Rochester Manufacturing Corporation (RMC) is considering moving some of its production from traditional numerically controlled machines to a flexible manufacturing system (FMS). Its computer numerical control machines have been operating in a high-variety, low-volume manner. Machine utilization, as near as it can determine, is hovering around 10%. The machine tool sales people and a consulting firm want to put the machines together in an FMS. They believe that a $3 million expenditure on machinery and the transfer machines will handle about 30% of RMC’s work.There will, of course, be transition and startup costs in addition to this.The firm has not yet entered all its parts into a comprehensive group technology system, but believes that the 30% is a good estimate of products suitable for the FMS. This 30% should fit very nicely into a “family.” A reduction, because of higher utilization,should take place in the number of pieces of machinery. The firm should be able to go from 15 to about 4 machines, and personnel should go from 15 to perhaps as low as 3. Similarly, floorspace reduction will go from 20,000 square feet to about 6,000.
Throughput of orders should also improve with processing of this family of parts in 1 to 2 days rather than 7 to 10. Inventory reduction is estimated to yield a one-time $750,000 savings,and annual labor savings should be in the neighborhood of$300,000.Although the projections all look very positive, an analysis of the project’s return on investment showed it to be between 10%and 15% per year. The company has traditionally had an expectation that projects should yield well over 15% and have payback periods of substantially less than 5 years.
1. As a production manager for RMC, what do you recommend? Why? Provide at least 3 reason for an optimistic or pessimistic position.
2. Critique these 2 comments.
-I strongly recommend that RMC should go through with the operation. If it is very likely to save more than 3 times the amount of money in the future(10% of tasks completed to 30%) after this change, there should not be much reason not to give it a shot. The only large issue is morality when it comes to dealing with the current human workforce. This issue can be fixed by simply assisting and ensuring every former worker gets another job before being laid off. Doing this will also create goodwill for the company, encouraging consumers to become loyal to a company they will percieve as ethical. Lastly, the lower costs the machines will end up bringing will encourage RMC to explore new business routes for more monetary gains, creating even more jobs for more individuals. This is an optimistic outlook on the situation, but an attainable one as well.
-As a production manager for RMC, I would recommend the FMS because although the project would have a negative NPV (net present value) when using a 15% discount rate, the 15% rate of return presents the rate of return given a beta is considerably high. However, an investment like this has a relatively low beta and should not be discounted using the same rate of return used on projects with a high beta. This is because the more risk that is borne, the higher the expected return. By using a 15% discount rate, the company would unknowingly reject projects that are profitable and accept projects that are not profitable. Another reason why I would recommend the FMS is that the question only talks about the cost savings related to the FMS while there are also going to be some additional cash flows as a result of this system. This system would attract more customers becuase of the reduction in the processing time. This would lead to an increase in revenue. Also just because the FMS reduces the amount of employees needed which could potentially cause damage on its reputation, it doesn’t mean that the company would have to lay off those workers. Considering the fact that the FMS reduces the floor space, the company could take on new projects and make those employees work on the new project.