ISyE 3104: Introduction to Supply Chain Modeling: Manufacturing and Warehousing Instructor: Spyros Reveliotis Spring 2006.

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1 ISyE 3104: Introduction to Supply Chain Modeling: Manufacturing and Warehousing Instructor: Spyros Reveliotis Spring 2006 Homework #2 Due Date: Monday, 1/30/06 Reading Assignment: The PowerPoint slides presented in class on Product and Process Selection, Sourcing, Equipment Selection and Capacity Planning, and the material from your textbook assigned at the end of these presentations. Also, for those of you interested to see some more discussion on the material presented in class, Chapters 5 and 7 (including the Supplement of Chpt. 7) from the book by Jay Heiter and Barry Render, entitled Operations Management, that I have passed to the Library Reserves. Problem set: A. Answer the following questions: 1. Explain what is robust product design and why it is important. 2. What is a House of Quality, and what is the main information encoded in it? 3. What are the advantages of standardization? 4. Does group technology promote standardization or not? Explain your answer. 5. How do companies respond to customer request for more extensive customization while promoting standardization for their products and processes? 6. Discuss the importance of flexibility in modern production processes and explain how this concept manifests itself in the operation of contemporary organizations. 7. In the break-even analysis presented in class for the make or buy problem, there was a single break-even-point. Can you contemplate a situation where there might be two break-even-points? Explain clearly your answer, providing all the necessary quantitative analysis. B. Solve the following problems; 1. A company needs to introduce a new part in its production. The capital expenses for supporting the in-house production of this item are estimated at the range of $500,000. The labor cost for in-house production is estimated at $20 per unit, while the necessary raw material can be procured at a cost of $35 dollars per unit. Alternatively, the company can out-source the production of this part to one of its suppliers at a cost of $80 per unit. If the production requirements for this part are expected at the level of 500 units per month, what is the minimum life-span of the part that can justify (from an economical standpoint) its in-house production?

2 2. A printed circuit board is manufactured on an assembly line with 4 workstations. The estimated demand in the next few months is 200 units/day. It is important to have enough capacity to meet this demand, for reasons of profit and goodwill. The number of machines and the resulting production capacity at each station are as follows: Station Number of machines Throughput per day The production manager has suggested that production capacity be increased by purchasing 3 additional machines for station 3; each machine will have a capacity of 50 units/day, and each machine will cost $210,000, installed. The alternative is to subcontract the required extra production, at a cost of $50/unit. a. Explain whether the manager s proposition is a viable solution or not. b. What would be a reasonable capacity expansion plan that would enable the company to meet all the expected demand by producing in-house? c. What will be the cost of outsourcing all the extra demand for the entire next year to the aforementioned subcontractor? Assume that the year has 260 working days. d. An alternative plan that is contemplated by the company is to add only two machines at station 3 and outsource all the extra demand to the aforementioned subcontractor. Compare this solution to the solution of item c above, assuming that the variable cost for in-house production is $30 per unit. 3. An electronics firm is currently manufacturing an item that has a variable cost of $.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14,000 per month. Current demand volume is 360,000 units per year. The firm can substantially improve the product quality by adding a new piece of equipment at an additional monthly fixed cost of $6,000. Variable cost would also increase to $.60 per unit, but annual demand volume is also expected to jump to 600,000 units due to the improved product quality. a. Based on the above information, determine whether the addition of the new equipment is a profitable proposition for the company. b. What is the minimum unit price that would render profitable the addition of the new equipment? Demonstrate clearly all the calculations that support your answers to the above questions. 4. The materials manager for a certain company must determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce. One million units are expected to be produced over the entire product life cycle. Start-up and production costs for the make decision are estimated to total $1 million, but there is a 0.6 probability that the resulting production will fail to meet

3 the required quality standards. In that case, the company will have to decide whether to spend another $1 million to redesign the production line or to eventually purchase the required component from outside. It is also estimated that after the suggested refurbishing, the line will meet the quality standards with probability 0.9. On the other hand, if the line fails to pass these standards for the second time, the only alternative is to purchase the component from outside. Finally, regardless of when the purchase will take place, it will cost $.50 for each procured unit, plus $.5 million in vendor development costs. a. Propose a strategy that will result in the minimum expected cost for the company over the entire product life cycle. b. Also, identify the worst and the best possible outcomes for the company under the strategy suggested in part a. C. Do the case study on the Product Design at Regal Marine, provided in the next pages..

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