Page 246 - Operations Strategy

EvAluATing PRoCEss TECHnology 221

Figure 6.12 assessing the ‘acceptability’ of a process technology

Operations resource Market
capabilities requirements

Is the process How does the process
technology . . . Proposed technology a ect . . .
Scarce? process Quality?
Di cult to move? technology Speed?
Di cult to copy? Dependability?
Di cult to Flexibility?
substitute for? Cost?

Financial evaluation
Does the process
technology give an
acceptable return on
the investment
necessary for its
adoption?

accountant’s view is that the cost of something is whatever you had to pay to acquire
it originally. The economist, on the other hand, is more likely to define costs in terms
of the benefits forgone by not investing elsewhere: that is, the opportunity cost of the
technology. Thus, to the economist, the cost of investing in a process technology is
whatever could be gained by investing an equivalent sum in the best feasible alterna-
tive investment. While opportunity costing has obvious intuitive attractions, and is
particularly useful in process technology investments where alternative technologies
may bring very different benefits, it does depend on what we define as the best feasible
alternative use of our resources. The accountant’s model of acquisition cost is at least
stable – if we paid €1,000 for something, then its value is €1,000, irrespective of what-
ever alternative use we might dream up for the money.

The life cycle cost
The concept of life cycle costing is useful in process technology evaluation. It involves
accounting for all costs over the life of the investment that is influenced directly by the
decision. For example, suppose a company is evaluating alternative integrated ware-
housing systems. One system is significantly less expensive and seems at first sight to
be the least costly. But what other costs should the company consider apart from the
acquisition cost? Each system would require some initial development to remedy out-
standing technical problems before installation. The systems would also have to be
‘debugged’ before operation, but, more importantly, during its years of life the plant
will incur operation and maintenance costs that will, in part, be determined by the orig-
inal choice of system. Finally, if the company wants to look so far ahead, the disposal
value of the plant could also be significant. In fact, total life cycle costing is impossible
in any absolute sense. The effects of any significant investment ripple out like waves
in a pond, impinging on and influencing many other decisions. Yet it is sensible to

M06 Operations Strategy 62492.indd 221 02/03/2017 13:05