EXECUTIVE SUMMARYAccording to labor statistics and expert forecasts, it is expected that the office furniture industry will continue grow in demand. To attract new clients and remain competitive, Precision Steel Fabrication (PSF) must modernize its existing technology with the procurement of a tube laser.
This business case seeks to secure funding for the purchase of tube laser option 2, which provides the greatest return on investment and best suits our needs. The proposal provides an overview of the project opportunity, alternatives, data and timeframes, risk assessment and communication plan.PROJECT OPPORTUNITYThe Project and Opportunity StatementPrecision Steel Fabrication (PFS) has an opportunity to modernize its existing technology and gain the competitive advantage through the procurement of a tube laser (Ask the Expert, 2006). Currently, PSF spends approximately $60,000 in tooling costs which is passed down to the consumer, thus making it difficult to retain and attract new business clients. Another challenge is the slow production rate of current production machinery and its inability to make precise cuts without burrs, thus requiring re-work (Koepfer, 2018). Several layers in the production process hinders operational efficiency as multiple machines and operators must be utilized to fabricate customer products.
In an effort to evaluate the prospect of purchasing a tube laser, this business case was developed. Opportunity Statement:The procurement of a tube laser will increase sales and revenue at PFS by accelerating production rates, minimizing upfront tooling costs, and increasing customer satisfaction.Business Objectives and PrioritiesBusiness Objectives Identified:Objectives DescriptionObjective 1 Reduce operating costs and increase revenue Objective 2 Improve production rates and efficiencyObjective 3 Increase customer satisfaction, client base/loyalty, and sales profitsObjective 4 Improve employee morale, conduct training, and minimize layoffsPriorities:• Decrease operating costs and increase revenue• Increase production rates and efficiency• Increase sales profits and customer satisfaction• Employee training and re-trainingAssignment of MetricsDecrease Operating Costs and Increase Revenue• Annual Cost to run current jobs through tube laser• Tooling Cost Comparison• Breakeven AnalysisImprove Production RatesCurrent production rates are less than desirable, hovering between 80 to 100 parts per hour, thus slows down the rate in which products are manufactured.
To measure the effect of the tube laser on production efficiency, the production rate of each option was analyzed.Increase Sales Profits and Customer SatisfactionHistorical sales data and customer surveys were compiled and were utilized in “what-if” scenarios (Constantin, 2016) to identify the option with the greatest impact on sales and customer satisfaction. Employee TrainingAfter installation of the tube laser, employees will need to be trained by an expert on the machines use, capabilities, and safety features. Each employee will be required to attend a week long, on-site training certification course and will be re-evaluated after 6 months to gauge task proficiency through a hands-on skills and competency evaluation. ALTERNATIVESList of AlternativesAlternatives DescriptionOption 1 Keep existing equipment (status quo), hire one additional maintenance technicians to fix machines during break-down.Option 2 Tube laser with small diameter and thinner wall cut capabilities, rear auto-loader (JLS /Brodure).Option 3 Large tube laser that extends 20 further than the others and is capable of handling multiple types of steel.
Handles small to very large diameter tubing and comes with an automatic bundle loader (Nakamura).Option 4 Tube laser similar to option 2 with an automatic loader (Luxemburg).Gathering InputMembers of sales and marketing, finance, HR, and production met to discuss costs, resources, production needs, sales strategy, training, employee transfers, and potential layoffs. After discussion, it was determined that there would be no layoffs and that employees would be retrained in other areas of production. In terms of sales strategy, recommendations included use of sales forecasting through “what-if” scenarios to identify the potential implications of each alternative and to identify target segments for marketing outreach (Constantin, 2016). Other recommendations included hiring additional staff to support new marketing strategies, consumer outreach, and sales ramp-up.
The finance department was interested the financial impact of the purchase on current and future fiscal budgets. The HR departments recommendations ranged from hiring experts to train employees on the new equipment, scheduling a timeframe and space for training, and hiring additional HR staff to support potential job shifts. The production team recommended hiring a maintenance technician to handle break-downs of existing equipment and also provided the necessary space to install the new equipment should this route be chosen. Discussions with other stakeholders suggested the organization hire an independent consultant to manage all aspects of project implementation; however, it was decided that an internal implementation team would be created. Narrowing the Options• Hire training consultant to provide training on new equipment• Hire maintenance technician for status quo option • Shift some production staff to other areas of the plant for training on new responsibilitiesDATA AND TIMEFRAMEGathering Data Data consisted of information gathered by finance, sales, marketing, and production staff. Metrics relating to costs, financial feasibility, and return on investment were initiated. Analysis was made of the Tube laser cost per hour by calculating wage rates, depreciation, and the cost of the tube laser over a seven-year period. A breakeven analysis identified length of time it would take to pay off the laser and begin to turn a profit.
To identify the impact of the laser on production rates, the cost of machining current jobs through the tube laser were analyzed. Static cycle times were calculated to get an idea of how the length of time it takes a part to cycle through the production process from start to finish. To identify potential re-work issues, the first past yield was examined (Sefcik, n.d). Sales and marketing staff gathered documentation on past sales, current market needs, and customer satisfaction. To achieve an effective marketing and sales strategy, the department sought to identify market trends and reviewed past customer satisfaction reports.
TimeframeThe project will begin its initial phase in November of 2004 and is expected to be fully operational in approximately 2 years. Training is expected to take approximately one week for the production staff. This includes hands-on practice and initial skills assessments. Sales staff will be trained in one week by the vendor on product features and capabilities but will formulate their sales strategy within a two-month period.
The following table provides applicable milestones and timeframes for achieving each task:Task Responsibility Start Date Complete StatusProject Meeting Department Heads 11/3/2004 11/3/2004 Market Research Marketing/Production 11/4/2004 11/15/2004 Develop/Analyze Metrics Department Heads 11/4/2004 11/20/2004 Project Approval CEO/Department Heads 11/20/2004 11/20/2004 Negotiation/Purchase Finance Department 1/15/2005 2/15/2005 Hire Maintenance Tech Finance Department 12/15/2004 1/30/2005 Client Marketing Marketing 3/6/2005 Ongoing Hire Training Expert HR 1/3/2005 2/15/2005 Equipment Installation Supplier 4/1/2005 4/6/2005 Production Training Training Expert 4/25/2005 4/30/2005 Sales Training Sales Department Head 3/1/2005 3/5/2005 Operation Begin Production Manager 5/15/2005 Ongoing Training Evaluations Production Manager 11/30/2005 1/3/2006 Customer Surveys Marketing 1/3/2006 7/1/2006 Evaluate Project Benefits Department Heads 9/30/2006 10/31/2006 Documented Estimates and AssumptionsThe following assumptions have been made based on decision outcomes:• An internal implementation team will be created to manage all aspects of the project• Hire expert training consultant at $18,500 to train production staff on new laser• HR department will create new job descriptions for employees shifting to other positions• If status quo option is selected, one maintenance technician will be hired at $40,000/yearANALYZE ALTERNATIVESMeasurement of Alternatives Against MetricsSeveral key metrics were used to compare all possible options. In addition to the table below, a breakeven analysis revealed the new laser would have a seven-year payoff with a breakeven point in sales of $387, 586 that would be achieved in the second year of operation. Alternatives Upfront Tooling Cost Production Rate Annual Operation Cost Sales Impact Yr 2 Total Costs Assigned Initial Start-up CostOption 1 $ 60,000 100 $ 114,500.17 – $ 40,000 $ 40,000Option 2 $ 30,000 400 $ 61,124.
29 $ 600,000 $ 1,018,500 $ 203,275Option 3 $ 40,000 200 $ 91,686.44 $ 310,000 $ 1,018,500 $ 203,275Option 4 $ 30,000 400 $ 61,124.29 $ 600,000 $ 1,018,500 $ 203,275Comparing AlternativesWith four options to consider, we not only analyzed the financial aspects and production capabilities of each option but conducted market research to identify vendors with product availability, excellent customer service, and a sound reputation. In terms of funding, Option 1 requires $40,000 to hire a maintenance technician. Options 2-4 require an initial investment of $184,775 and with additional monthly payments. The cost of hiring a training consultant and new maintenance technician were factored into the following comparisons: Option 1 Benefits: No training costs, maintain status quo, no personnel reassignmentsDrawbacks: No reduction in tooling costs, requires manual load, requires additional maintenance technician at $40,000 per year, minimal increase in sales/revenue, production rate 100 pph, and operating costs remain at $114,500.
17; may not be able to keep up with consumer demand.Option 2Benefits: Increased sales of 160,000 in first year, production rate 400 pph, tooling costs $30,000, operating costs $61,124.29, manual loader, vendor customer service, product (laser) available, increased customer service and market competitiveness.Drawbacks: $1M procurement cost, training consultant $18,500, requires shifting of personnel and training, can only cut smaller diameter tubing with thinner walls.
Option 3Benefits: Increased sales of 160,000 in first year, tooling costs $40,000, operating costs $91,686.44, manual loader, runs more types of steel, handles various tubing sizesDrawbacks: $1M procurement cost, training consultant $18,500, requires shifting of personnel and training, requires more space (20 ft), slower production 200 pph, only one operating in japanOption 4Benefits: Increased sales of 160,000 in first year, production rate 400 pph, tooling costs $30,000, operating costs $61,124.29, manual loader, increased customer service/market competitivenessDrawbacks: $1M procurement cost, training consultant $18,500, requires shifting of personnel and training on new duties, lack of sales knowledge/product.COURSE OF ACTION AND RISK ASSESSMENTSolution Option 2: JLS /BrodureThis option was selected because it was the best value for our money and fit the needs of the organization. With sales earnings estimated at $600,000 (in second year) and a much faster production rate than some of the other tube lasers, it is the most economical choice. This option also offers ease of purchase, excellent vendor customer service, and is readily available for purchase.
Furthermore, the 50% reduction in tooling costs for this particular option will increase customer base, satisfaction, and loyalty thus making PSF more competitive within the industry. Risk Assessment and Required ModificationsThe risks associated with the procurement of a tube laser (Option 2) include:• Failure to secure a training expert within the specified timeframe• Anticipated sales estimates fall short• Lack of adequate resources to complete projectTo mitigate the risks, we will negotiate services with our second-choice training expert should our selected expert fall through. An in-depth training will prepare sales staff with the knowledge needed to rigorously market the new technology to promote sales. Although unlikely, we would revert back to status quo on a temporary basis should the required resources fall below acceptable levels. However, based on our assessment we believe the risk factors are very low.IMPLEMENTATION PLANPurpose and MilestonesThe implementation plan will ensure all required actions and milestones are successfully met. Milestones have been fully developed and assigned with expected completion dates and is provided in the timeline portion of this proposal. During the implementation phase, procurement staff will negotiate the tube laser contract and contract for the training expert.
The manufacturing department will deliver products and plans to the manufacturer for product testing to ensure product specifications are met prior to the purchase (Ask the Expert, 2006). HR staff will develop new job descriptions for shifting employees and will schedule all training; this includes training on the tube laser. The cost of the tube laser will require an initial deposit of $184,775.00 and carry annual cost of $37,440.00 which will be budgeted for by the finance department. Marketing and sales staff will ensure target populations are informed of the new technology and lower tooling costs through the development of brochures, sales calls, and on-site visits. Return on InvestmentReturn on investment will take seven years, but the benefits of the project will begin to produce increased sales within the first year at $160,000 and $600,000 in year two. The Net Present Value (NPV) was calculated using a discount rate of 20%, initial investment amount of $184,775, Cashflow of $388,027 and an estimated tube laser life expectancy of 15 years.
Calculations yielded a positive NPV of $138,580.83, thus making it a profitable purchase decision (Accounting for Management, n.d).Tracking ResultsResults will be tracked using several of the key metrics already used in this proposal to evaluate project progress and outcomes. These results will provide a framework for lessons learned that will be applied to future projects. To evaluate outcomes, we will monitor all aspects such as expenditures, revenue, timeliness, resources, and production outputs to ensure objectives were successfully met.Communication PlanA communication plan has been devised to inform audiences of PSF’s new modernization efforts and its capability to provide high-quality components at a much faster and cheaper rate than in the past.
Key decision makers have been given the data and will review this proposal for approval. All departments have been notified of their responsibilities and are ready to engage in project tasks and requirements.ConclusionIt is recommended that PSF approve funding for the procurement of a tube laser to increase productivity, minimize production and tooling costs, and increase customer satisfaction. With an initial investment of $184,775, the return on investment will yield substantial results and increase significantly increase cashflow, thus giving PSF the competitive advantage over its competitors.
.ReferencesAccounting for Management. (n.d.
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The importance of sales forecasting in establishing marketing strategies. Bulletin of The Transilvania University of Brasov, Series I: Engineering Sciences, 9(1), 3-8. Retrieved from EBSCOhost.Koepfer, C. (2018).
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