporters or in competition with imported goods, increasing integration with world markets has one message for Indian firms:  wake up to the challenges of a competitive environment and seek strategic investments to improve market stature internationally. The technique presented here allows managers to make a quantitative assessment of the benefits and strategic value of advanced technologies, and take an informed investment decision. By posing challenging questions, managers can evaluate for themselves the true risks of not investing in emerging technology. As Henry Ford succinctly put it, “If you need a machine and don’t buy it, then you pay for it without getting it.” While caution is justified while making large capital investments, the risk of not investing can be ignored no longer.