MINI-CASE 4. 1:

The Light vehicle Division of Rockwell International makes seat-slide assemblies for the automotive industry. They have two major classifications for investment opportunities: developing new products to be manufactured and sold, and developing new machines to improve production. The overall approach to assessing whether an investtnent should be made depends on the nature of the project.

In evaluating a new product, they consider the following:

1. Marketing strategy: Does it fit the business plan for the company?

2. Work force: How will it affect human resources?

3. Margins: The product should generate appropriate profits.

4. Cash flow: Positive cash flow is expected within two years.

In evaluating a new machine, thev consider the following:

1. Cashflow: Positive cash flow is expected within a limited time period.

2. Quality issues: For issues of quality, justification is based on cost avoidance rather than positive cash flow.

3. Cost avoidance: Savings should pay back an investment within one year.

Discussion

All companies consider more than just the economics of a decision. Most take into account the other issues-often called intangibles-by using managerial judgment in an informal process. Others, like Rockwell International, explicitly consider a selection of intangible issues. The trend today is to carefully consider several intangible issues, either implicitly or explicitly. Human resource issues are particularly important since employee enthusiasm and commitment have significant repercussions. Environmental impacts of a decision can affect the image of the companv. Health and safety is another intangible with significant effects. However, the economics of the decision is usually (but not always) the single most important factor in a decision. Also, economics is the factor that is usually the easiest to measure.

Questions

1. Why do you think Rockwell International has different issues to consider depending on whether an investment was a new product or a new machine?

2. For each of the issues mentioned, describe how it would be measured. How would you determine if it was worth investing in a new product or new machine with respect to that issue?

3. There are two kinds of errors that can be made. The first is that an investment is made when it should not be, and the second is that an investment is not made when it should be. Describe examples of both kinds of errors for both products and machines (four examples in total) if the issues listed for Rockwell International are strictly followed. \Miat are some sensible ways to prevent such errors?