Suppose that, to install the proposed conveyor system, there would be a 2-days 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?

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. Figure 3.1 SMC present prime and finish process 2nd Prime spray booth 1st Prime 2nd Prime oven 20 Oven Sand Pit fill 12nd Prime washer Washer Inspect Major repair Inspect Pack area Finish Stud drivers Inspect Sand Pit fill Major repair 2001 by Chan S. Park, Department of Industrial & Systems Engineering, Auburn University - This case is developed for classroom use only. 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. 2nd Prime spray booth Washer washer The inspectors associated with the pit filling 2nd Prime oven let Prime operations would be eliminated in Sand Pit fill the proposed 2nd Prime process, leaving Inspect that job to the pit Major repair fillers themselves. The major repair area would be Ares affected relocated so that it would be near the final inspection Finish Start point and repaired parts could easily be sent through the second priming Figure 3.2 SMC proposed prime and finish process station again. After the final inspection, the conveyor would carry the panels down to the first floor to be packed and shipped. This would completely eliminate the need for the elevator and facilitate a steady material flow. Pit H - Stud drivers Pack area The proposed system would be designed and built to satisfy ergonomic considerations. So, jobs would be easier to perform, and the number of required employees would be reduced. Also, the inspection stations would be minimized, which would further reduce the total number of employees needed for the prime and finish operation. The question is, will the savings that would be derived from the reduction in labor justify the cost of the proposed system? 3.1 SITE PREPARATION Before installation of the new system, the old equipment must be removed, rearranged, and painted. This site preparation would be done by the in-house staff at the cost of $337,000. The firm could elect to expense the preparation cost at the time the new system is installed. Some of the existing machines would be relocated, but all would be retained in the new system; thus, there would be no replacement of equipment. 3.2 COST OF NEW EQUIPMENT The proposed system requires a new conveyor, a drive, and a new sanding machine to be located near the first prime area. The cost for purchasing and installing the new equipment is estimated at $598,000. (The installation would take place during the regularly scheduled plant maintenance period, so that no shut down costs are expected.) It also requires an increase in net working capital, costing $85,000. 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 maintena 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 x MACRs Rate Depreciation $598,000x0.1429 $ 85,454 $598,000x0.2449 $146,450 $598,000x0.1749 $104.590 $598,000x0.1249 $ 74,690 $598,000x0.0892 $ 53,342 Total $464,526 This adds up to $464,526, leaving a book value of $133,474 at the end of 5years. 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 $80,000. 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 $47,362/year for hourly production workers. We thus find an annual savings of (17employees) *($47; 362/employee/year) = $805,154/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 $18,220 $17,000 $18,500 $31,500 $21,500 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-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.) 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. Figure 3.1 SMC present prime and finish process 2nd Prime spray booth 1st Prime 2nd Prime oven 20 Oven Sand Pit fill 12nd Prime washer Washer Inspect Major repair Inspect Pack area Finish Stud drivers Inspect Sand Pit fill Major repair 2001 by Chan S. Park, Department of Industrial & Systems Engineering, Auburn University - This case is developed for classroom use only. 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. 2nd Prime spray booth Washer washer The inspectors associated with the pit filling 2nd Prime oven let Prime operations would be eliminated in Sand Pit fill the proposed 2nd Prime process, leaving Inspect that job to the pit Major repair fillers themselves. The major repair area would be Ares affected relocated so that it would be near the final inspection Finish Start point and repaired parts could easily be sent through the second priming Figure 3.2 SMC proposed prime and finish process station again. After the final inspection, the conveyor would carry the panels down to the first floor to be packed and shipped. This would completely eliminate the need for the elevator and facilitate a steady material flow. Pit H - Stud drivers Pack area The proposed system would be designed and built to satisfy ergonomic considerations. So, jobs would be easier to perform, and the number of required employees would be reduced. Also, the inspection stations would be minimized, which would further reduce the total number of employees needed for the prime and finish operation. The question is, will the savings that would be derived from the reduction in labor justify the cost of the proposed system? 3.1 SITE PREPARATION Before installation of the new system, the old equipment must be removed, rearranged, and painted. This site preparation would be done by the in-house staff at the cost of $337,000. The firm could elect to expense the preparation cost at the time the new system is installed. Some of the existing machines would be relocated, but all would be retained in the new system; thus, there would be no replacement of equipment. 3.2 COST OF NEW EQUIPMENT The proposed system requires a new conveyor, a drive, and a new sanding machine to be located near the first prime area. The cost for purchasing and installing the new equipment is estimated at $598,000. (The installation would take place during the regularly scheduled plant maintenance period, so that no shut down costs are expected.) It also requires an increase in net working capital, costing $85,000. 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 maintena 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 x MACRs Rate Depreciation $598,000x0.1429 $ 85,454 $598,000x0.2449 $146,450 $598,000x0.1749 $104.590 $598,000x0.1249 $ 74,690 $598,000x0.0892 $ 53,342 Total $464,526 This adds up to $464,526, leaving a book value of $133,474 at the end of 5years. 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 $80,000. 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 $47,362/year for hourly production workers. We thus find an annual savings of (17employees) *($47; 362/employee/year) = $805,154/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 $18,220 $17,000 $18,500 $31,500 $21,500 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-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.)