Streltsov A.V.
Head of the Department of
Organization and Development Strategies of
Industrial Enterprises
Samara State University of Economics.
EVALUATING THE EXPEDIENCY OF LAUNCHING NEW PRODUCTION AT MACHINE
BUILDING ENTERPRISES
Annotation
The article evaluates the
economic expediency of launching new production at machine building
enterprises. The dependences for choosing the rational moment for production
renovation is suggested based on the probable dynamics of economic indices.
Keywords: new products, machine building enterprises, profit
maximization.
I. Introduction
The implementation of innovations on the enterprise
is considered to be quite a complicated process. It covers various aspects of
the enterprise’s activities. The integration to strategic development plan, an
investigation of a broad range of problems demands its investment explanation.
One of the most significant problems is the detection of the rational moment
for the beginning of new production manufacturing. The launch of new products
is necessary for the enterprise for improving their performance indicators,
increase in competitiveness on the market. However, ill-timed launch of new
products can considerably aggravate basic economic indices of enterprise.
Many
authors examine the problems of production renovation in their works. Some of
them suggest using the average age of the production as the criteria, others –
total costs for all the projected period of producing the machine models, the
third – the combination of profit and the full costs for developing, adopting
and using the new and the outdated model for the whole period of its usage. It
is possible to single out a number of other approaches as well.[1]
II. Problem definition
The goal of the investigation consists in the development
of methodological approaches to the definition of the rational moment for the
beginning of new products launching. Thus, scenario approach should be used by
studying different variants of dynamics of basic economic indices of enterprise
within new product launching in manufacturing.
III. Results
The
problem of determining the most economically beneficial period for starting new
production and modifying the old one at the enterprise is of great importance
currently as it influences the work of the enterprise not only at the present
time but for the perspective period as well. Of course, product renovation
should be based on the data got from market research, but it is also important
to evaluate the dynamics of economic indices that is the result of this
substitution.
The
analysis of the existing approaches to the estimation of reasonability of the
beginning of new products launching on the enterprises proved the fact that
these approaches as a rule make it possible to evaluate the losses (benefits)
from impeding and accelerating the change of the models, the interrelation of
the possible pace of renovation and the efficiency of the work of the machine-building complex, the influence of the
length of producing a certain model on the efficiency of the enterprise
functioning.
In order to increase the degree of the calculations study
it is necessary to examine various scenarios of launching new models and
production modification in time, connect them with investment calculations. It
is possible to carry it on by
forming certain conditions and
restrictions for various types of production.
The first condition is maximizing
the profit by launching both old and new machines during the strategic period:
(1)
where t, T – the period of launching the existing product;
t´ – the time of launching the new
product by mass production; Ò´ – the length of
the strategic period; Dt – the profit from launching the existing
product;
D´ – the profit got from producing the new product; KZ –
capital costs necessary for producing the new products; r´ – the interest rate; r
– the
interest rate used in the calculation of the discount ratio.
The profit can change under the
influence of various factors, especially competition. Delaying the launch of the
new model can cause a decrease in profit because of the activity of
competitors.
In order
to combine the possible variants of production renovation with the equipment
renovation it is necessary to form the second condition:
(2)
Due to
the formula it is necessary to maximize the profit got from already launched production
up to the moment of introducing the new production. In other words it is
necessary to maximize the assets that can be used as investments in the
equipment necessary for producing the new production.
The launch
of the new production makes sense only if the profit from its production excels
the profit that was possible to get from the old production:
(3)
Thus, if you want to choose
the optimal moment for starting production of new products, maximizing the possible
volume of the investment resources generated
at the enterprise up to the moment of staring producing the new product,
it is necessary to choose such time period (t´), when all the principal functions
(1, 2) and the restriction (3) are observed. The time period that we get (t´) will become the
initial condition for forming the variants of renewing the active part of the
new capital.
Let’s consider the elements of the above mentioned
model as a tentative example.
Let the
product model “A” be in mass production at the machine building enterprise. It
is going to be changed for model “B” during the strategic period. The replacement
can be accomplished starting from the 3rd year and is delayed for
the later period. The yearly volume of production on the following models is
shown in Table 1.
Table 1
The yearly launch of the products on the models «À», «B», thousands of
items
|
Model |
The amount of the launched production per
years |
|||||||||
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|
|
«À» |
80 |
80 |
60 |
60 |
45 |
45 |
45 |
- |
- |
- |
|
«B» |
- |
- |
60 |
80 |
100 |
100 |
80 |
60 |
45 |
45 |
The cost
characteristics of products in monetary units are shown in Table 2 . Let’s suppose that
they do not change in the years of the calculated period.
Òàble 2
Cost characteristics of
the models of products «À» and «B», monetary units
|
Model |
Wholesale price |
Prime cost |
Amortization in prime
cost |
|
«À» |
36000 |
28000 |
2000 |
|
«B» |
43000 |
34000 |
3000 |
Let the
interest on the deposit be 10%, the weighted average of the cost of
the enterprise capital used for determining the discount rate is 15%. There is no
current need for money by the enterprise and all the free assets are located at
the deposit. Let’s consider different variants of launching the new model by
mass production.
It is necessary to know the size of the strategic
period and the change in the production amount of the launched model. It
directly influences the efficiency of this or that variant. For example,
depending on the length of the calculated period one variant of renovation can
be at the same time advantageous and disadvantageous.
Let the
strategic period be 12 years, launching the new model by mass production contributes
to the full stop of launching the old one.
First,
let’s determine the whole amount of the yearly cash receipts from the sales of
the projected production volume (production volume is equal to the sales
volume, taxation is not taken into consideration). Therefore, for model
“A” having launched 80 thousand of
items we get: (36000 - 28000 + 2000) • 80000 = 800 (million
of monetary units) As for the other variants of launch you can see the data in
Table 3
Òable 3
The variants of launch
and profit from the projected machine production
|
Yearly launch, Thousands of items |
Yearly profit, millions of
monetary units |
|
|
Model «À» |
Model «B» |
|
|
45 60 80 100 |
450 600 800 1000 |
540 720 960 1200 |
Hereafter,
we analyze the possible future (accumulated) cost of assets got from the sales and
their current cost. It is necessary to
conduct the analysis for each yearly launch that should be done by introducing
the future cost of assets got from the yearly launch of machines to the moment
of forming the strategic plan (zero year).
Let’s consider the
further years of enterprise functioning during the strategic period and compare
the current cost of profit got from this type of production renovation with the
others. Also the influence of the possible changes of the interest rates
determined by the alternative investments and the structure of the attracted
enterprise capital is also taken into account. Let’s imagine that
the launch of model «B» by mass production can be postponed for the fifth year.
The tendency of the changes of the yearly launch remains the same. From the first
to the fourth year inclusive the enterprise launches model «À», from the fifth to the twelfth - model «B». The final calculations on
both variants of production renovation are represented in Table 4.
Table 4
The possible profit
from the launch of model «B» by mass production
from the 3-rd year of strategic
period
|
Years |
Yearly launch, thousands of items. |
Yearly profit, millions of monetary units. |
The profit accumulated to the end of
strategic period, millions of monetary units. |
The current cost of the accumulated profit,
millions of monetary units |
||
|
α=0,15 |
α=0,10 |
α=0,05 |
||||
|
1 |
80 |
800 |
2282,5 |
426,6 |
727,2 |
1270,9 |
|
2 |
80 |
800 |
2074,9 |
387,8 |
661,1 |
1155,3 |
|
3 |
60 |
720 |
1697,7 |
317,3 |
540,9 |
945,3 |
|
4 |
80 |
960 |
2057,8 |
384,6 |
655,6 |
1145,7 |
|
5 |
100 |
1200 |
2338,5 |
437,1 |
745,0 |
1302,1 |
|
6 |
100 |
1200 |
2125,8 |
397,3 |
677,3 |
1183,6 |
|
7 |
80 |
960 |
1546,1 |
288,9 |
492,6 |
860,8 |
|
8 |
60 |
720 |
1054,2 |
197,0 |
353,8 |
586,9 |
|
9 |
45 |
540 |
718,7 |
134,3 |
228,9 |
400,2 |
|
10 |
45 |
540 |
653,4 |
122,1 |
208,2 |
363,8 |
|
11 |
45 |
540 |
594,0 |
111,0 |
189,2 |
330,7 |
|
12 |
45 |
540 |
540,0 |
100,9 |
172,0 |
300,7 |
|
Total |
- |
- |
- |
3304,9 |
5653,8 |
9846,0 |
In column
2 of this table the possible launch of machines is shown as it is, in column 3
– the profit from the yearly launch determined by the profit and amortization.
Column 4 shows the possible accumulated profit to the end of the strategic period
from the corresponding yearly launch of machines without taking into account
the indices brought at the moment of analysis. For example, the
launch of 80 thousand of machines in the first year (if all the money got was
invested in the deposit) guarantees 2282,3 million of monetary units of profit to
the end of the strategic period. Next columns show the current cost of this approach.
As we
can see from the tables the most preferable variant is the launch of model «B» from the 3-rd
year of strategic period. In this case the current cost of the possible approach
exceeds the variant of renovation from the 5th year by 102,7 million
of monetary units (while the discount norm is 15%). Therefore, the concentration
of resources aimed at the renovation of the active part of the main capital, the
main phases of the change preparation work, adjusting the equipment in use for
launching the new model should be finished by the beginning of the 3rd
year of strategic period.
Table 5
The possible profit
from the launch of model «B» by mass production
from the 5th year of strategic
period
|
Years |
Yearly launch, thousands of items. |
Yearly profit, millions of monetary units. |
The profit accumulated to the end of
strategic period, millions of monetary units. |
The current cost of the accumulated profit,
millions of monetary units |
||
|
α=0,15 |
α=0,10 |
α=0,05 |
||||
|
1 |
80 |
800 |
2282,5 |
426,6 |
727,2 |
1270,9 |
|
2 |
80 |
800 |
2074,9 |
387,8 |
661,1 |
1155,3 |
|
3 |
60 |
600 |
1414,9 |
264,4 |
450,7 |
787,7 |
|
4 |
60 |
600 |
1286,2 |
240,4 |
409,8 |
716,1 |
|
5 |
60 |
720 |
1403,1 |
262,2 |
447,0 |
781,2 |
|
6 |
80 |
960 |
1700,7 |
317,7 |
541,8 |
946,9 |
|
7 |
100 |
1200 |
1932,6 |
361,2 |
615,7 |
1076,1 |
|
8 |
100 |
1200 |
1756,9 |
328,4 |
559,7 |
978,2 |
|
9 |
80 |
960 |
1277,8 |
238,8 |
407,1 |
711,5 |
|
10 |
60 |
720 |
871,2 |
162,8 |
277,6 |
485,1 |
|
11 |
45 |
540 |
594,0 |
111,0 |
189,2 |
330,7 |
|
12 |
45 |
540 |
540,0 |
100,9 |
172,0 |
300,6 |
|
Total |
- |
- |
- |
3202,2 |
5458,9 |
9540,3 |
For a
more adequate reflection of the real state of affairs in certain economic situations
it is necessary to analyze other factors besides the various discount rates. For example, the
alternative variants of investing the capital, its partial or full use for the
current economic aims, the size of the profit, the investment grounds for
product renovation and the use of the profit got from the launch of the old and
new models.
The analysis of the competitive environment for the new
production also influences decision making. The main critical
indices responding to competitors’ activity are the volume of the yearly sales
and the yearly launch in thousands of items accordingly and the price of the
unit.
However one criterion is not enough for final decision making,
even if it is a resumptive one like the current cost of the possible profit. It is also necessary to analyze the other models. So in the situation of the asset deficit
for the investments in a new model and the exigency in production renovation, the
worst variant based on the criterion of the current cost can be accepted, that nevertheless
provides the maximum amount of assets accumulated by the moment of changing the
model due to the formula (2). Let’s consider the example.
When the interest rate of
the possible investment makes 10% (the deposit), the monetary flows
of self-financing that make the profit and amortization will be 1848 million of
monetary units by the beginning of the 3rd year and by the end of the
5th year - 3622,1 million of monetary units. Hence, targeting at the
maximization of the possible sources of self-financing it is bette4r to start
production renovation from the 5th year (see Table 5). However it is
necessary to take the activity of the competitors as well. Let the yearly
launch of the new products decrease twice because of the activity of the
competitors. This
variant becomes non-lucrative.
The conducted
analysis makes it possible to form the base for developing the variants of strategic
production planning. That in its turn combines many of the enterprise programs
in one strategic plan. For example, the activities of equipment and production renovation, the concentration
of finance resources for these goals (monetary flows for self-financing) and
others. The suggested algorithms allow to coordinate the innovative, investment
and financial policy of the enterprise at the initial stage.
IV.
Conclusion
Theoretical value of the investigation involves
further development of approaches to the estimation of reasonability of the
beginning of new products launching in machine-building enterprise. Practical
value makes it possible for machine-building enterprises’ managers to take more
sound decisions concerning the beginning of new production launching.
References
Bleh U., Gettse U. Investment calculations. Translated from
German/Under the editorship of A.M.Chuykina, L.A.Gamotina. Kaliningrad:
Yantarniy Skaz, 1997.
Chuprynov B.P., Mathematical modeling methods in economics.
Samara: Samara State Academy of Economics, 1996.
Grinchel T.P., Industrial
production “life cycle” planning. L.: LGU, 1980.
Shmalen G., Fundamentals and problems of company
economics. Translation from German/Under the editorship of A.G.Porshneva. M.:
Finance and Statistics, 1996.
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