Case 1 Economic at Buick-D-2023-v9 (5)

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti EECS 352 – Engineering Economics and Decision Analysis A-17- Revised 11/1/23-Type D Professor Malakooti Case Study Term Project General Instructions (25% of Total Grade) Submit Word-file to Canvas with Embedded Excel Objects This project must be done by each student. Any copying from any other source will result in getting an F in this course and other severe penalties. Please respond to all questions. The Report for Each Model and Each Question of the Case Study It is important to write a good report, in particular state your problem very clearly and give a brief background and rational of the problem. Describe the development of your model/solution step-by-step, along with any assumption you make. Display the results in suitable forms and discuss your analysis of results along with your conclusions and recommendations. Answer the questions posed and follow the hints and suggestions given. The final report should be prepared promptly. It should consist of the following sections and details:  Introduction---provide a brief background of the case, and present a crisp problem statement and the objective of the study—what questions you are trying to answer? For what purpose? And so on.  A. Solution Strategy from Engineering Economics point of view:—describe the approach you are using to carry out and organize your study and the assumptions you are making (make these very clear). You will most likely develop/adopt a cash flow model—show in some reasonable detail how the individual cash flows are generated and integrated.  B. Solution Strategy from Decision Making and Risk point of view:—describe the approach you are using to carry out and organize your study and the assumptions you are making (make these very clear). You will most likely develop/adopt at least two decision scenarios (alternatives) where each alternative will have at least two criteria and incorporates risk analysis. You may need to assume some information (data) for Part B.  Results—Include all EXCEL printouts in the appendix but do a good summary analysis of your computer results in this section. Please use hide rows, or hide column (to hide the middle part of a long and large sheet), or “fit-in-one-page” feature to print one sheet in one page.),  Conclusion and recommendations—take your computer results one step further by making relevant interpretation of those results o to answer the study questions that you pose in the introduction section and o to try to fully accomplish your study objective. 1

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti This should include a recommendation of what choice to take and the reasoning/justification behind your recommendation.  Generate an Excel sheet for each analysis using the exact format of the template shown in the Appendix (displayed at the end of this document). The format of the report should be as following.  Introduction including the background, rational and statement of the problem  Model description: a complete detail of the mathematical model showing the decision variables, the objective function, and constraints. For each key relation, a short description should be given.  Result and Analysis: summary description of results and answer to questions including all sensitivity analysis as appropriate.  Conclusions and recommendations  Appendix A: computer outputs.  Appendix B: computer codes (if any).  Appendix C: table of coefficients (if any). Appendix D: Extra Credit (Provide Your Suggestions for Improving this Case Study; you may also provide appropriate data for your suggested questions). YouTube links . The following links should help you visualize how the Sheet Molding Compound (SMC) Process works. 1- https://www.youtube.com/watch?v=dDv0hD2ooGs 2- https://www.youtube.com/watch?v=e4Nm0jzpu7o Preview YouTube video SMC Manhole Covers-Zhejiang Resin Municipal Facility Co., 2

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti Economic Analysis of a Modified Conveyor System at Buick-Oldsmobile-Cadillac Concepts illustrated: Payback period, present worth analysis, rate of return analysis, depreciation, and development of project cash flows. Required Readings: Text Book and Handouts of Professor Malakooti ______________________ 1. Background The Buick-Oldsmobile-Cadillac (BOC) plant in Lansing, Michigan, is involved in the fabrication and assembly of the Olds Calais, Buick Somerset Regal, and Pontiac Grand Am. A small part of the total operation is the sheet molding compound (SMC) area where plastic parts are formed from sheets of plastic material. Front-end panels (the front part of the car where the lights are housed) are produced here, and a conveyor system is used to transport the panels after they are formed. This case study examines an economic justification analysis for a proposed modification of the conveyor system that would decrease the number of workers needed while improving quality and facilitating material flow. 2. Description of Present SMC Prime and Finish Process The SMC prime and finish operation starts on the first floor with stud drivers as shown in Fig 3.1. ______________________________________________________________________ © 2001 by Chan S. Park, Department of Industrial & Systems Engineering, Auburn University - This case is developed for classroom use only. 4

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti Here a machine screws a two-ended bolt into each front end panel so that it can be attached to the car later. The conveyor then moves the panels upstairs where they are washed and primed. Next, the conveyor moves the panels through an oven to heat-treat the prime coating and then returns them to the first floor. An inspector checks each panel for pits and defects and marks them for the pit filler, who uses compound to fill in the defects. The compound must dry before it is sanded (the next operation), but the current setup does not allow sufficient room for this to happen every time. After the panel is sanded down, it travels up to the second floor again, where it is inspected for any major repairs that must be made. If repairs are needed, the panel is taken of the conveyor; otherwise, it moves on to the washer, where any dust and debris is removed. The conveyor then moves the panel up to the third floor to the second prime spray booth and back down to the second floor, where it is processed through an oven. The panel is inspected again, and the pit fill and sand operations are performed as necessary. Again, the area currently allocated to this operation does not always allow the compound enough time to dry. The conveyor moves the panels to final inspection and to the packing area. Once the panels are packed, they must be moved via elevator to the first floor, where the shipping docks are located. There is only one elevator, and if it malfunctions, there is no way to transport the parts to the first floor. The existing system is producing good quality front-end panels, but the current arrangement requires that the conveyor travel frequently between three floors and separates two similar operations, requiring two supervisors. The finished and packed parts must also be moved from the second floor packing area down to the first floor with an elevator. In addition, the repair and maintenance for the conveyor system will require an estimated $180,000 in the upcoming year alone in order to keep it in operable condition. Projected maintenance costs for later years are unavailable but they are estimated to be around $100,000 per year. 3 The Proposed System The proposed system would be a modification of the current prime and finish conveyor system. It would reduce the number of trips made between floors, use just one supervisor to oversee similar operations, eliminate the need for the elevator, and reduce the number of employees needed for the prime and finish operation. The proposed system under would still be used to move the panels along a specified route while different operations are performed on them. The major change is that almost all of the major operations would be performed on the second floor as shown in Figure 3.2. The areas needed for the two pit fill and sanding operations would be located in the same general area, thus requiring only one supervisor; the result should be better control of and more uniform standards for those operations. There would be more room between the pit filling station and the sanding operation so the compound would have an adequate amount of time to dry, resulting in better quality. A sanding station for hood line sanding would be added after the stud driver machines in the proposed process. (The hood line is where the front-end panel meets the hood of the car an area very visible to the consumer.) In an effort to improve quality, it has been determined that this job should receive careful attention and be performed before the initial priming process. 5

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti period, so that no shut down costs are expected.) It also requires an increase in net working capital, costing $80750. This additional working capital must be considered part of the initial net cash outlay, but it can be recovered in full at the time of project closing. The economic life of this new system is not precisely known, but the firm's past experience with this type of equipment indicates that the system has about 10 years of useful life, even though the physical life could easily extend almost 20 years with proper maintenance. Since automobile models are changing from a conventional to a more aerodynamic look, however, the BOC plant is planning to install an entirely new system within 5 years. Therefore, BOC management would not expect the modified system to serve more than 5 years if installed. The purchased equipment falls in the 7-year MACRS category, with no investment tax credit allowed. The depreciation for each year over the study period is calculated as follows: Year Depreciation base  MACRS rate Depreciation 1 $568,100  0.1429 $ 81,181 2 $568,100  0.2449 $139,128 3 $568,100  0.1749 $99,361 4 $568,100  0.1249 $ 70,956 5 $568,100  0.0892 $ 50,675 Total $441,300 This adds up to $441,300, leaving a book value of $126,800 at the end of 5 years. The salvage value of this system after 5 years is also in question, but it is estimated that the value of the scrap and used parts taken o_ the system at the end of 5 years would not be large enough to offset the cost of dismantling and scrapping the system, resulting in a negative salvage value of about $79,800. 3.3 Expected Cash Savings The savings involved in this project will come from the reduction of 17 employees from the process. These employees will all be hourly production workers working one of three shifts (day, afternoon, or midnight). The BOC plant uses an average figure for employee wages when computing the cost associated with workers. This figure, the average annual straight time and overtime cost, is $47,244/year for hourly production workers. We thus find an annual savings of (17employees)  ($47,244/employee/year) = $803,141/year: 3.4 Operating and Maintenance Costs The additional operating and maintenance costs associated with the modified system are estimated to be Year Additional O&M costs 1 $18,174 2 $16,958 3 $18,454 4 $31,421 5 $21,446 The increased costs are primarily due to additional power requirements in the sanding operation. The trend in operating costs over the project years reflects the inclusion of an allowance for start- 7

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti up inefficiencies in the first year, cash expenditures for overhauling expenses in the fourth year, and a gradual loss of operating efficiency thereafter. 3.5 Other Considerations Another factor for the BOC to consider at this time is the alternative uses for funds. The BOC has sufficient funds to modify the current operating system; however there are other ways these funds could be used. The other projects the management is considering at this time have an estimated return of at least 15% after taxes. This implies that the BOC's MARR would be 15%. (The marginal income tax rate at present is 40% and no change in this rate is expected.) 3.6 Basic Analysis Questions For basic – engineering economics problem provide your solution and analysis. Determine the project cash flows for the 5-year life of the proposed conveyor system. Then determine the followings. I. Question for Phase I (By Tuesday Before Thanksgiving) 4. If then questions Issues for Considerations in this Case Study (You must show the use of Excel, e.g. see An Example in the last page): 4.1 Determine the project cash flows for the 5-year life of the proposed conveyor system. Then determine the expected internal rate of return and decide whether the project is economically viable. Also, determine when would be the earliest year that the BOC can revamp the system and the project would still be a good investment. 4.2 Suppose that, to install the proposed conveyor system, there would be a 2-day's of plant shut-down. This translates into a cost of $350,000 in lost production. How should this shut- down cost be considered in the analysis? 4.3 Suppose that there is no place to accommodate the 17 workers in the plant and they must let go. This action would lead to paying $200,000 for severance. How would this payment affect the profitability of the investment? 4.4 ( Extra 5 Credit out of 100 for Phase I for inflation) Recall that the annual savings figures based on displacing 17 workers were assumed to remain unchanged over the years. Suppose that the wages would increase at the annual rate of 7% over the years, due to inflation. The annual O&M cost would also increase at the annual rate of 6%. The general inflation rate is expected about 5% per year during the project period. How does this scenario of inflation affect the profitability of the investment? 8

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti GD = EV – GV i k k p i i i i=1 i=1 ( p y (y ) )         Consider risk averse case of z= -0.66; what does the solution mean? How it compares to and is related to the pessimistic scenario (above Question of 5.2 ) and to mean-variance (above Question 5.3). Hint: For this problem, it may be easier to normalize all cost values from 0.01 to 0.99, then use Φ = 0 .Note that when you normalize the highest cost will be 0.01 and the lowest cost will be 0.99. (Alternatively, you may assess Φ and Φ X based on the given heuristic of one per cent for the range). 5.5. (Extra 5 credit: Asymmetric (Mixed) Risk Averse/Risk Prone Geometric-Dispersion Theory (GDT) Analysis). Use both Geometric-Deviation (GD) for risk averse and X- Geometric-Deviation (X-GD) for risk prone. Suppose that the Decision Maker is 66% risk averse and 33% risk prone using z = -0.66 and z X =+0.33. Explain how this solution compares to above pessimistic and optimistic approaches (Question 5.2.b), above mean- variance, and above risk-averse using GD. How useful is considering asymmetric GDT using GD and XD vs. symmetric mean-variance using SD. For assessment purposes, Φ < y < Φ X in the GDT model covered in handout. Therefore, XV can be written as: Φ ¿ ( ¿ X − y i ¿¿ p i )− EV ¿ Φ X − ∏ i = 1 k ¿ XD = ¿ (XD based on the upper limit Φ X ) Hint: For this problem, it may be easier to normalize all cost values from 0.01 to 0.99, then use Φ =0 and Φ X = 1. Note that when you normalize the highest cost will be 0.01 and the lowest cost will be 0.99. Alternatively, you may assess Φ and Φ X based on the heuristic given one present higher than the highest payoff. 6. Bi-Criteria Analysis Scenario Suppose that there are three possible design approach for this problem. Design Approach 1: Suppose that in the above case study we have found the total present value cost to be $140,000,000 (the lower cost is better); but we believe that the reliability of this systems in terms substantial breakdowns to be 4.24 on a 0 to 10 rating (the higher the better) Design Approach 2: Suppose that we can have better design where total present value cost is $190,000,000 (the lower cost is better); the reliability is substantially better, 7.25, on a 0 to 10 rating (the higher the better) Design Approach 3: Suppose that we can have a worse design where total present value cost is $110,000,000 (the lower cost is better); the reliability is, 1.25, on a 0 to 10 rating (the higher the better). 10

EECS 352: Eng. Economics Term Project Case Study Professor Malakooti Table below shows these three alternatives. Design Approach 1 (Normal) 2 (More cost) 3 (Less cost) Objective 1: Total cost of project $160,000,000 $190,000,000 $110,000,000 Objective 2: Given Reliability of Design; 0 is the worst and 10 is the best 4.25 7.75 1.25 Apply the concepts that you have learned about solving multiple criteria (attribute) decision making for these three alternatives. Respond: 1. Any of them is inefficient 2. Justify choosing only one of non-compensatory methods of Ch. 14 of your text book (e.g. satisficing or lexicographic ordering etc. …), then apply it using your own judgment/preferences. 3. Use the compensatory Ch. 14 of your text book (the weighting approach), use weights of importance for the two objectives (criteria) as 0.7 and 0.3, respectively ; i.e. w 1 = 0.7 and w 2 = 0.3; then rank them. (Hint: you must first normalize values and convert them for maximization problem for both criteria) , do agree or disagree with basic assumption of this method; do agree with the best solution using this method. 4. Graphically present the normalized values of this problem (based on Part 3) in terms of criteria 1 vs. criteria 2, and show the utility contours solution of part 3 graphically. 5. Extra 5 Credit out of 100 for Phase II Using MCDM: Use MCDM-GDT model (also called Z Utility Theory) for solving MCDM method to analyze the solutions, you can use the same weights that you used in part 3; use z = -0.7 value; rank alternatives, do you agree with the best ranked solution, why or why not? Hint: you can choose your own z from -1 to 0, and compared to the above given z = -0.7 . 11