ROCHESTER

MANUFACTURING’S
PROCESS DECISION
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Graduate Case Study

Presented to the School of Business and Economics
University of San Carlos
P. del Rosario Street, Cebu City

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In Partial Fulfillment
of the Requirements for the Degree
Masters of Management Major in Hospitality Management

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SUBMITTED BY:

JOYCE O. REBANO
CLAIRE ANN A. VISANDE
LIKHA HIMAYA G. PIAO
HANNAH G. BAAC

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PRESENTED TO:

DR. PEPITO T. ECHAVEZ

I – INTRODUCTION

Rochester Manufacturing is a precision machining job shop for metal or plastic parts
requiring tight tolerances. Rochester Manufacturing offers expertise in difficult-to-
machine materials often used in critical parts such as fluid power components, medical
device components, and industrial equipment and hydraulic components. The company
offer developmental assistance from prototyping to commercial manufacturing of small
to medium-sized lots, including reverse engineering of undocumented components.
They also provide secondary operations including precision electrolytic deburring and
outsourced operations such as plating, heat treating and anodizing.

II – PROBLEM STATEMENT (OBJECTIVES)

The group aims to give recommendations to Rochester Manufacturing Corporation as a

product manager and analyze the project’s return of investment if the corporation will
move from traditional numerically controlled machines to a flexible manufacturing
system (FMS). It also aims to give a case scenario to RMC’s plant manager for
maintaining the status quo until there will be a return of investment. The group will
discuss the case for an optimistic sales manager of how effective FMS is it in terms of its
return of investment.

III – ANALYSIS AND FINDINGS

(1) As a Production Manager we would recommend this project, though now without an
extensive amount of deliberation.

There are 5 Operation Management considerations of implementing flexible

manufacturing system (FMS):

OM
BENEFITS/ NEGATIVES CONSIDERATION
COMPONENT

Unknown transition and start up

INSTALLATION None/ $3 Million Expenditure
costs

20% utilization increase/

UTILIZATION
overestimate

INVENTORY/ Significant decrease in inventory Unquantifiable, but large cost

THROUGHPUT and throughput saving possibilities
 PHYSICAL Create space for other product
14,000 square foot opened up
SPACE lines

At $3 Million expenditure and

Positive Return of Investment
RETURN OF
with conservative assumptions/
INVESTMENT
under typical project yield
12.5% Return of Investment, the
project’s payback period is 8 years.
This exceeds firm expectation of
less than 5 years payback

*Payback period = Project Cost/ (ROI * Project Cost) = 1/ROI

While ROI and payback period fall below company standards, the potential for new
business lines in the empty space, low project risk and capital saved from inventory and
throughput re-education justify the project.

(2) While the above analysis is both conservative and realistic, both FMS salesperson and
plant manager must consider best and worst-case scenarios, respectively. A conservative
plant manager is most concerned with maintaining their current line and growth with
limited disruption. These assumptions must be conservative.

Installation poses the largest threat to current product lines and cost savings. $3
Million in expenditures could be a very generous estimate, with various transition, start
up, and unforeseen expenses likely. It is not uncommon for projects to cost twice an
estimate, making the project a $6 Million dollar endeavor.

Utilization, like installation, could very likely be an overestimate. 20% is a high

estimate, with 15% being more likely and 10% being a distinct possibility. At this level of
utilization the ROI drastically drops and profit from product lines drops off (due to low
volume).

Inventory and throughput are direct functions of utilization. A conservative estimate

of utilization would point to a much larger inventory and lower throughput (each
decreasing ROI of the project).

Physical space is a set amount, and will not decrease even in conservative estimates.
If the 14,000-square foot space is not put to efficient and profitable use, then optimistic
contributions of a new product line cannot be considered in Return of Investment
estimation.

ROI, and subsequently payback period, is already below company standards. With
this in mind, conservative estimates push ROI well below 10%. At a certain point,
investing in Treasury Bills or CDs provides the same payoff with no risk and no transition
period.

(3) An FMS salesperson has the opposite considerations of a project manager. They are
looking present the FMS OM system in a favorable a financially liberal light.

Installation carries a consistent price, but companies with infrastructure may have
already invested in infrastructure and personnel that reduce redundancy costs.

Utilization was estimated at a “conservative” 20%. Due to high throughput and low
inventory capability of the FMS system, the potential for greater utilization is higher.
Furthermore, FMS’s greatest strength is autonomy, versatility, and adaptability. While
the current system may have comparable utilization, a product or market change would
render the current system unusable. This would not be the case with the new FMS
system.

Inventory and throughput are direct functions of utilization. A higher estimate of

utilization would point to a much lower inventory and higher throughput (each
increasing ROI of the project).

Physical space is a set of amount, and will not increase even in liberal estimates. If
the 14,000-square foot space is put to efficient and profitable use, then a whole another
product line could be added to the company. This creates an unaccounted for ROI
contributor.

ROI, and subsequently payback period, is below company standards. That being
said, the FMS system allows the company to quickly and efficiently changes product lines
(important, but not accounted for in ROI). Conservative estimates also put ROI at the
“low-end” of company standards, but the product provides a guaranteed product line
improvement with a possible large upside.

III - ANALYSIS AND FINDINGS

IV – CONCLUSION AND RECOMMENDATIONS

From the analysis and findings gathered by the group, thereby, we recommend that the
Rochester Manufacturing Corporation should move ahead with the Flexible Manufacturing
System (FMS) now. With the new system, there is a high return of investment for the project
covering

REFERENCES:
1) www.rochestermfg.com