Use of activity-based costing and economic value analysis for the justification of capital investments in automated material handling systems

This paper develops a two-stage method for the justification of investment in modern material handling systems. The underlying approach places heavy e mphasis on the use of cost avoidance data quantified by activity-based cost ing systems. The first stage collects the life-cycle costs and benefits res ulting from the reconfiguration of material handling systems in manufacturi ng facilities. A recently developed software package for process modelling and management is employed to capture the characteristics of material handl ing activities and to derive accurate applied cost rates for each activity and material handling system combination. These activity-related cost data as well as various opportunity costs are incorporated in a case-specific, i nvestment decision model that constitutes the second stage of the method. T he model performs an Economic Value Analysis for each material handling alt ernative. In doing so, it offers a sound basis for economic comparison of d ifferent systems. A case study illustrates the merit of our two-stage metho d in decision making by placing an accurate and reliable economic value on the transition from manual to automated material handling in a manufacturin g facility. The use of activity-based costs reverses the decision of sustai ning the 'status quo' supported by a traditional investment justification a pproach restricted to solely labour cost reductions.