Final Report_Group16

THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF MECHANICAL AND MANUFACTURING ENGINEERING

SULLIVAN’S FLOORING CONCEPT FINAL REPORT

Bachelor of Mechanical Engineering June 2013

Group 16 Chuan Qin z3326752 Haipeng Lu z3328225  Sichun Zhou z3325210 Vincent Lim z3309837 Yan Wang z3326641 Xiaomeng Xie z3267281

Abstract In management of engineering projects and business, it is vital to know the appropriate tools to make the best decisions in choosing strategies. A case study for a flooring side venture owned by one Norman Sullivan was given. Norman Sullivan had came up with a new flooring concept which processes pinewood to duplicate the look of hardwood and with other techniques created an unique, rustic look at an affordable price. Increase in demand for this concept led Norman Sullivan to re-evaluate his current process and consider strategies to improve his process; the hiring of additional labor and the purchase of a router. An analysis of cost was performed to help make the decision regarding the choice of strategy. Following that, an analysis from a short term perspective with Present Worth and Rate of Return was performed. An analysis for a long term perspective consisting of breakeven analysis and Present Worth analysis with consideration of tax and inflation was also performed. The results of these analyses led to the same conclusion; that the hire of 2 labors is the best strategy.

Group 16

2

Table of Contents 1. INTRODUCTION..........................................................................4 2. SULLIVAN’S BUSINESS................................................................5 2.1 KEY FACTORS OF SUCCESS............................................................................5 2.2 STRENGTHS................................................................................................ 6 2.3 RISKS........................................................................................................ 6 2.4 OPPORTUNITIES........................................................................................... 7 3. ISSUE ANALYSIS.........................................................................9 4. HYPOTHESIS............................................................................13 5. MACHINE COST........................................................................13 6. OTHER COSTS..........................................................................16 7. COST MODEL............................................................................18 7.1 SHORT TERM ANALYSIS...............................................................................18 7.1.1 Time Consumption..........................................................................18 7.1.2 ROR Analysis.................................................................................. 20 7.1.3 Present Worth Analysis...................................................................25 7.2 LONG TERM ANALYSIS..................................................................................27 7.2.1 Breakeven Analysis........................................................................27 7.2.2 Long Term Cost Models...................................................................30 MACHINE ROR................................................................................................ 33 8. DISCUSSION.............................................................................34 9. CONCLUSION............................................................................35 10. REFERENCE............................................................................36

Group 16

3

1. Introduction A study was conducted for Norman Sullivan, a carpenter based in London, Ontario. Norman Sullivan had in the spring of 2007 been posed with decisions regarding the future of his new custom wood-flooring concept. At that time, Sullivan’s wood flooring business is a side venture, which allows him to work full time as a carpenter at Southwestern Ontario. Sullivan had acquired his skills in carpentry from working under experienced and skilled tradespeople and as of the spring of 2007, had acquired eight years of experience in construction. Sullivan’s new concept started from a construction of a friend’s guest cabin. To duplicate the hardwood, rustic look which his friend wanted but was too costly to justify, Sullivan laid 12 inch wide pine planks, stained and finished it to have a similar appearance to hardwood. Another distinctive feature is his installation method which consists of securing the planks to the sub floor with several rows of screws visible on the board. To contribute to the desired rustic look, doweling was done where the steel screw heads are hidden by filling each screw hole with round wooden plugs, sanded to floor level. This concept was warmly received by his friend and spread by word of mouth. $6 per square foot was charged and earning margins are about 50 percent. Four and a half hours per week are dedicated to board manufacturing while installation is primarily done on weekends. 15 flooring jobs are projected for the coming year with an estimated 1 200 manufactured pine planks required. Sullivan’s process in the manufacture of his floorboards is given in the flow chart below.

Plank Planing CutTrimming and Joint Construction Drill screw Sand & dowel + Inspect+ holes Final Modification 5min

1min

mins

4min

4min

1min

Figure 1. Flow Chart

Group 16

4

The joint creation in the manufacture is one that Sullivan seeks to improve. In addition to being time consuming, it also required multiple adjustments for consistency and is prone to error. Thus to improve quality and maintain consistent production, Sullivan is considering the purchase of a router and the hiring of extra help. An economic analysis will be conducted to derive the best combination of strategies that Sullivan could implement.

2. Sullivan’s Business Sullivan’s flooring business is a product based and service based type of industry. The floor boards are self manufactured, thus a product was made for sale and as Sullivan will assemble floors for the customers, there is also a service component. The nature of the industry requires competitive edge in terms of product and customer satisfaction.

2.1 Key Factors of Success As in accordance with Sullivan’s business, unique design, competitive prices and customer satisfaction have been identified as three Key Factors of Success for the flooring business. Unique design can be considered as customized floors are an essential component of the market. Sullivan’s uncommon use of pinewood gave a natural look for the flooring which in tandem to the doweling method that Sullivan used gave a more rustic look which led to Sullivan’s success in satisfying his friend, the customer. Price is also a significant Key Factor of Success as the decision to use pinewood for his friend in Sullivan’s case was because hardwood was too costly. Pinewood has significant advantage of price. Hardwood floor costs up to 5 to 16 dollars per square foot, however, pinewood only costs up to 6 dollars per square foot. The Final Key Factors of Success is customer satisfaction. From Sullivan’s first success in customer satisfaction with this friend, it started word of mouth referrals which led to rapid growth in his business. Thus, key factors of success of Sullivan’s floor business are unique design, competitive price and customer satisfaction.

Group 16

5

2.2 Strengths Strengths of a business can be considered a business specific version of KFS. It is important to evaluate strengths to compare with existing competitors. In Sullivan’s case, strengths of his business could be seen in his product, customers, himself as an owner and the company itself. First of all, the pine wood product that is currently the main product of his business had a large profit margin. Through some research, an average of approximately 40% (Albert D.B., 2007) profit margin for competing hard wood products were found compared to the stated 50% margin for pine wood product. Secondly, Sullivan has the access to a large amount of potential customers. Sullivan was employed as a full time carpenter in a well-known design and renovation company therefore he knew a few people who might interest in his design concept. Thirdly, Sullivan has a strong professional background. His father and grandfather were also carpenters and hence there is positive family influence on his business as it can help establish a reputation for him. Some businesses with a craft lineage use this fact to make it their selling point which Sullivan can also do. Moreover, he has a business degree and sale experience which should benefit his flooring business. Fourthly, he has worked for highend project for wealthy family and professionals for many years. High end usually suggests expensive products and good quality. Through this, consumers are more likely to link him with high end and thus good quality even though his current product is of the cheaper option. And finally, this is a self-owned company, which means that he has a lot of freedom in making decisions.

2.3 Risks The risks associated with the business owned by Norman Sullivan in this case study have been identified as the following: undecided customers, lack of competition prevention, quality variability, reliance on word of mouth advertising and risk of missed deadlines. Undecided customers refer to the fact that in this market, customers do not exactly know

Group 16

6

what they want. Thus, there is no guarantee of stability for market share. This risk is connected to the next risk; lack of prevention competition, in that Sullivan could not prevent his rivals from copying his idea and getting a larger market share out of this concept. As his business is of a part time nature, he could not get a large market share due to labor and supply constraints and there is risk that full time competitors with larger economies of scale and supply capabilities would take him out of the market. The next risk is quality variability which is an explicitly stated risk given by the case study. This risk amplifies the risks of the next issue; reliance on word of mouth advertising. If Sullivan’s quality falls, his reliance on word of mouth advertising which he could not control could make him lose a large part of his market share out of negative word of mouth advertising from customer dissatisfaction. Even without considering the consequences of quality variability, his reliance on word of mouth could also lead him to lose market share to future competitors who resort to standard method of advertising such as internet and newspaper advertising. Finally, the risk of missed deadlines results from his current one man labour process and also the time variability of his process. If anything befalls on Sullivan, no labour would be done and the progress of a project would completely stop. This might lead to missed promised deadlines with customers and possibly lead to customer dissatisfaction, an important key factor of success.

2.4 Opportunities Opportunity is defined as the possible external advantages that a company can use to achieve success. In this business case study, the opportunities are considered based on two categories; manufacturing products, and further investigations. From the case study, two possible ways to solve this problem has been presented; purchasing new equipment and/or hiring additional labors. Purchasing a machine will improve the production efficiency whilst also improving the quality. Extra labor hire can improve manufacturing efficiency but not quality, since although the pieces are easier to handle by more people, the handmade process still has the same capacity of product quality.

Group 16

7

New construction procedures that can save manufacturing time while improving quality can also be developed. Because the property of the material as softwood is less durable than hardwood, the quality of the product needs to be enhanced. This can be achieved by either improving the manufacturing process as presented before or searching for raw material suppliers who would provide better quality products while maintaining lower or equal price. For a formal company, providing after sales service is an indispensable item. Proper service can give customer feedback and enhance customer loyalty and if Sullivan has yet to implement this, it would be a good opportunity. After Sales service can also bring extra benefits by providing extra income from maintenance service and selling and advertising of new products from this maintenance of relations. There are also market share expansion opportunities that can be adopted. Sullivan has yet to employ marketing, where marketing is a common way to publicize company business. Advertising on newspaper, brochures, or website are several general ways for doing marketing he could employ. Additionally, building a company website is a better way to introduce the company’s concept but may not be suitable to propagate recognition. Establishing a brand is another option Sullivan could adopt for his business when it has certain customer base or consistent production line which can ensure the production rate. In addition, market survey may also be a good option to find out the customers’ needs and find potential customers at the same time. To increase revenue and profit, establishing a side business is a great option for gaining profit from each step of his process. Among the opportunities he can exploit are; selling raw material to individuals, providing only manufacturing process or installation service and offering training for people who want to learn about softwood flooring. Furthermore, Sullivan can seek collaboration with other investors. Partnering can be a method to supplement lack resources from each other. This additional access of resources can be in terms of both financial and technical areas. As more investors join in, the more resources and the less risk the business will have. As a result, every investor would be better off. Group 16

8

3. Issue Analysis  Issue Tree Inconsistent Material Supplies

Inconsiste nt Production

Unable to Deal with Increasing Demand

Limited Production Capacity

Non-standardized Manufacturing Process Limited Working Time

Low Manufacturing Efficiency Limited Workplace Limited Storage Space

Average Quality

Longer Installation Time Waste of Time in Manufacturing More Services Required after Sale

Figure 2. Issue Tree

The major issue Sullivan is confronting is that he is unable to finish all the expected work (i.e.15 projects) in the upcoming year. Instead of dividing this issue into whether he should hire people or purchase equipment, there is a different approach to focus on three other sub-issues: the inconsistent production, limited manufacturing productivity and average quality. Therefore, the other changes that Sullivan can possibly make in the future are also included beside purchasing a machine and hiring labor.

Group 16

9

The first sub-issue is the “inconsistent production”, which means Sullivan still has troubles to keep current production going in smooth and steady state. Since pinewood is not the primary choice for most wood board manufacturers, the material supply may affect the production. Moreover, though the manufacturing process of Sullivan has been confirmed, there are possibilities to improve it to optimize design, shorten the production time and improve current quality. The second sub-issue “limited productivity” is the most obvious one; the limited working time and low manufacturing efficiency are the key components. Since this is only a side venture, Sullivan has to do all the works himself without much help from a machine. Moreover, there are two hidden issues, limited working and storage space, which are due to the lack of a large workshop. The last sub-issue; average quality is considered as a hidden issue. It is relevant to the material and design concept, which can actually reduce the overall efficiency in three phases: manufacturing, installation and after-sale. First of all, more floorboards need to be produced since there will be some faulty boards; secondly, it takes longer to install the floorboards when there are not consistency in dimensions; finally, the after-sale service volume will increase. In this report, expanding production and improving quality would be considered as the major goals since they are more relevant to Sullivan’s current problem than the others. In terms of increasing working time, hiring part-time labor would be a good option. On the other hand, purchase of a machine would both increase manufacturing efficiency and product quality.

Group 16

10

Table1: Issue Analysis Framework

As it has been illustrated in the previous part, this case includes three sub issues, inconsistent production, average quality and limited production capacity. To begin with, due to the increasing customer demand, Sullivan could gain larger market share if the production is consistent. By investigation of the production line, the manufacturing process could be modified. Customer survey and interview are two methods to conduct the market analysis. Therefore, the quantity and quality of the product will be improved. Additionally, as the quality of the product is improved, Sullivan will be more competitive and establish a better reputation. The reliability will be improved by quality check. After introducing cutting and drilling machines, several steps can be fulfilled by mechanism. Through modifying the assembling process, like joint method, the appearance and sturdiness can be developed.

Group 16

11

Moreover, due to the limitation of the production capacity, Sullivan can meet the increasing demand and gain larger market share if he increases the production capacity. The market analysis is carried out from the perception of customer and their feedback. By hiring more labor and utilizing new production process, the production would be expanded and capability would be boosted. The analyses shown above include manufacturing process analysis, market analysis, reliability analysis, technology trend analysis and process capability analysis. These analyses may not be carried out at the same time. The manufacturing process analysis needs to be done to increase the capability. Reliability guarantees the quality of the products. After the improvement of production, the market analysis could be introduced to expand the market and looking for potential customers. When Sullivan has enough customers, new technology and process capability analysis would be conducted to increase the capability again and, therefore, gain larger market share.

Group 16

12

4. Hypothesis In our case study, two hypotheses would be considered. They are purchasing a router and hiring part-time labor. Even a do nothing approach and performing both the purchase and hiring would be discussed as well. Moreover, hiring multiple workers would be considered rather than buying more than one machine since the setup price of machine is much higher than labor cost.

5. Machine Cost Machine Selection Sullivan has a table saw already and he is looking for a suitable router to construct joints for his pinewood boards. Figure 1 below shows the capability of the router and as can be seen, Sullivan’s task shown in exhibit 1would not be more complicated than the bottom shape’s. Thus a 3-axis machine would be more than enough.

Figure 3: 3-axis machine cut capability

Exhibit 1. Sullivan’s concept board

By considering Sullivan's workload, the CNC router type is chosen; CNC being an abbreviation for Computer Numerical Control router. The price of a low-end 3-axis CNC router is about 4000 dollars as we can see from the bottom table .

Group 16

13

Table 2: CNC Router Price (CNC Router Resource, 2013) CNC Router Price range

Axes

Comments

Lower than $4000*

3

Hobby CNC router

$4000-$25,000

3

Low end CNC router: limited in size and

$25,000-$50,000

3 or 4

materials Middle-Range CNC router: signage and panel

$50,000-$100,000

4 or 5

work High end CNC router: wide variety of uses

More than $100,000

4 or 5

Highest

end

CNC

router:

Heavy-duty

machinery use

Finally, a multiple function CNC wood routers from Jinan Huawei CNC Router company (Alibaba, 2013)is selected, shown in the table below. The purchase cost is $5000. Maintenance and repair fee is approximately $600 per year and the electricity cost is $52 per year based on its power rating and London Electricity rate.

Group 16

14

Table 3. Jinan Huawei CNC Router Specifications Voltage

380V

Power(W)

5kw

Weight

1700kg

Working area

1300*2500mm

1. Table 4: Machine Price and Costs Estimated Cost

Actual Cost

The router

$4000

$5000

Maintenance and repair

$800 per year

$600 per year

Electricity

$400 per year

$ 52 per year

The outcomes of the machine are similar to Sullivan's expectations, which has been list in the table below. With better board quality, the installation time is halved and there will be no faulty boards and the manufacturing time is reduced into 11 minutes per board. Finally, because of the machine can create more unique looks for the floor board, there is a possibility that the potential customer number will increase.

Group 16

15

Table 5: Machine Outcomes Installation time

50% faster than before

Manufacturing time

Reduce to 11 min per board (originally 15minutes)

Improving quality

No faulty board in manufacturing (originally 2% defect rate)

Design flexibility

Potential customer number increase from more design capability Increase in price for unique look

6. Other Costs Some basic information regarding the costs needs to be clarified. Firstly, the electricity fee was derived from the official website of London Ontario Electricity Rate Canada. We can see from Table 6, London Ontario, Electricity Rate that mid-peak which is 7 am to 11 am and 5 pm to 7 pm of weekdays, costs 10.4 cents per kWh, and off-peak which is after 7pm of weekdays and weekends, costs 6.7 cents (Ontario Energy Board, 2013) Since Sullivan has full time job and can only work 4.5 hours per week, therefore, it is assumed that he does his flooring business half time on mid-peak period and half time on off-peak

period. Thus, an average the electricity fee

6.7 +10.4 =8.55 cents 2

per kWh was done.

Secondly, it was found from that gas price is $4.5/gallon which is $1.2/L in Canada (Alter, 2012). We assume Sullivan has a Ford 4.0 car, it used 12L of gasoline every 100km (US Department of Energy, 2013). It can be calculated that for every 100 km, Group 16

16

Sullivan’s car costs $14.27 for gasoline. For each customer, we assume Sullivan needs to go to their house twice which means two return travels, the first round is for measuring and surveying of the house, the second round is for assembling the floor. Moreover, an approximate single travel distance of 50km was assumed. Thus, the distance Sullivan needs to travel for each project can be calculated as 50km X 4. Therefore, the gasoline cost is 50km X 4 X b X $14.27/100km X100 where b is the number of projects. In addition, a rate of defect for Sullivan in his floor board manufacture is 2%, a normal person’s rate of defect is approximately 5% as a rule of thumb (Wallender, 2013), as Sullivan is an experienced carpenter, an assumed half the rate of defect is deemed reasonable. All the basic information is shown below in Table 7 (Miscellaneous Background Information)

Moreover, labor cost is considered as $2 /hour for 4.5 hours per week as Sullivan estimated in the given case study. This can be concluded as $100 per week per labor. Sullivan’s business satisfied all regulations of The Ontario Employment Standards Act, such as the minimum wage of $10.25 per hour per labor where Sullivan’s labor cost is higher than this (Ontario Ministry of Labour, 2013). In addition, the weekly work hour’s limit is 48 hours and Sullivan’s labor only works 4.5 hours per week, with rest periods considered into it. Finally, revenue of each plank equals to $61.08. Since we know from the case study that each plank size is 10ft X 12 inch convert into cm is 300.48 cm X 30.48 cm = 0.916 meter square. It is known that each plank has size of 1 foot square, Sullivan has $6 profit. Therefore, we can conclude that each plank has revenue 2

0.916 m $6 × 2 =$ 61.08 2 2 0.09m /ft ft

.

Table 6. London Ontario, Electricity rate (Ontario Energy Board, 2013) Period On Peak

Group 16

Time Weekdays:11 AM to 5PM

Rate 12.4cents per kWh

17

Mid Peak

Off peak

Weekdays: 7 AM to 11 AM and 5 PM to 7 PM Weekdays: 7 PM to 7 AM Weekends and Holidays – 24 HOURS

10.4 cents per kWh

6.7 cents per kWh

Table 7. Miscellaneous Background Information Electricity Gasoline Revenue Failure rate

$8.55 cents/kWh $28.54/project $61.08/plank 2%

7. Cost Model Having established the costs of various aspects of the business, a cost model can now be developed. The analysis is differentiated into two perspectives; one for the short term and another in terms of long term. In this case, short term is taken to be in the coming year while a study period of five years was taken for the long term analysis.

7.1 Short Term Analysis 7.1.1 Time Consumption The short-term analysis for different alternatives depends on the time required to accomplish the 15 projects. The average manufacturing time per piece decides the total time needed. Therefore, the manufacturing steps for all alternatives are distributed by line-balancing method. The original time for each step, when Sullivan is the only operator, according to the case study is presented below:

Group 16

18

Plank Planing CutTrimming and Joint Construction Drill screw Sand & dowel + Inspect+ holes Final Modification 5min

1min

mins

4min

4min

1min

Figure 4. Flow Chart

In allocation of labor, the more tricky steps such as trimming and joint constructions that require more technical skills are assigned to Sullivan since he is more experienced and would not make errors. For ease of analysis, the manufacturing time for other laborer(s) matches the time the Sullivan needs for the process. For example, in alternative one and two, Sullivan needs 9 and 5 minutes respectively to finish his part of job, the time for other labour(s) used the same amount of time respectively so that the one piece can be manufactured in 9 and 5 minutes correspondingly. The line-balancing for all the alternatives is shown in table 8 (Manufacturing Steps and Time): Table. 8: Manufacturing Steps and Time Task

Task Time (Labor)

Task Time (Machine)

Task Description

Task That Must Precede

A B C

5 1 4

N/A N/A 3

A B C

D

4

1

Planning Cutting Plank Trimming and Joint Construction Drill screw & dowel holes

E

1

N/A

D E

Sand + Inspect+ Final Modification Total

15 min

Group 16

11 min

19

A 5min

B 1min

C 4min

D 4min

E 1min

Figure. 5: Precedence diagram Table. 9: Process Combination (Konnully, 2013 ) Stations

Task

Task Time (min)

Unassigned Time

Cycle Time (min)

0 idle

15

Do Nothing Sullivan

A, B, C, D, E

15

Alternative 1 (one labor) 9 0 idle 6 3 idle Alternative 2 (two labor) 5 0 idle 5 0 idle 5 0 idle Alternative 3 (one machine) 11 0 idle

Sullivan Labor

C, D, E A, B

Sullivan Labor 1 Labor 2

B, C A D, E

Sullivan

A, B, C, D, E Alternative 4 (one labor & one machine) B, C, D, E 6 0 idle A 5 1 idle

Sullivan Labor

9 5

11

6

7.1.2 ROR Analysis Do Nothing Based on the information provided by the case study background, the 15 projects require approximately 1200 planks so the planks required per project should be 80 planks. The manufacturing time per plank for the original plan is 15 min/plank so that the required manufacturing time per project is 20 hours. Because Sullivan can only work 4.5 hours each week outside of his full-time job working time, the time for each project to finish is roughly 5 weeks. Each year has 52 week (including public holidays), as a result, the maximum project number can be finished is 10. The calculations are considered as consistently evenly distributed for the corresponding costs and revenues.

Group 16

20

80 piece / project ×

15 hour =20 hour → 20 ÷ 4.5 hour /week=4.44 week ≅ 5 week 60

52 week ÷ 5 week =10.4 projects ≅ 10 projects Based on the manufacturing time per plank and the total projects can be finished in the coming year, the revenue, costs of different aspects can be worked out. Revenue per year =$ 61.08 / piece ×80 piece ×10 projects=$ 48864 / year Revenue per month =Revenue per year ÷ 12=$ 48864 / ye ar ÷ 12=$ 4072/ month The electricity cost for the original plan is the electricity consumption of the table saw which has maximum power of 1800w. The operating time for the table saw during the trimming procedure takes 4 minutes. Therefore, the corresponding monthly electricity cost can be calculated. Electricity cost =

Cost Elec=

10.34 Cen/kWh

1800 W 4 × hr × ( 80 ×10 ) × 8.55Cen/kWh=$ 8.21 → $ 0.68/month 1000 60

Based on previously stated assumptions in section 4 (Cost Background), the average travel length for delivery/ measurement of each project is 50km and the fuel cost has been presented as well. The monthly fuel cost can also be calculated as follows. Fuel cost =

$ 14.27/100 km

km (total ) =10× 4 × 50 km=2000 km/ year

C ost fuel =

$ 14.27 20000 km × =$ 285.4/ year → $ 23.78 /month 100 km 100 km ∴Cost total/ month=Cost Elec + Cost fuel =$ 24.46 /month

Group 16

21

The assumed defect rated is 2%, the cost for that is: Cost failitem =Fail items No . ×Cost per plank =2 × ( 80× 10 ) × $ 30.54 per plank =$ 488.64 The total capital cost in this case is the material cost only which is: C . Cost material =$ 30.54 / plank ×(80 ×10)=$ 24432 In the rate of return (ROR) analysis, the cost for electricity/fuel and the revenue are counted as monthly, but the cost for fail item and purchase for material are counted as capital cost. This gives the original plan the cash flow distribution diagram.

Figure 6 Cash Flow Diagram

The equation used for ROR analysis is: 0=−PW D + PW R PWD: present worth of costs or disbursements PWR: present worth of incomes or receipts Then the equation for DN alternative is listed as:

0=−( C .Cost material +Cost fail item )−Total Cost monthly ( P/ A , i ¿ , Period ( month )) + Revenue monthly ( P/ A , i¿ , Period (m

Group 16

22

Other Alternatives The calculations for other alternatives are done through the same procedures but depend on various manufacturing time for each independent situations. Table 10. Manufacturing Time

Time Manufactur ing time/plank( hr)

Time/proj ect (hr)

Time/proj ect (week)

Number of Projects

Total Manufactur ing Time (month)

Alternativ e 1 (1 Extra Labor)

9/60

12

3

15

11

Alternativ e 2(2 Extra Labor)

5/60

6.67

2

15

7

Alternativ e 3 (1 Machine)

11/60

14.67

3.3

15

12

Alternativ e 4 (1 Extra Labor + 1 Machine)

6/60

8

1.78

15

7

The revenue for the four additional alternatives follows the same procedures as for the DN. However, the salvage value of the machine needs to be considered after the period finishing the projects. The salvage value depreciates at a rate of 25% in accordance to the declining balance method. The equation used is: Salvage=Capital Cost × ( 1−i )=$ 5652× (1−0.25 )=$ 4239

Table 11. Revenue and Salvage

Group 16

23

Revenue Revenu e/plank ($/piece )

Number of Planks

Total Revenu e ($)

Time/proje ct (month)

Monthly Revenue ($/month )

Salvag e ($)

Alternative 1 (1 Extra Labor)

61.08

1200

73296

11

6663.27

Alternative 2(2 Extra Labor)

61.08

1200

73296

7

10470.86

Alternative 3(1 Machine)

61.08

1200

73296

12

6108.00

4239

Alternative 4 (1 Extra Labor + 1 Machine)

61.08

1200

73296

7

10470.86

4239

For the cost section, the factors dependent on the number of project such as electricity cost and fuel cost are solved based on finishing the anticipated 15 projects thus the total costs for these two are the same for the additional alternatives, but the manufacturing period and subsequently the monthly cost are different. The capital costs for alternatives with machine contain the extra cost for the purchase of the machine.

Table 12. Costs Cost Electrici ty Cost ($)

Group 16

Fuel Cost ($)

Monthly Labor Cost ($/month

Time/p roject (mont h)

Total Monthly Cost ($/mont

Capit al Cost of

Capital Cost of Materi al ($)

24

Fail Item Cost ($)

) Alternativ e1

12.312

428.1

Alternativ e2

12.312

428.1

Alternativ e3

12.312

428.1

Alternativ e4

12.312

428.1

h)

420

11

840

Machi ne ($)

460.04

7

902.92

12

36.70

420

7

482.92

5652 5652

36648

732.9 6

36648

732.9 6

36648

732.9 6

36648

732.9 6

The Equation used for solving ROR for these four additional alternatives is similar to the one used for DN:

+C . Cost machine C . Cost material +Cost fail item(¿)−Total Cost monthly ( P / A , i , Period ( month ) )+ Revenuemonthly ( P/ A , i ¿ , Period ( month )) ( 0=−¿ ¿

The cash flow distribution diagrams for the additional four alternatives are the same with the one used in DN. By substituting the corresponding values into the equation shown above for each case, the ROR can be solved and presented in the table below: Table 13. Short term ROR

ROR

Group 16

Do Nothing

Alternativ e 1 (1 Extra Labor)

Alternativ e 2 (2 Extra Labor)

Alternativ e 3 (1 Machine)

12.13%

11.66%

17.14%

9.20%

Alternativ e 4 (1 Extra Labor + 1 Machine) 13.85%

25

7.1.3 Present Worth Analysis Present worth is the equivalent present value of the money that will be earned in the future. It is essential to the cost model analysis it is because the alternative that has the highest present value is has the great chance to be the best solution for this short-term business analysis. The decisive strategy for the short term will be made based on results of both Present Worth and ROR analysis. The analysis for present worth for all the alternatives uses the same basic cash flow distribution diagram presented in the ROR analysis section. An Excel command is used to derive the Present Worth. The corresponding Excel equation/command used is: CF CF PV =P+ NPV (i , year ¿ cell , last ¿ cell) The i% is the effective interest. It is solved based on the assumption of the Minimum Attractive Rate of Return (MARR) is 10%. Substituting and solving the equation for the effective interest yields the following result: m

Effective ,i=(1+

r 10 ) −1= 1+ m 12

(

12

) −1=10.47

where, r is the MARR and m is the analyzing period. In this short-term analysis, the frequency is set to be monthly so m is 12 as there is 12 month in a year. Therefore, the effective interest rate is 10.47%. The data for all options has been calculated and presented in the ROR section as well. Therefore, by applying the command for each case, the results of present values are shown in the table below: Table 14. Short Term Present Worth for Different Strategies Strategy

Group 16

Do Nothing

Alternative 1 (1 Extra Labor)

Alternative 2 (2 Extra Labor)

Alternative 3 (1 Machine)

Alternative 4 (1 Extra Labor + 1 Machine)

26

PW ($)

2658.05

2909.39

9199.77

-314.31

7767.79

In the short-term analysis, the cost of company permit fee, tax, and inflation are not considered. The machine requires maintenance every one year, and since the maximum manufacturing period among all the alternatives is one year, the maintenance fee for the machine is not counted either. Furthermore, the assumptions of providing consistent production and evenly distributed tasks per month are made during analysis. Observing the result data in ROR analysis and present value analysis, alternative 2 (hiring two extra labours) has the highest result in both of the sections. This is due to the high production efficiency that takes the shortest manufacturing time per plank (5min/plank), and it takes the shortest manufacturing period for accomplishing the 15 projects. In addition, for short-term analysis with certain project numbers, the options with less fixed cost bring more profits. Since the options with purchasing new machine require much higher set-up costs, these options are not recommended. In conclusion, because hiring two labours has the highest values in both ROR and present value, it is the best option for Sullivan for finishing the anticipated 15 projects in the coming year.

Group 16

27

7.2 Long Term Analysis Table 15. Costs of Strategies with Long Term Considerations

Cost($)

Variable Cost

Capacity Cost Total Revenue

Alternatives Set Up Cost ($) Labor Cost ($ per year ) Land Lease Cost ($ per year) Maintenance Cost ($ per year) Router Electricity Cost ($ per year) Suggested Advertising Cost ($ per year) Insurance ($ per year) Material Cost ($ per project, $30.54 per board) Permit Fee ($ total, $90 per project) Transport Cost ($ Total, Fuel Cost ) Waste Piece Cost ($ Total, 2 boards/project) Project Capacity Annual Operating Cost Total Total Revenue ($)

1 1 Machi Machin 1 ne + 1 2 e Labor Labor Labor -5000 0 -5000 0 0 -2600 -2600 -5200 7920 7920 7920 7920 600 0 600 0 52 0 52 0 500 90 36648

500 90 46420. 8

500 90 70852. 8

500 90 83068. 8

1350 428.1

1710 542.26

2610 827.66

3060 970.36

0

61.08 19 54682. 14 92841. 6

0 61.08 29 34 75910. 90538. 46 24 14170 166137 5.6 .6

15 47618.1 73296

The cost of each strategy from a long perspective is given in the table above. Similar to the short term analysis, some costs are at the same rate such as the material cost, utility, transport, labor, maintenance and waste piece cost. On the other hand new costs considered include land lease (Loopnet , 2013), advertising and insurance (Ian W. Wallace Ltd, 2013); fixed costs which are independent to project capacity. The newly considered variable fee is permit fees derived from the Canadian Home Builders’ Association, calculated by the projects capacity times the permit fee per project.

7.2.1 Breakeven Analysis

Group 16

28

For long-term analysis, as demand is changing constantly through time, it is important to conduct analysis in consideration to this fluctuation of demand. Therefore, breakeven analysis using annual worth (AW) method was carried out for this purpose. AW values of each alternative were calculated referring to the above table. The following equation applied in this analysis uses Excel. AW=ABS (PMT (MARR, no of years, Setup cost, Salvage value)- round(time to finish one job)*labor rate*labor number- material cost- electricity cost- patrol cost- building permit cost- land lease cost- advertisement cost- insurance cost- machine maintenance and electricity cost) The graph below illustrates the total AW of each alterative verse the number of jobs per year. The maximum capacity of each alternative was taken into considered. AW values were converted to positive.

AW vs Quantity 120 100 80 1 labour 2 labour AW, thousand dollar per year

160 machine

1 labour+ 1 machine

DN

40 20 0 0

5

10

15

20

25

30

35

40

Quantity, no. of jobs per year

Figure 7. Relationship between AW and quantity

However, as differences between the AW of each alternative are relative small compared to total AW values, the intersection point of lines are not clear from the graph above. As a result, all the common AW factors were eliminated. Only costs related to labor and

Group 16

29

machine were taken into account. The table below demonstrates the factors considered in the long term analysis.

Table 16: AW factors related to labor and machine 1 machi 1 labor 2 labor ne Setup cost 0 0 5000 years 5 5 5 salvage value(after 5 years) 0 0 1186 labor rate($/week) 100 100 0 output (week/job) 2.67 1.5 3.26 variable cost(total 2.67*x*1 1.5*x*10 labor cost) 00 0*2 0 machine maintenance and electricity cost 0 0 652 MARR（after tax + inflation 15.82 adjusted) 15.82% 15.82% % *x=quantity, number of jobs per year

1 labor+ 1 machine 5000 5

DN 0 5

1186 100 1.77

0 0 4.44

1.77*x*100

0

652

0

15.82%

15.82 %

Therefore, the equation applied was adjusted as followed. AW=ABS (PMT (MARR, no of years, Setup cost, Salvage value) - round (time to finish one job)*labor rate*labor number- machine maintenance and electricity cost) The following figure shows the machine and labor AW factors using quantity as a variable. As noticed that, the AW values were also converted to positive.

Group 16

30

AW(machine + labor) vs Quantity 16000 14000 12000 10000 8000 labour per year 2 labour AW,1dollar 6000

1 machine

1 labour+ 1 machine

DN

4000 2000 0 0

5

10

15

20

25

30

35

40

quantity, no. of jobs per year

Figure 8. Relationship between AW(machine + labor) and quantity

Observing the points of intersection yields us the table below. Table 17. Decision Table based on AW breakeven analysis

No. of Quantity, no. of jobs per year

r Alternative chosen

0-10

DN

11-15

1 Machine

16-20

1 Labor

20-29

1 Labor and 1 Machine

30 and above

2 Labor

It could be seen that the alternate of do nothing is suitable for the number of projects below ten. If the number of project is between 11 and 15, one machine would be the best option. For more than 30 projects, the alternative of two labors can meet the requirement.

Group 16

31

7.2.2 Long Term Cost Models Present Worth with Tax Analysis The first step in a tax analysis is to determine the CFBT i.e. Cash Blow Before Tax. CFBT is given by the following equation. CFBT = GI-E-P+S

GI = Gross Income E = Expenses P = First Cost S = Salvage Value Consequently following the equation, the cash flow within the next five years for all strategies are derived and presented in the table below, table 17.

Table 18. Cash Flow Before Tax

Year 0 1 2 3 4 5

Machine CFBT -$5,000.00 $25,329.90 $25,329.90 $25,329.90 $25,329.90 $26,516.42

Machine & 1 Labour Hire CFBT -$5,000.00 $60,447.14 $60,447.14 $60,447.14 $60,447.14 $61,633.66

1 Labour Hire CFBT $0.00 $38,159.46 $38,159.46 $38,159.46 $38,159.46 $38,159.46

2 Labour Hire CFBT $0.00 $75,599.36 $75,599.36 $75,599.36 $75,599.36 $75,599.36

The Present Worth value is derived from the excel command P + NPV(i%,year_1_CF_cell, last_year_CF_cell)

Applying this command to the CFBT yields the Present Worth values tabulated below. Table 19. The Present Worth values

Strateg y

Group 16

Machine Purchase

Machine Purchase and Labour Hire

1 Labour Hire

2 Labour Hire

32

PW, 5 years, 10%

$91,756.99

$224,878.96

$286,581 .05

$144,654.38

Research of Canadian tax rate has identified a federal tax rate of 15% and a state tax rate of 5.05%. (Government of Canada, 2013) Following that, the effective tax rate identified by the equation Te = (S & L Rate) + (1- S & L Rate)*(Federal Rate) (Voorthuysen, 2013 ) *Te = Effective Tax Rate *S & L Rate = State and Local Rate

The equation gives us an effective tax rate of 12.475%. Depreciation in this case is considered using the declining balance (DB) method at a rate of 25%. The Cash Flow after Tax (CFAT) for every strategy had been put in the table 18 constructed from Excel. The Cash Flow After Tax is given by the equation below: CFAT = CFBT – Ti (Te) = GI – E – P – S – (GI - E- D) Te (Voorthuysen, 2013 )

*D = Depreciation Table 20. Cash Flow After Tax

Year 0 1 2 3 4 5

Group 16

Machine CFAT -$5,000.00 $22,325.93 $22,286.95 $22,257.71 $22,235.78 $23,257.84

Machine & 1 Labour Hire 1 Labour CFA T Hire CFAT -$5,000.00 $0.00 $52,906.36 $33,399.07 $52,906.36 $33,399.07 $52,906.36 $33,399.07 $52,906.36 $33,399.07 $53,944.86 $33,399.07

2 Labour Hire CFAT $0.00 $66,168.34 $66,168.34 $66,168.34 $66,168.34 $66,168.34

33

An original Minimum Attractive Rate of Return (MARR) of 10% was assumed for Sullivan’s strategies as the case study stated that he would be satisfied for 10% rate of return from his machine. Taking into consideration of inflation, the adjusted MARR, MARRf, given by If = i + f + if (Voorthuysen, 2013 ) *if = MARRf *i = real *f = Inflation

became 15.825%, inflation and interest rate at Canada of 2007 being 3% and 3.5% respectively (Trading Economics , 2013). After taking into consideration of this new MARR and then calculating the PW for CFAT with the excel command below, P + NPV(i%,year_1_CF_cell, last_year_CF_cell)

With i% being 15.825%, it yielded the Present Worth values given in Table 19. Table 21. Present Worth After Consideration of Tax and Inflation

Strat egy PW

Machine $68,725.08

Machine & 1 Labour $169,438.69

2 Labour 1 Labour Hire Hire $109,806.28 $217,541.98

As one could observe from the table, the 2 additional labor hire has the most present worth value, which is also the case for present worth before tax and inflation considerations. With the tax analysis, it is observed that the effect of tax does not significantly affect the choice of strategy, as there are very large differences in cash flows for each strategy.

Machine ROR Table 22. Machine Yearly Cash Flow and RoR Ye ar

Group 16

1 Machine Cash Flow

34

0 1 2 3 4 5 Ro R

-5000 25677.9 25677.9 25677.9 25677.9 25864.42 513.50%

In the case study, it was stated that a Rate of Return of 10% is acceptable to justify the purchase of the machine. Calculating the yearly cash flow and using the IRR Excel command to find the Rate of Return for the purchase of machine gives a rate of 513.5% with just the purchase of one machine. However, additional hire of 2 labor gives better results in terms of Present Worth and also without any set up costs, thus in preference to 2 labor hire strategy, machine will not be purchased. Going beyond the scope of the case study, 2 labor hire in conjunction with purchase of the machine might give good results as well. To sum up, based on breakeven analysis, the alternative of two labors can better fulfill more than 29 projects each year. If Sullivan has sufficient customers, the alternative of 2 labors would not only complete the tasks, but also has the highest present worth. However, considering the situation that Sullivan has 15 projects in the coming year and the number of customers reaches 29, which is nearly doubled at the 5th year, the alternative of one machine and one labor would be the best option, for the cost is the lowest while the present worth is still high.

8. Discussion In conjunction with the earlier analysis with present worth, the decision of which strategy to use can be determined. One problem in making a decision is the lack of information regarding projection of future demand. The long term present worth analysis assumes that demand fulfills each strategy’s project capacity; however there are many circumstances Group 16

35

that might prevent this. The breakeven analysis was used to help in this problem, if Sullivan gathered enough data to be able to accurately predict the number of jobs he would have in year, he could use the breakeven analysis to choose which strategy is best based on volume. On the other hand, analysis from a short term and long term perspective has given the conclusion that 2 labor hire theoretically gives the best benefit given the appropriate conditions, as the most cash flow and value is generated. In addition to generating the most cash flow, labor hire of this nature also offers flexibility. In the event that Sullivan was wrong about his approximation of future potential jobs, the workers due to being hired in casual basis can be put on leave until they are necessary. In addition, it allows Sullivan the greatest amount of project capability and the ability to get the largest market share with his new concept, thus eliminating an aforementioned risk of losing out in market share. The hire of labor safely covers the risk of missed deadlines that was a problem before as well. The only issue Sullivan might need to be careful is quality control for his labor.

Group 16

36

9. Conclusion In conclusion, without more accurate data on demand for Sullivan’s concept, the additional hire of 2 labors is the strategy Sullivan should adopt. In addition to having more worth in the short and long run, this strategy also gives him flexibility in cost saving should his approximations of future customers fall short due to unforeseen circumstances. With accurate data regarding the volume he would have each year or limiting himself to a number of projects per year, he could refer to the breakeven analysis table results which gives the best strategy worth depending on the volume of jobs per year.

Group 16

37

10. Reference Albert D. B. (2007). Steadily Improve Your Wood Flooring Business Over Time. Retrieved 2013 from Hardwood Floors: http://hardwoodfloorsmag.com/articles/article.aspx?articleid=176&zoneid=4. Alibaba (2013). Multi Functions CNC Router. Retrieved 2013 from Alibaba.com: http://jnhwcnc.en.alibaba.com/product/815161387215879358/Multi_Functions_CNC_Router_Engraving_Wood_and_Marble_Stone _Machine.html Alter, L. (2012). Gas Prices in Canada Hitting Record Highs, U$5.68 per Gallon and they can't blame Obama. Retrieved 2013, from Tree Hugger: http://www.treehugger.com/environmental-policy/gas-prices-canada-hittingrecord-highs-us-568-gallon-and-they-cant-blame-obama.html Canada Interest Rate . (2013). From Trading Economics : http://www.tradingeconomics.com/canada/interest-rate Forintek Canada Corp. (2006). Wood Flooring. Retrieved 04 11, 2013, from Solutions for Wood: http://www.solutionsforwood.com/_docs/reports/Flooring_Sector.pdf Government of Canada. (2013). Canada Revenue Agency. Retrieved 2013, from What are the income tax rates in Canada for 2013?: http://www.craarc.gc.ca/tx/ndvdls/fq/txrts-eng.html Ian W. Wallace Ltd. (2013). Craft Insurance . Retrieved from Craftsmen Insurance : http://www.craftinsurance.co.uk/Company-profile/ Konnully, J. (2013). What is assembly line balancing? Retrieved 2013, from Slide Share: http://www.slideshare.net/JosephKonnully/assembly-linebalancing Loopnet . (2013). Ontario Industrial Properties For Lease. Retrieved from Loopnet : http://www.loopnet.com/Intl/Canada/Ontario-Commercial-RealEstate/ Ontario Energy Board. (2013). Electricity Prices. Retrieved 2013, from Ontario Energy Board: http://www.ontarioenergyboard.ca/OEB/Consumers/Electricity/Electricity+Pric es Ontario Ministry of Labour. (2013). Employment Standards. Retrieved 05 11, 2013, from http://www.labour.gov.on.ca/english/es/

Group 16

38

Trading Economics . (2013). Canada Interest Rate . From Trading Economics : http://www.tradingeconomics.com/canada/interest-rate US Department of Energy. (2013). Fuel Economy of 2011 ranger. Retrieved 2013, from Fuel Economy: http://www.fueleconomy.gov/feg/bymodel/2011_Ford_Ranger.shtml Voorthuysen, E. V. (2013 ). Engineering Managment . Sydney : McGrawth Hill . Wallender, L. (2013). How much hardwood flooring to order. Retrieved 2013, from About.com: http://homerenovations.about.com/od/hardwoodfloor/a/HowMuch-Hardwood-Flooring-To-Order.htm

Group 16

39