CASE 3: Rochester Manufacturing’s Process Decision Chapter 7

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 salespeople 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, floor space 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.

Discussion Questions
1. As a production manager for RMC, what do you recommend? Why?
2. Prepare a case by a conservative plant manager for maintaining the status quo until the returns are more obvious.
3. Prepare the case for an optimistic sales manager that you should move ahead with the FMS now.
A. INTRODUCTION

Rochester Manufacturing is a precision machining job shop for metal or plastic parts requiring tight tolerances.
The company 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.

B. BACKGROUND
Rochester Manufacturing was established in 1979 and is located 40 miles west and south of Cleveland in
Wellington, OH. Our 12,000 sq. ft. CNC job shop and 2,500 sq. ft. office area combined with our apprenticeship-trained
journeymen machinists provide our customers with an excellent complement of machines and well-qualified personnel. The
company is a member of the National Tooling and Machining Association (NTMA) and is ISO 9001 compliant.
C. STATEMENT OF THE PROBLEM
Outwardly, Rochester’s Manufacturing Corporation’s main issue revolves around its return on investment as it
considers moving some of its production from traditional numerically controlled machines to a Flexible Manufacturing
System (FMS). The analyst aims to give recommendations to Rochester Manufacturing Corporation as a product manager.
She will also 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 intends to provide a case scenario to RMC’s conservative plant
manager for maintaining the status quo until there will be a return on investment (ROI). The analyst will discuss the case for
an optimistic sales manager of how effective FMS is it in terms of its return on investment.

D. ALTERNATIVE COURSES OF ACTION

The analyst of the case attacked the problem statements using different perspectives of the Rochester’s
Manufacturing Corporations’ significant employees: Production Manager, Plant Manager, and Sales Manager. In analyzing
the case, the analyst of this case study considered the aforementioned five (5) Operation Managemen t considerations of
implementing Flexible Manufacturing System (FMS) in the case: Installation, Utilization, Inventory or Throughput, Physical
Space and Return on Investment.
VIEWPOINT NO. 1: As a Production Manager

COMPONENT Advantages Disadvantages Consideration

Installation $3 million expenditure Unknown transition and start-up costs
20% utilization
Utilization Overestimate
increase
Significant decrease
Unquantifiable, but large cost saving
Inventory/ Throughput in inventory and
possibilities
throughput
14,000 square foot
Physical Space Create space for other product lines
opened up
At $3 Million expenditure and 12.5%
Positive Return on
Return on Investment, the project’s
Investment with Under typical project
Return on Investment payback period is 8 years. This exceeds
conservative yield
firm expectation of less than 5 years
assumptions
payback.
Payback period = Project Cost/ (ROI x 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.

As production manager, he or she believes that the inherent advantages of an FMS should tilt the scales in favor
of FMS. His or her management task should be easier and therefore better. The task will be easier and better because
those parts of his or her workday that are related to scheduling, manpower, maintenance, and housekeeping should re-quire
less direction and be easier to control. He or she would be inclined to ask the “numbers people” to be sure they included all
of these relatively minor shop floor issues in the decision.
VIEWPOINT NO. 2: As Conservative Plant Manager

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. The considerations are as
follows:

 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.

A conservative plant manager may well be the individual in the decision-making process who is asked about the
re-turn on investment. ROI may be largely the plant manager’s responsibility. If the numbers do not support change, then do
not do it. Additionally, the trauma of change in layout, training, and acceptance by workers contains numerous hidden costs.
Consequently, the plant manager may have a strong case for the status quo.

VIEWPOINT NO. 3: As Optimistic Sales Manager

An FMS salesperson has the opposite considerations of a project manager. They are looking present the FMS
operation management system in a favorable a financially liberal light. The considerations are as follows:

 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 amounts, 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.

The optimistic sales manager’s case is that improved delivery time (such as improved throughput) and improved
quality may well yield a higher market share, which, if the company is already above break even, is great for profitability, and
hence, ROI will be higher than projected (sales growth is not typically included in ROI computations). Additionally, the
management task is easier (such as there will be fewer machines to maintain, fewer people to supervise), and additional
floor space will be available when needed.

E. RECOMMENDATION
 From the analysis and findings mentioned above, thereby, the analyst recommends that the Rochester
Manufacturing Corporation should move ahead with the Flexible Manufacturing System (FMS). Among the three viewpoints,
the production manager’s perspective is the most relevant to the case. With the new system, there is a high return of
investment for the project covering. 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. Inherent advantages of an FMS should tilt the scales in favor of FMS.

F. CONCLUSION
Flexible manufacturing systems are becoming a prominent part of manufacturing businesses around the globe.
They are designed to react and adapt to changes within the production process, including any unexpected issues or
problems. They provide a number of production benefits and help companies to achieve greater success.
Although it requires extensive planning, which can involve creating detailed designs and schedules, highly skilled
employees to operate the machinery, and may be expensive to implement and add to the company at first. However, they’ll
help FMS save money in the future. They reduce the costs of operation because their ability to adapt to changes helps to
prevent defective products as well as wasted time and resources. On top of that, they require fewer workers to operate them
compared to other manufacturing systems, so companies can save on labor costs. But perhaps, the biggest benefit of
flexible manufacturing systems is that they will help FMS become more efficient. They work to keep everything running
smoothly in most situations. If something within the process changes, they can easily adapt and keep production flowing to
reduce delays and bottlenecks. This helps to create faster production times and, as a result, increased customer service and
satisfaction.