In the commercial sector, the amount of profits is generally directly proportional to the reduction of overall production costs. Hence, any cost reduction effort including factory modernization is considered favorably by corporate management.
On government products, profits are considered as a fixed percentage of the cost to produce. Therefore, any factory modernization effort that reduces production costs also reduces company profit. Hence, a disincentive to modernize facilities associated with government products exists.
Where modernization efforts have been introduced, those efforts have been typically limited to "quick-fix" improvements implemented in an unplanned, "piecemeal" fashion. Emphasis has been on immediate or near-term payback, as opposed to longer term benefits such as (1) the future ability to compete or (2) the advance manufacturing capability that ensures the capability to produce a future generation of product. This approach frequently leads to problems in later integration of discrete modernization tasks into an efficient total manufacturing operation. Those integration problems compound the difficulty in convincing corporate management of the benefits accrued by investing in factory modernization.
An aggressive long-range company policy and objectives statement leads to the integration of factory automation technology and improved management system capability. The use of semiautomatic equipment, particularly in electronics manufacturing, has proven essential in reducing transition risk. Indeed, in some instances 200 percent improvement in defect rates has been achieved. Corporate attitude is a key element in encouraging factory modernization.
The long-term benefits should be considered along with the cost of equipment, proofing, and direct increases in productivity. Long-term objectives should involve increasing use of automated methods in conjunction with the growing application of computer-controlled manufacturing. Those long-term benefits can best be analyzed if a corporate policy exists that establishes the capability and mix of product that is desired within the next five to ten years. This corporate long-range plan should be flowed down to the appropriate technical levels, so that an integrated modernization plan can be developed. Also, in any modernization effort, the contractor long-range policy should include flow down to all subcontractors. The proposed improvements should be consistent with the contractor's long-range strategic objectives. A thorough analysis should be performed on any proposed improvements, and those improvements must be validated before implementation on the factory floor. This approach results in a workable modernization plan that increases productivity, and allows for an integrated and coordinated factory. Modernization incentives then can be compared to the technical merit intelligently assessed. The upfront cost associated with some state-of-the-art manufacturing equipment precludes the use of a short-term Return On Investment (ROI) strategy without a careful look at those long-term benefits that are consistent with corporate long-range planning.
The government also can encourage modernization. Why modernize? From the government's perspective, increased productivity reduces the cost to produce. The funding profile also is quite attractive. The government prefers contractor funding but the contractor's investments may be guaranteed by the government when appropriate. As a result of the government's Industrial Modernization Incentive Program (IMIP), both the contractor and the government share in the cost savings. The overall objective of the program is an increase in the rate of modernization.