●
Cost. The new system is certain to require fewer direct operatives to staff the warehouse,
but will need extra engineering and maintenance support. Overall, however, lower labour
costs are likely.
Does the technology give an acceptable financial return?
Assessing the financial value of investing in process technology is in itself a specialized subject. And while it is not the purpose of this book to delve into the details of financial analysis,
it is important to highlight one important issue that is central to financial evaluation: while
the benefits of investing in new technology can be spread over many years into the future,
the costs associated with investing in the technology usually occur up front. So we have to
consider the time value of money. Simply, this means that receiving €1,000 now is better than
receiving €1,000 in a year’s time. Receiving €1,000 now enables us to invest the money so
that it will be worth more than the €1,000 we receive in a year’s time. Alternatively, reversing
the logic, we can ask ourselves how much would have to be invested now to receive €1,000 in
one year’s time. This amount (lower than €1,000) is called the net present value of receiving
€1,000 in one year’s time.
For example, suppose current interest rates are 10 per cent per annum; then the amount
we would have to invest to receive €1,000 in one year’s time is:
:1,000 *
1
= :909.10
(1.10)
So the present value of €1,000 in one year’s time, discounted for the fact that we do not have
it immediately, is €909.10. In two years’ time, the amount we would have to invest to receive
€1,000 is:
:1,000 *
1
1
1
*
= :1,000 *
= :826.50
(1.10)
(1.10)
(1.10)2
The rate of interest assumed (10 per cent in our case) is known as the discount rate. More
generally, the present value of € x in n years’ time, at a discount rate of r per cent, is:
:
x
n
(1 + r>100)
Worked example
The warehouse which we have been using as an example has been subjected to a costing and
cost savings exercise. The capital cost of purchasing and installing the new technology can be
spread over three years, and from the first year of its effective operation, overall operations
cost savings will be made. Combining the cash that the company will have to spend and the
savings that it will make, the cash flow year by year is shown in Table 8.2.
Table 8.2 Cash flows for the warehouse process technology
Year
0
1
2
3
4
5
6
7
Cash flow (€000s)
–300
30
50
400
400
400
400
0
Present value
(discounted at 10%)
–300
27.27
41.3
300.53
273.21
248.37
225.79
0
However, these cash flows have to be discounted in order to assess their ‘present value’.
Here the company is using a discount rate of 10 per cent. This is also shown in Table 8.2. The
effective life of this technology is assumed to be six years:
240
PART TWO DESIGN
total cash flow (sum of all the cash flows) = €1.38 million
However,
net present value (NPV) = €816,500
This is considered to be acceptable by the company.
Calculating discount rates, although perfectly possible, can be cumbersome. As an alternative, tables are usually used such as the one in Table 8.3.
So now the net present value, P = DF * FV
where:
DF = the discount factor from Table 8.3
FV = future value
To use the table, find the vertical column and locate the appropriate discount rate (as a percentage). Then find the horizontal row corresponding to the number of years it will take to
receive the payment. Where the column and the row intersect is the present value of €1. You
can multiply this value by the expected future value, in order to find its present value.
Table 8.3 Present value of €1 to be paid in future
Years
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1
€0.970
€0.962
€0.952
€0.943
€0.935
€0.926
€0.918
€0.909
2
€0.942
€0.925
€0.907
€0.890
€0.873
€0.857
€0.842
€0.827
3
€0.915
€0.889
€0.864
€0.840
€0.816
€0.794
€0.772
€0.751
4
€0.888
€0.855
€0.823
€0.792
€0.763
€0.735
€0.708
€0.683
5
€0.862
€0.822
€0.784
€0.747
€0.713
€0.681
€0.650
€0.621
6
€0.837
€0.790
€0.746
€0.705
€0.666
€0.630
€0.596
€0.565
7
€0.813
€0.760
€0.711
€0.665
€0.623
€0.584
€0.547
€0.513
8
€0.789
€0.731
€0.677
€0.627
€0.582
€0.540
€0.502
€0.467
9
€0.766
€0.703
€0.645
€0.592
€0.544
€0.500
€0.460
€0.424
10
€0.744
€0.676
€0.614
€0.558
€0.508
€0.463
€0.422
€0.386
11
€0.722
€0.650
€0.585
€0.527
€0.475
€0.429
€0.388
€0.351
12
€0.701
€0.626
€0.557
€0.497
€0.444
€0.397
€0.356
€0.319
13
€0.681
€0.601
€0.530
€0.469
€0.415
€0.368
€0.326
€0.290
14
€0.661
€0.578
€0.505
€0.442
€0.388
€0.341
€0.299
€0.263
15
€0.642
€0.555
€0.481
€0.417
€0.362
€0.315
€0.275
€0.239
16
€0.623
€0.534
€0.458
€0.394
€0.339
€0.292
€0.252
€0.218
17
€0.605
€0.513
€0.436
€0.371
€0.317
€0.270
€0.231
€0.198
18
€0.587
€0.494
€0.416
€0.350
€0.296
€0.250
€0.212
€0.180
19
€0.570
€0.475
€0.396
€0.331
€0.277
€0.232
€0.195
€0.164
20
€0.554
€0.456
€0.377
€0.312
€0.258
€0.215
€0.179
€0.149
CHAPTER 8 PROCESS TECHNOLOGY
241
Worked example
A health-care clinic is considering purchasing a new analysis system. The net cash flows from
the new analysis system are as follows:
Year 1: -€10,000 (outflow of cash)
Year 2: €3,000
Year 3: €3,500
Year 4: €3,500
Year 5: €3,000
Assuming that the real discount rate for the clinic is 9 per cent, using the net present value
table ( Table 8.4), demonstrate whether the new system would at least cover its costs. Table
8.4 shows the calculations. It shows that, because the net present value of the cash flow is
positive, purchasing the new system would cover its costs, and will be ( just) profitable for the
clinic.
Table 8.4 Present value calculations for the clinic
Year
Cash flow
Table factor
Present value
1
(€10,000)
*
1.000
=
(€10,000.00)
2
€3,000
*
0.917
=
€2,752.29
3
€3,500
*
0.842
=
€2,945.88
4
€3,500
*
0.772
=
€2,702.64
5
€3,000
*
0.708
=
€2,125.28
Net present value =
€526.09
HOW ARE PROCESS TECHNOLOGIES IMPLEMENTED?
Implementating process technology means organizing all the activities involved in making
the technology work as intended. No matter how potentially beneficial and sophisticated
the technology, it remains only a prospective benefit until it has been implemented successfully. So implementation is an important part of process technology management. Yet it is not
always straightforward to make general points about the implementation process because it
is very context dependent. That is, the way one implements any technology will very much
depend on its specific nature, the changes implied by the technology and the organizational
conditions that apply during its implementation. In the remainder of this chapter we look
at three particularly important issues that affect technology implementation: the idea of
resource and process ‘distance’; the need to consider customer acceptability; and the idea that
if anything can go wrong, it will.
Resource and process ‘distance’
The degree of difficulty in the implementation of process technology will depend on the
degree of novelty of the new technology resources and the changes required in the operation’s
processes. The less that the new technology resources are understood (influenced perhaps by
the degree of innovation), the greater their ‘distance’ from the current technology resource
base of the operation. Similarly, the extent to which an implementation requires an operation
242
PART TWO DESIGN
Figure 8.6 Learning potential depends on both technological resource and process ‘distance’
to modify its existing processes, the greater the process ‘distance’. The greater the resource
and process distance, the more difficult any implementation is likely to be. This is because
such distance makes it difficult to adopt a systematic approach to analysing change and learning from mistakes. Those implementations which involve relatively little process or resource
‘distance’ provide an ideal opportunity for organizational learning. As in any classic scientific experiment, the more variables that are held constant, the more
confidence you have in determining cause and effect. Conversely, in
✽ Operations principle
an implementation where the resource and process ‘distance’ means
The difficulty of process technology
that nearly everything is ‘up for grabs’, it becomes difficult to know
implementation depends on its degree
what has worked and what has not. More importantly, it becomes
of novelty and the changes required in
difficult to know why something has or has not worked.8 This idea is
the operation’s processes.
illustrated in Figure 8.6.
Customer acceptability
When an operation’s customers interact with its process technology it is essential to consider
the customer interaction when evaluating it. If customers are to have direct contact with
technology, they must have some idea of how to operate it. Where customers have an active
interaction with technology, the limitations of their understanding of the technology can be
the main constraint on its use. For example, even some domestic technology such as DVD
recorders cannot be used to their full potential by most owners. Other customer-driven technologies can face the same problem, with the important addition that if customers cannot
use technologies such as internet banking, there are serious commercial consequences for a
bank’s customer service. Staff in manufacturing operations may require several years of training before they are given control of the technology they operate. Service operations may not
have the same opportunity for customer training. Walley and Amin9 suggest that the ability of
the operation to train its customers in the use of its technology depends on three factors: complexity, repetition, and the variety of tasks performed by the customer. If services are complex, higher levels of ‘training’ may be needed; for example, the technologies in theme parks
and fast-food outlets rely on customers copying the behaviour of others. Frequency of use is
CHAPTER 8 PROCESS TECHNOLOGY
243