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LinnæusUniversity
1
Final report 22-10-2012
In the
COURSE
Life Cycle Cost Analysis
2SE014
Course coordinator: Taye Matias
...
2
Acknowledgement
We would sincerely like to thank our lecturer Matias Taye interesting and useful
lectures. We would also...
3
Summary
This report is written for Life Cycle Cost Analysis‟s project at the autumn 2012. Our
case company which taken f...
4
Table of Content
1 Introduction............................................................................................
5
4.5 Calculation of PW,EAC,OEE .............................................................................................
6
1 Introduction
Introduction part is related to course of Life Cycle Cost, 2SE014, at Linnæus
University during the autum...
7
 Assume the maximum production of the punching machine after implementing TPM
is 265,000 units/year
 Assume the averag...
8
2 Theory
In this project, we are going to provide 3 alternatives which are adapting current
situation (no change), purch...
9
2.2 Present Worth
The present worth method is used to find out the most economical alternative. Present
worth assumes th...
10
OEE= Availability* Performance Efficiency* Rate of Quality
Availability is a comparison between the amount of time the ...
11
advanced experience, discussion, etc. Therefore, operators can have a better insight into TPM
and enhance their enthusi...
12
There are three chosen production lines and they are punching machine, edging press
and painting.
First, there is WIP (...
13
an internal interest rate of 8 %. There will be costs for tools and spare parts after the first year
and the costs are ...
14
4 Analyze
In the analyze part some methods are mentioned in the theory section. These methods
are Cost Breakdown Struct...
15
time so it will be able to downtime. In addition to “Company A” has mainly outsourced
maintenance for this reason outso...
LinnæusUniversity
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Figure-1: Buying a new machine (Cost Breakdown Structure)
Buying a new
machine
Recurring
Cost
Mainten...
LinnæusUniversity
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4.4 Cash Flow Diagram
Cash flow diagram is a tool used for show all costs and incomes like investment...
18
Cash flow table for buying a new machine
Revenue= 250000*100*0.92=23millions
Yea
r
Labour cost
(millions)
Tools
cost
(m...
19
Buying a new machine
PW= -10.08 – 12.07(P/A,0.08,10)- 0.619(P/A,3%, 8% ,10)- 0.062(P/A,10%, 8 %,10)-
0.69(P/A,10%, 8 %,...
20
4.6 Benefit Cost Analyses
Alternatives Total
Cost(PW)
OEE B/C
Alternative-1(buying a new machine) 103.32
million SEK
76...
21
5 Results
In our project, we use present worth (PW), equivalent annual cost (EAC), benefit-to-cost ratio
(B/C ratio) an...
LinnæusUniversity
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6 Conclusions
To increase their OEE we have generated three alternatives. We have decided that
“Buyin...
23
7 References
1. Adedeji B. Omitaomu, Olufemi A.,Computational,2007, Economic Analysis for
Engineering and IndustryBadir...
LinnæusUniversity
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Appendix1-Implementing TPM
Implementing
TPM
Recurring Cost
Training Costs
Hiring experts
Overtime Cos...
25
Appendix2-Maintain current situation
No changes, current
situation
Recurring
Cost
Maintenance
Costs
Spare parts
interna...
LinnæusUniversity
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Appendix 3- Cash Flow Diagram for implementing TPM
LinnæusUniversity
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Cash flow table for TPM
Revenue=190000*100*0.76=14.44millions
Yea
r
Labor cost
(millions)
Tools
cost
...
LinnæusUniversity
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Appendix 4- Cash Flow Diagram for no changes
29
Cash flow table for no changes
Revenue= 153000*100*0.65=9.95 millions
Yea
r
Labor cost,
(millions)
Tools
cost
(millions...
30
Appendix5- Calculation of Present Worth, EAC, OEE for Implementing TPM
PW=-0.1+14.44(P/A,0.08,10)-0.619(P/A,3%,8%,10)-0...
31
Appendix 6-Calculation of Present Worth , EAC, OEE for Maintain current situation
PW= [-1.12(P/A, 3%, 8%, 10) - 0.417(P...
LinnæusUniversity
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Apendix7
Buying new machine
Buying New Machine Cost Table
Recurring Costs Non-Recurring
-Operational ...
LinnæusUniversity
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Implementing TPM Cost Table
Recurring Costs Non-Recurring
-Training Costs -Labor Costs
 Hiring exper...
34
Maintain current situation
Recurring Costs
-Operational Costs
 Labor = 619000 SEK /year , raise 3 % annually
 Tools =...
35
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Lcc project

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Lcc project

  1. 1. LinnæusUniversity 1 Final report 22-10-2012 In the COURSE Life Cycle Cost Analysis 2SE014 Course coordinator: Taye Matias Faculty: School of Engineering Group E Hande Madenoglu Ka Man Yan Serkan Alan Kin Yan Man
  2. 2. 2 Acknowledgement We would sincerely like to thank our lecturer Matias Taye interesting and useful lectures. We would also like to thank for his time and providing valuable information and continuous support and guidance through this project. Växjö, October 2012
  3. 3. 3 Summary This report is written for Life Cycle Cost Analysis‟s project at the autumn 2012. Our case company which taken from Matias Taye. And the company is a fictive company. Company name is “Company A” which is located in south part of Sweden. The factory in “Company A” is manufacturing different kinds of machines to use in daily life for families such as washing machines, fridges, ovens and etc. The factory in “Company A” is over twenty years old. In the factory, “Company A” is using a line production to manufacture the different kind of machines. We took three different operations which are punching, edging and painting. In this report we have generated three alternatives to help “Company A” to decrease their downtime. There is a critical machine which is punching machine. This machine affect whole production line because of its working performance. Our alternatives are buying a new punching machine, do maintenance with implementing TPM methodology and no changes at the current situation. By using the Benefit/cost analysis method we will able to compare these alternatives to each other and select the best.
  4. 4. 4 Table of Content 1 Introduction.......................................................................................................................................... 6 1.1 Background.................................................................................................................................... 6 1.2 Assumption.................................................................................................................................... 6 1.3 Task................................................................................................................................................ 7 1.4 Research methodolgy.................................................................................................................... 7 2 Theory................................................................................................................................................... 8 2.1 Cost-Breakdown Structure (CBS)................................................................................................... 8 2.2 Prensent Worth............................................................................................................................. 8 2.3 Equivalent Annual Cost (EAC)........................................................................................................ 8 2.4Benefit Cost Analysis (B/C Analyses).............................................................................................. 9 2.5 Overall Equipment Effectiveness (OEE)......................................................................................... 9 2.6 Total Productive Maintenance (TPM) ………………………………………………………………………………….….10 3 Empirical findings ............................................................................................................................... 11 3.1 Presentation of the company...................................................................................................... 11 3.2 Production line ............................................................................................................................ 11 3.3 The current situation................................................................................................................... 12 3.3.1 Information about the critical machine ............................................................................... 12 3.3.2 Critical components of the ciritcal machine......................................................................... 12 3.3.3 Maintenance sturcture of the critical machine.................................................................... 13 4 Analyze ............................................................................................................................................... 14 4.1 Problem....................................................................................................................................... 14 4.2 Alternative................................................................................................................................... 14 4.2.1 Buying a new machine.......................................................................................................... 14 4.2.2 Implemneting TPM............................................................................................................... 14 4.2.3 Maintain current situation.................................................................................................... 15 4.3. Cost Breakdown Structure ............................................................................................................. 15 4.4 cash Flow Diagram .......................................................................................................................... 17
  5. 5. 5 4.5 Calculation of PW,EAC,OEE ............................................................................................................. 18 4.6 Benefit Cost Analysis ....................................................................................................................... 20 5 Results ................................................................................................................................................ 21 6 Conclusion ......................................................................................................................................... 22 7 References.......................................................................................................................................... 23 Appendix I.............................................................................................................................................. 24 Appendix 2............................................................................................................................................. 25 Appendix 3............................................................................................................................................. 26 Appendix 4............................................................................................................................................. 28 Appendix 5............................................................................................................................................. 30 Appendix 6............................................................................................................................................. 31 Appendix 7............................................................................................................................................. 32
  6. 6. 6 1 Introduction Introduction part is related to course of Life Cycle Cost, 2SE014, at Linnæus University during the autumn semester 2012. This chapter mention about the background, a short task description and research methodologies. 1.1 Background Life Cycle Cost Analysis is a useful method to collect and treat all costs that occur over the full life span or a specified period of a services or goods. Aim of the Life Cycle Cost analysis method minimizing the costs and maximizing the turnover. The Life Cycle Cost Analysis includes the entire life cycle regarding raw material manufacture, distribution, transportation, maintenance. LCC provides important inputs in the decision making process. The Life Cycle Cost Model is a method to calculate the Life Cycle Costs in a company. “Life Cycle Costs are summations of cost estimates from inception to disposal for both equipment and projects as determined by an analytical study and estimate of total costs experienced during their life.” (P.Barringer, D.P. Weber, 1996) 1.2 Assumptions In this paper, all the given information in the task paper is used as a primary data for evaluating fictive data which is taken Matias Taye. Assumptions are made only if there is lack of information. All the assumptions that are made are listed below. Assumption for buying a new machine  Assume the condition of the new machine at the first ten years and no external maintenance at the first 10 years.  Assume internal maintenance performs every year.  Assume the new machine is energy saving, so the overhead cost can be lowered  Assume the up time of the new punching machine is 92 %.  Assume max- production = 300000 units/ year  Assume average production = 250000 units/ year  Assume the scrap rate is 1% Assumptions for implementing TPM:  Assume the external maintenance performs every 2 years.  Assume the internal maintenance performs every year.  Assume the up time of the punching machine after implementing TPM is 76%.
  7. 7. 7  Assume the maximum production of the punching machine after implementing TPM is 265,000 units/year  Assume the average output is 190,000 units/year  Assume the scrap rate =6%  Assume each operator has to participate in the training for 4 hours/week  Assume there are 45 working weeks per year The rest of the paper is organized as follows: In the second section, the relevant theories, methods and tools are described. In this section, the methods that are used in the paper are explained. Third section focuses on the tasks empirical findings. Fourth section is analyzed to decide best alternative. 1.3 Task First of all the aim of task is to analyze the selected production line and choose critical machine. Project goal is mainly to come up with three alternatives for improving the working performance for whole production line. There are three alternatives. One of them is buying a new machine and the other one is implementing TPM. By following the Life Cycle Costing LCC methodology and use Benefit /Costs analysis method it is possible to select the best alternative for the company. 1.4 Research methodology As mention above “Company A” is a fictive company. Thus, we had all data about the company and production line which are given by Matias Taye. Whole used methods are gathered by lecture notes, books, some data bases such as Emerald, Science direct and Google scholar.
  8. 8. 8 2 Theory In this project, we are going to provide 3 alternatives which are adapting current situation (no change), purchasing new machine and implementing TPM. We are going to evaluate these alternatives by using: 1. Cost Breakdown Structure (CBS) 2. Present Worth (PW) 3. Equivalent Annual Cost (EAC) 4. Benefit Cost Analysis (B/C analysis) 5. Overall Equipment Effectiveness (OEE) 6.Total Productive Maintenance (TPM) After computation, we can choose the best alternative by comparing the results obtained. 2.1 Cost Breakdown Structure (CBS) CBS is very important for life cycle cost analysis. This is because the main detailed costs of different alternatives can be obtained through cost breakdown structure, and be classified into different cost categories which cover labor force, materials, energy, transportation, etc. (Zhu Hong, Hu Wenping,2010) The Cost Breakdown Structure can be divided into three phases which are cost of acquisition phase (CBO), cost of operation and maintenance phase (COM) and cost of decommissioning and disposal phase (CD). The cost can be further breakdown for analysis purpose. (Zhu Hong, Hu Wenping,2010) There are basic characteristics should take care when using CBS. These are: -It should include internal costs and relevant costs -Important to identify all cost elements and their context -CBS should be compatible. -CBS should be categorized costs to allow monitoring -CBS should be devised to see different levels of data -CBS should be flexible enough to allow cost allocation LCC= CBO + COM + CD
  9. 9. 9 2.2 Present Worth The present worth method is used to find out the most economical alternative. Present worth assumes that future investment has a value in today‟s dollars and that value is determined by the cost of money over a fixed period of time. Therefore, the present worth method is used to indicate the value of money which the company would gain. The value of present worth should be positive in order to be attractive because negative value means there will be a loss if the project is launched. (Mark Shaw, DennisE. Snyder,2001) 2.3 Equivalent Annual Cost (EAC) EAC is an approach to calculate how much a project costs annually. Engineering design and projects often consider costs and thus it is crucial to find out the annual cost. It is also very important to present the EAC of a project to the management personnel because they have to plan the annual budget before launching a new project. 2.4 Benefit Cost Analysis (B/C analysis) Benefit and cost analysis involves identifying costs and benefits for each alternative investment and selecting the best alternative according to a pre-specified criterion. Benefit cost analysis is used to show how much return there is per money of investment. It helps predict whether the benefits of an alternative outweigh its costs, and by how much relatives to other alternatives. (Schniederjans, Marc J. Hamaker, Jamie L. Schniederjans, Ashlyn M).4 Depreciation 2.5 Overall Equipment Effectiveness (OEE) OEE measures the actual performance of a tool or machine relative to its performance capabilities. Its constituents include Availability, Performance Efficiency and Rate of Quality. (S.E. Gouvea da Costa, E. Pinheiro de Lima,2002)
  10. 10. 10 OEE= Availability* Performance Efficiency* Rate of Quality Availability is a comparison between the amount of time the machine is actually producing and the amount of time it was planned to produce. Performance Efficiency is a comparison between the real production rate of the machine and the expected production rate. Rate of Quality is a comparison between the number of produced units that fits the specifications and the total units produced. (S.E. Gouvea da Costa, E. Pinheiro de Lima,2002) By calculating the OEE of different alternatives, we can compare which alternative has the highest performance capabilities. For example, we can find out the OEE of an operation after implementing TPM. If the OEE of the operation after implementing TPM is higher than doing nothing, then TPM should be adapted in terms of OEE. 2.6 Total Productive Maintenance (TPM) TPM involves the participation of all employees in the company because top management plays an important role in creating supportive environment to implement TPM and operators plays an important role in finding and solving problems in the production line. TPM puts emphasis on the operator‟s duty on maintenance known as Autonomous Maintenance. Operators can have a better understanding on how equipment works, notice the abnormalities of the equipment and tell if quality is decreasing through training, exchange of
  11. 11. 11 advanced experience, discussion, etc. Therefore, operators can have a better insight into TPM and enhance their enthusiasm to participate in the production process. Hence, the maintenance group can concentrate on more complicated problems. Autonomous Maintenance work includes (Li u Yile, Xu XueHang, ZouLei, 2008): 1) Clean up including seiri(sort), seiton(set in order), seiso(shine or sweep), seiketsu(standardize) and shitsuke(sustain). 2) Identify and eliminate root cause of machine failure 3) Establish data collection and standards to prevent the problems found in step 1 and 2 from happening again. 4) Develop standards to verify key operating parameters. 5) Train operator on equipment function and the key elements for good operation. 6) Identify spare parts and tools needed and availability. 7) Repeat the above steps for continuous improvement. 3 Empirical findings 3.1 Presentation of the company Company A is a leading company in Sweden and it produces appliances. It produces products for families with simple request in their ordinary day such as tumble dryers, ovens, fridges and washing machines. Company‟s facilities are in south part of Sweden. There are about 490 employees. In 2009 their endorsement was about 1.5 billion SEK. They produce mainly professional washing machines, dryers, drying cabinet something like that as well as they improve booking/paying system about laundry rooms for real estate owners. 3.2 Production line Production is composed of different sections. Different sections produce different parts. They produce some major parts and also they purchase a lot of electrical components which they cannot produce. And these components are kept in inventory. All parts have different cycle time so production of different parts starts at different time. Manufacturing processes are planned so that all parts can be ready during assembly. Also all stations have assigned TAKT times. They use 5S and lean manufacturing methods to eliminate non-value activities and decrease major wastes. If all parts cannot be produced at the right time, there will be production delay and this affects the whole production process.
  12. 12. 12 There are three chosen production lines and they are punching machine, edging press and painting. First, there is WIP (work-in-progress) storage of steel sheets in different sizes with different depth used for altered products. These sheets will be loaded into the three punching machines to do modification. The punching machine will perform one kind of job each time. After that, the processed sheets will be transferred to the edging machines. The edging machines are operated manually and this causes heavy lifting to the operators. Finally, the sheets are painted and will be dried for two to three days in store. 3.3 The current situation Our critical machine is one of the punching machines which have been used for more than 20 years and it has gone through many failures during its usage. Now the punching machine has no any book value. Since different punching machines have different working performances a breakdown in the punching machine will cause delays for the whole production line as no replacements of other machines can take place. So we are going to do an analysis on this machine by using different approaches and evaluate it. 3.3.1 Information about the critical machine A similar machine at present time costs around 10 million SEK on the market. The average output from the punching machine is 3400 details per work week. The machine operates at 65% so the maximum output from the punching machine will be 5230 details per work week. The costs for the punching machine will be estimated as 25 % of the total cost specified for the production line. The salvage value is assumed to be 15000 and declining balance depreciation method is used with a machine life length is 10 years. The company uses
  13. 13. 13 an internal interest rate of 8 %. There will be costs for tools and spare parts after the first year and the costs are assumed to rise with 10 % per annum. 3.3.2 Critical components of the critical machine The software program used in the machine is old and there are some minor problems. Failure of the system must be fixed before the machine starts working again. Loading of the steel sheets are the raw materials for the punching machine to proceed. The steel sheets should be of good quality for the punching machine to operate. The adaptor tool holder should be in good conditions for the machine to produce quality items. 3.3.3 Maintenance structure of the critical machine There are 3 technicians working for the reparation and maintenance of punching, edging and painting production line. Operators are responsible for minor maintenance tasks. The punching machine will have an ordinary maintenance service outsourced annually to ensure the machine operation follows the safety regulations. A thorough maintenance of the machine will be carried out every second year or after 25000 operating hours. It is known that the punching machine is at the end period of its life cycle as it breaks down frequently and minor unplanned stoppages take place.
  14. 14. 14 4 Analyze In the analyze part some methods are mentioned in the theory section. These methods are Cost Breakdown Structure (CBS), Benefit Cost Analyses which helps to make decision. We have compared the three alternatives and compare each other by using Present Worth, Equivalent Annual Cost as decision criteria. 4.1 Problem A main goal at “Company A” is to increase working performance for the whole production line and also decrease the downtime. We choose the punching machine as our critical machine which has been used for several years and has experienced many breakdowns during its usage. Failure of this machine can also affect the whole production line. Thus, we have tried to find a solution for this machine. 4.2 Alternative There are three alternatives we have come up with to increase working performance for the whole production line. Alternatives are:  Buying a new machine,  Implementing TPM,  Maintain the current situation. 4.2.1 Buying a new machine According to fictive data about “Company A” punching machine is the bottleneck in the production line. Thus buying a new machine is chosen as an alternative to increase the working performance and decrease the downtime. The hard thing when buying a new machine is, pay the cost of machine. But on the other the company is being able to purchase new machines cost in the future, if they have higher benefit. Buying a new machine will result in an increase of the performance on the production line and production capacity will be increased. 4.2.2 Implementing TPM There are some data about “Company A” and some of these are about maintenance and some cost of maintenance. In the company maintenance department spend most of their time on corrective maintenance. Thus, it cause waste money and time, also it can cause to stop whole production line. As well there is more problem because of using corrective maintenance. When the failures occur, technicians try to solve problem during the operation
  15. 15. 15 time so it will be able to downtime. In addition to “Company A” has mainly outsourced maintenance for this reason outsourced maintenance contributed to addiction to other company which makes maintenance for them. “Company A” could not manage themselves their maintenance, during the last year they spend about 1.5 million SEK on external maintenance. As a result, implementing TPM helps to manage their maintenance activities. Also thanks to implementing TPM to eliminate their external maintenance costs. 4.2.3 Maintain current situation Today “Company A” has three punching machines but still they have not enough working performance due to one of the punching machine gives error frequently. So that punching machine is chosen as a critical machine. To deal with that problem there are two alternatives besides current situation are analyzed to find a solution. If these alternatives benefits are not going to more than costs, current situation will be maintained. 4.3 Cost Breakdown Structure Cost breakdown structure is done for three alternatives. As you can see Figure.1 there is a cost breakdown structure table for „buying a new machine‟. Recurring cost and non- recurring cost are shown for the buying new machine on the Figure.1. Maintenance cost, overhead cost and operational cost is selected for recurring cost. When new machine is bought, it has to be need maintenance; also it needs some operating activities. Of course there will be an overhead cost too. So we focused these three costs and find sub-heading for them. Capital cost is under the non-recurring cost headline. We found two sub-heading first cost and installation cost. Capital cost is the essential cost to find the benefits of buying a new machine. There are also other alternative‟s tables is done by cost breakdown structure (Appendix1, Appendix2). There are some cost which are in CBS listed in Appendix 7.
  16. 16. LinnæusUniversity 16 Figure-1: Buying a new machine (Cost Breakdown Structure) Buying a new machine Recurring Cost Maintenance Costs Spare parts internal maintenance Overhead Costs insurance facility electricity Operational Costs labour tools materials training Non- Recurring capital costs first costs installation costs
  17. 17. LinnæusUniversity 17 4.4 Cash Flow Diagram Cash flow diagram is a tool used for show all costs and incomes like investment, salvage value, maintenance costs. Cash Flow Diagram for buying a new machine Other cash flow diagrams and cash flow table for other alternatives are in appendix 3, appendix 4 Also table below are showed costs and revenue.
  18. 18. 18 Cash flow table for buying a new machine Revenue= 250000*100*0.92=23millions Yea r Labour cost (millions) Tools cost (millions) Spare parts cost (millions) Other costs (millions) Revenue (millions) Total cost (millions) 0 10.08 1 0.619 0.062 0.690 12.07 23 13.441 2 0.638 0.068 0.759 12.07 23 13.535 3 0.657 0.075 0.835 12.07 23 13.637 4 0.676 0.083 0.918 12.07 23 13.747 5 0.697 0.091 1.010 12.07 23 13.868 6 0.718 0.100 1.111 12.07 23 13.999 7 0.739 0.110 1.222 12.07 23 14.141 8 0.761 0.121 1.345 12.07 23 14.297 9 0.784 0.133 1.479 12.07 23 14.466 10 0.808 0.146 1.627 12.07 23 14.651 4.5 Calculation of Present Worth, Equivalent Annual Cost, OEE Present worth, EAC, OEE are calculated for three alternatives. Buying a new machine is shown for an example in this part. We assumed that 23 million SEK is income of the company per year for ten years. We also calculate our incomes and cost‟s present worth. After that we found net present worth.
  19. 19. 19 Buying a new machine PW= -10.08 – 12.07(P/A,0.08,10)- 0.619(P/A,3%, 8% ,10)- 0.062(P/A,10%, 8 %,10)- 0.69(P/A,10%, 8 %,10)+ 23(P/A,0.08,10) = 51.01 Millions SEK EAC = 10.08(A/P, 0.08, 10) – 23 + 12.07 + 0.619(P/A, 3%, 8%, 10)(A/P, 0.08, 10) + 0.062(P/A, 10%, 8%)(A/P, 0.08, 10) + 0.69(P/A, 10%, 8%)(A/P, 0.08, 10) = 10.08(0.149) – 23 + 12.07 + 0.619(7.550133691)(0.149) + 0.062(10.07023086)(0.149) + 0.69(10.07023086)(0.149) = -7.6 millions Calculating OEE when buying new machine Availability= 92% Average production= 250000 units/year Maximum production= 300000 units/year Performance= 250000/300000= 83.3% Quality rate=250000(1-1%)/250000=99% OEE= 76% Values are used for calculations:  Tied up capital: 10.08 (million SEK)  Labor cost: 0.619 (million SEK)  Tools cost: 0.062 (million SEK)  Spare parts cost: 0.69 (million SEK)  Other cost (these are presented in CBS part): 12.07 (million SEK)  Revenue: 23 (million SEK) Other calculations are in the appendix (Appendix5, Appendix6)
  20. 20. 20 4.6 Benefit Cost Analyses Alternatives Total Cost(PW) OEE B/C Alternative-1(buying a new machine) 103.32 million SEK 76% 0,7356 Alternative-2(implementing TPM) 155.46 million SEK 39% 0,2529 Alternative-3(maintain current situation) 101.60 million SEK 51% 0,5020
  21. 21. 21 5 Results In our project, we use present worth (PW), equivalent annual cost (EAC), benefit-to-cost ratio (B/C ratio) and overall equipment effectiveness (OEE) to help to determine which alternative (no changes, buying a new machine or implementing TPM) we should choose. We use the cost break down structure to show all the cost which includes the recurring cost and non- recurring cost incurred each year for each alternative. Cash flow diagrams are also drawn to show the revenue and cost. They are shown in the Appendix. Then the present worth and equivalent annual cost is calculated. Comparing the present worth of the three alternatives, “Buying a new machine” has the highest present worth and it is a positive value. However, the other two alternatives have a negative present worth value and this means these two alternatives may suffer a loss. And “Buying a new machine” is more attractive to choose. Comparing the equivalent annual cost of the three alternatives,” buying a new machine” does not have equivalent annual cost because the annual revenue is larger than the annual cost. However, the other two alternatives have an equivalent annual cost which cannot be covered by the annual revenue. Applying the present worth and OEE to calculate the benefit-to-cost ratio, we find that “buying a new machine” attains the highest B/C ratio, and based on all the above factor, we conclude that our company should choose the alternative of buying a new machine because it will bring more benefits to the company. The company can gain more compared with the other alternatives.
  22. 22. LinnæusUniversity 22 6 Conclusions To increase their OEE we have generated three alternatives. We have decided that “Buying new machine” alternative is the best results for “Company A”. By using “Buying new machine” alternative provides the most return. We considered all three alternatives by using benefit cost method to choose most optimal alternative. Overall Equipment Effectiveness, Equivalent Cost annual, total cost‟s present values are considered for benefit cost method. If “Company A” choose “implementing TPM” alternative, total cost would be lowest total costs but OEE would not increase so much. Also implementing TPM is so hard in a short term because TPM is working culture and changing companies culture can take so long times. If “Company A” chose maintain current situation , punching machine which is critical machine continue causing problem and OEE would be low level because of delaying whole production line. Recommendations: To be able to achieve increasing OEE and working performance around 30 % we recommended “Company A” to buy new machine alternative. Recommendation is based on whole analysis and decision making methods.
  23. 23. 23 7 References 1. Adedeji B. Omitaomu, Olufemi A.,Computational,2007, Economic Analysis for Engineering and IndustryBadiru, 2. Christopher A. Mattson, Anoop A. Mullur & Achille Messac,2007,Engineering Optimization 3. H.P. Barringer and D.P. Weber,1996, “Life cycle cost tutorial” 4. Marc J. Schniederjans,Ashlyn M. Schniederjans,Dara G. Schniederjans, 2005, Outsourcing and insourcing in an international context, p.100ff. 5. Mark Shaw, Dennis E. Snyder,C ,2001,Selection of Wood Pole Alternatives by Means of Present-Worth Analysis,. H. Guernsey & Company, Oklahoma City, OK 6. Nancy R. Tague, 2004, The Quality Toolbox, Second Edition, ASQ Quality Press, pages 376-378 7. S.E. Gouvea da Costa, E. Pinheiro de Lima ,2002,Uses and Misuses of the “Overall Equipment Effectiveness” for Production Management, ,PUCPR-Pontifical Catholic University of Parana- Brazil, Production and Systems Engineering Group 8. Zhu Hong, Hu Wenping 2010,An instance based on a 3-dimensional model of Life Cycle Cost for overhead lines
  24. 24. LinnæusUniversity 24 Appendix1-Implementing TPM Implementing TPM Recurring Cost Training Costs Hiring experts Overtime Costs Overhead Costs insurance facility electricity Operational Costs labour tools materials training resource teaching material documentation maintenance & repair spare parts internal maintenance external maintenance Non- Recurring Labour Costs Consulting Cost resource software
  25. 25. 25 Appendix2-Maintain current situation No changes, current situation Recurring Cost Maintenance Costs Spare parts internal maintenance external maintenance Overhead Costs insurance facility electricity Operational Costs labour tools materials training Non- Recurring
  26. 26. LinnæusUniversity 26 Appendix 3- Cash Flow Diagram for implementing TPM
  27. 27. LinnæusUniversity 27 Cash flow table for TPM Revenue=190000*100*0.76=14.44millions Yea r Labor cost (millions) Tools cost (millions) Spare parts cost (millions) Other costs (millions) External maintenan ce cost (millions) Revenue (millions) Total cost (millions) 0 0.1 1 0.619 0.062 0.690 12.58 0 14.44 13.951 2 0.638 0.068 0.759 12.58 1.5 14.44 15.545 3 0.657 0.075 0.835 12.58 0 14.44 14.147 4 0.676 0.083 0.918 12.58 1.5 14.44 15.757 5 0.697 0.091 1.010 12.58 0 14.44 14.378 6 0.718 0.100 1.111 12.58 1.5 14.44 16.009 7 0.739 0.110 1.222 12.58 0 14.44 14.651 8 0.761 0.121 1.345 12.58 1.5 14.44 16.307 9 0.784 0.133 1.479 12.58 0 14.44 14.976 10 0.808 0.146 1.627 12.58 1.5 14.44 16.661
  28. 28. LinnæusUniversity 28 Appendix 4- Cash Flow Diagram for no changes
  29. 29. 29 Cash flow table for no changes Revenue= 153000*100*0.65=9.95 millions Yea r Labor cost, (millions) Tools cost (millions) Spare parts cost (millions) Other costs (millions) External maintena nce cost (millions ) Revenue (millions ) Total cost (millions) 0 1.12 0.417 4.64 12.47 1.5 9.95 20.1 1 1.15 0.459 5.11 12.47 0 9.95 20.7 2 1.19 0.505 5.62 12.47 1.5 9.95 21.3 3 1.22 0.555 6.18 12.47 0 9.95 21.9 4 1.26 0.611 6.80 12.47 1.5 9.95 22.6 5 1.30 0.672 7.48 12.47 0 9.95 23.4 6 1.33 0.739 8.22 12.47 1.5 9.95 24.3 7 1.37 0.813 9.05 12.47 0 9.95 25.2 8 1.42 0.894 9.95 12.47 1.5 9.95 26.2 9 1.46 0.984 10.9 12.47 0 9.95 27.3 10 1.50 1.082 12.0 12.47 1.5 9.95 28.6
  30. 30. 30 Appendix5- Calculation of Present Worth, EAC, OEE for Implementing TPM PW=-0.1+14.44(P/A,0.08,10)-0.619(P/A,3%,8%,10)-0.062(P/A,10%,8%,10) - 0.69(P/A,10%,8%,10) -1.5(P/F,0.08,2)-1.5(P/F,0.08,4)-1.5(P/F,0.08,6) - 1.5(P/F,0.08,8)-1.5(P/F,0.08,10) 12.58(P/A,0.08,10) =-0.1+14.44(6.710)-0.619(7.550133691)-0.062(10.07023086) -0.69(10.07023086)-1.5(0.8573)-1.5(0.7350)-1.5(0.6302) -1.5(0.5403)-1.5(0.4362)-12.58(6.710) =-4.71 millions EAC=-14.44+0.1(A/P,0.08,10)+12.58+1.5(P/F,0.08,2)(A/P,0.08,10) +1.5(P/F,0.08,4)(A/P,0.08,10)+1.5(P/F,0.08,6)(A/P,0.08,10)+1.5(P/F,0.08,8) (A/P,0.08,10)+1.5(P/F,0.08,10)(A/P,0.08,10)+0.619(P/A,3%,8%,10)(A/P,8%,10)+ 0.062(P/A,10%,8%,10)(A/P,8%,10)+0.69(P/A,10%,8%,10)(A/P,8%,10) =0.695 millions Calculating OEE when implementing TPM Availability= 76% Average production= 190000 units/year Maximum production= 265000 units/year Performance= 190000/265000= 71.7% Quality rate= 190000(1-6%)/190000=94% OEE= 51%
  31. 31. 31 Appendix 6-Calculation of Present Worth , EAC, OEE for Maintain current situation PW= [-1.12(P/A, 3%, 8%, 10) - 0.417(P/A, 10%, 8%, 10) – 4.64(P/A, 10%, 8%, 10) – 12.47 (P/A, 0.08, 10) + 9.95 (P/A, 0.08, 10)] *(1+0.08) – 1.5 – 1.5(P/F, 8%, 2) – 1.5 (P/F, 8%, 4) – 1.5(P/F, 8%, 6) – 1.5(P/F, 8%, 8) – 1.5(P/F, 8%, 10) = [-1.12(7.550133691) – 0.417(10.07023086) – 4.64(P/A, 10%, 8%, 10) – 12.47(6.17) + 9.95(6.71)]– 1.5 – 1.5(0.8573) – 1.5(0.7350) – 1.5(0.6320) – 1.5(0.5043) – 1.5(0.4632) = -88.7millions EAC= -9.95 + 12.47 + 1.12(P/A, 3%, 8%, 10)(A/P, 8%, 10)(1+0.08) + 0.417(P/A, 10%, 8%, 10)(A/P, 8%, 10)(1+0.08) + 4.64(P/A, 10%, 8%)(A/P, 8%, 10)(1+0.08) + 1.5(A/P, 8%, 10) + 1.5(P/F, 8%, 2)(A/P, 8%, 10) + 1.5(P/F, 8%, 4)(A/P, 8%, 10) + 1.5(P/F, 8%, 6)(A/P, 8%, 10) + 1.5(P/F, 8%, 8)(A/P, 8%, 10) +1.5(P/F, 8%, 10)(A/P, 8%, 10) = -9.95 + 12.47 + 1.12(7.550133691)(0.149)(1.08)+ 0.417(10.07023086)(0.149)(1.08) + 4.46(10.07023086)(0.149)(1.08) + 1.5(0.149) + 1.5(0.8573)(0.149) + 1.5(0.7350)(0.149) + 1.5(0.6302)(0.149) + 1.5(0.5403)(0.149) + 1.5(0.4632)(0.149) = 13.02 millions Calculating OEE with no changes Availability= 65% Maximum production: 235000 units/ year Average production: 153000 units/ year Performance rate=153000/235000= 65% Quality rate= 153000*(1-8%)/ 153000= 92% OEE= 39%
  32. 32. LinnæusUniversity 32 Apendix7 Buying new machine Buying New Machine Cost Table Recurring Costs Non-Recurring -Operational Costs -Capital Costs  Labor = 619000 SEK /year , raise 3 % annually  First Costs= 10 Millions SEK  Tools = 62000 SEK/ year , raise 10 %  Installation Costs = 80000 SEK  Materials = 60 SEK / unit , 9180000/ year  Training = 20000 SEK/ year -Maintenance Costs  Spare parts= 690000 SEK/ year , raise 10 % annually  Internal maintenance = 270000 SEK/year -Overhead Costs  Insurance  Facility  Electricity = 300*24h *5d*45w = 2600000 SEK/year
  33. 33. LinnæusUniversity 33 Implementing TPM Cost Table Recurring Costs Non-Recurring -Training Costs -Labor Costs  Hiring experts = 30000 SEK/years  Consulting Experts = 60 000 SEK  Overtime Costs = 320 SEK/hour  Software= 40000 SEK -Resource  Teaching material= 20000/year  Documentation= 5000/year -Overhead Costs  Electricity  Facility  Insurance = 300*24h *5d*45w = 2600000 SEK/year -Maintenance &Repair  Spare Parts = 690000 SEK/year  Internal Maintenance = 270000 SEK/year -Operational Costs  Labor = 619000 SEK /year , raise 3 % annually  Tools = 62000 SEK/ year , raise 10 %  Materials = 60 SEK / unit , 9180000/ year  Training = 20000 SEK/ year
  34. 34. 34 Maintain current situation Recurring Costs -Operational Costs  Labor = 619000 SEK /year , raise 3 % annually  Tools = 62000 SEK/ year , raise 10 %  Materials = 60 SEK / unit , 9180000/ year  Training = 20000 SEK/ year -Maintenance Costs  Spare Parts = 690000 SEK/year  Internal Maintenance = 270000 SEK/year  External Maintenance = 1500000 SEK/year -Overhead Costs  Electricity  Facility  Insurance = 300*24h *5d*45w = 2600000 SEK/year
  35. 35. 35

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