Question 1: Describe the business performance of Peerless before the purchase of the state-of-the –art punch presses in 1991 and after that? (2.5 points).
In 1981, the company faced a do or die decision that forced them to use new technology. If the lasers failed, the company would have had nothing to fall back upon. There was no good economic justification available at the time upon which to base the decision. By contrast in 1984 the company had a track record with the technology, had a good feel for the market and its potential growth, and was in a much stronger position financially. Ted can be much more comfortable making this decision because of the reduction in uncertainty. The decision is harder on one way though. When the company had it’s back to the wall, it was clear that something different had to happen and quickly. When the company is in a more comfortable position, the pressure to make a decision is greatly reduced, making it easier to procrastinate.
Question 2: What factors made Ted decide to purchase three punch presses in 1991? Were these factors also what Ted considered for buying the 1,200-watt laser cutter? (2.5 pts).
The decision Ted faces now is purchase the 1200-watt laser cutter, with the decision he faced in 1991 when he was considering the three punch presses. There are some potential factors with the new laser: Peerless will be creating products that are unfamiliar to them. Peerless has no way of knowing if the new market will respond as well as the saw blade market did to the anticipated improvements in quality and cycle time coming from the laser. The new product line will require different distribution channels, different marketing techniques, and will draw new and different competition.
Peerless may not be able to attract enough business to keep the system productive. The potential benefit is, of course, a new large market to successfully apply Peerless’s laser cutting experience. A significant strategic variable that Peerless should consider is the long-term viability of the saw blade market. The success of laser cutting (as Peerless has experienced) and other technologies has the potential to reduce the overall market for mechanical cutting devices over the long term.
Question 3: Of the three major types of control systems – cybernetic, go/no-go, and postcontrol – which would have been the most useful with the first laser and why? With this new laser and why? (2.5 pts).
The laser itself would use cybernetic systems to control the cutting process. The first implementation project would have benefited most from cybernetic processes as well because of Peerless’s unique position. Since they were in a do or die position, they would not have wanted to kill the project for the conventional reasons. In fact, based on the typical parameters used for go/no-go controls, Peerless would have been justified in killing the first laser project. Instead, because of their dire circumstances, they stuck to their guns and eventually achieved success. The second implementation project would benefit from go/no-go controls because it is being conducted in a much more stable business environment in which where the company could back away from the project if necessary.
Question 4: Calculate the variable cost per blade of laser cutting with this new system. Assume that the variable cost of the laser is $4/hour, that the laser custs at the rate of 40 inches per minute, that a typical blade of 14 inches diameter sells for $25, and the same computer and software will be used as currently. Material load time for a 10-blade sheet of steel is one minute. Use a 3-inch arbor hole size and assume that a cut tooth doubles the cut distance. (2.5 pts).
The potential problems might be in purchasing the 1200-watt laser following steps are needed to estimate the payback: 1. Estimate the amount of laser cutting needed using a 14 inches saw blade as a typical product. The blade would have approximately a 44 inches circumference. 2. Based on the cutting speed of 40 inches/minute, the cutting would take 2.4 minutes. Adding time to handle the blade, and maintain the workstation, estimate the total time at 3 min/blade. 3. Estimates the operating cost of a 1200 watt laser at $ 10/min, making the laser’s portion of the blade cost $ 30/blade, it is not a particularly significant amount for a $25 blade. 4. Estimates the cost of the laser to be about $200,000. Assume an additional $100,000 for computers and training bringing the total to $300,000. 5. If the laser can produce a blade every 3 minutes, than it could produce 160 in eight hours at $25 a unit.
Based on Exhibit 1, the current profit margin is 12%, so it’s safe to assume that the single shift daily profit would equate to 160 X $25 X 12% or $480. 6. Given the $300,000 cost of the laser, the single shift payback period would be 625 days or half that amount for a two-shift operation. In addition to the brisk payback, the laser improves quality, cycle time and flexibility in responding to customer demand. The new laser system adds to the high tech image of the company and reinforces the employee’s pride. The original laser system was probably viewed as a threat to jobs when it was first implemented. Now that the company has experience with the benefits of laser cutting, they are in a better position to justify the investment both on non-economic and economic grounds.