Pencil Sharpener Report#6 Economic Analysis Discrete Event Simulation December 05, 2001 Hernan Joglar John Sharkey

1. 2.875 Mechanical Assembly and its Role in Product Development Pencil Sharpener Report#6 Economic Analysis Discrete Event Simulation December 05, 2001 Hernan Joglar John Sharkey

2. Report Contents Introduction Part A: Economic Analysis • Cost Estimates • Cash flow analysis • IRoR Analysis • Final Thoughts on economical analysis Part B: Discrete Time Simulation Workstation Layout • Summary of Simulation Approach • Assembly Flow#1 • Assembly Flow#3 Appendices • Mold Cost Estimation • Pencil Sharpener Exploded View • Pencil Sharpener Structural Decomposition • Pencil Sharpener Disassembly Photo • Pencil Sharpener Indentured Part List • Pencil Sharpener Parts & Material List • Part Handling and Insertion Times

3. Introduction • Purpose is to : • Perform an economic analysis of the assembly layout, including development, manufacturing, transportation and assembly costs. • Run a discrete event simulation of this assembly line and improve the design should any problem arise. • Approach for economic analysis was to utilize cost estimates already done in previous reports and complete them with new reasonable estimates in the areas not covered before. Then input the data in the spreadsheet provided and extract results to analyze them. • Costs are only estimates as no complete information of manufacturing process is available. • In general costs were estimated assuming this product is inserted in an on-going process of incremental improvements of an architecture already established for previous generations of this product. • Costs that might be shared by a family of products were estimated that way as this team is aware that this sharpener is actually one of many in its family • CellSim software used for assembly process discrete time simulations

4. Part A: Cost Estimates Estimated Assembly Fixed Cost • Costs in the above table have been extracted from previous reports, only some quantities have been changed.

5. Estimated Assembly Labor (variable) Cost Estimated Assembly Fixed Cost (cont.) • Hourly wages estimates are full burden for mainland China • Facility cost is unknown (estimated to be less than $0.15/unit) • Variability of facility cost in china is large between highly populated areas and the rest of the country. • This is not a sensitive parameter • Even though the pencil sharpener is a simple product, the analysis performed during • this course has shown that this component has an important amount of engineering. • That is the reason why we have estimated a rather high cost for engineering labor.

6. Estimated Part Manufacturing Cost • Cost of injection molds vary widely depending on area of mold base cavity plate (cm2), and combined thickness of cavity and core plates in mold base (cm). See Appendix No 1.We do not have detailed manufacturing information to make a good estimate for this molds. However, for the size and shape of the parts we can infer that there are 5 more complicated molds, costing $9,000 each, and four simpler ones that might cost around $ 4,000, as indicated in the chart in the Appendix mentioned above. • Injection molding and razor blade manufacturing machinery are assigned costs estimated assuming they also make parts for other products* too and that maybe more than one machine may be run in parallel during full production period. This is because injection molding process might take longer (cooling time) than assembly process, in which our production capacity calculations are based. • *Razor blades are provided by “Exacto” sister division, internal procurement.

7. Estimated Development Cost • This cost is assuming this is a modification of an existing product, not a breakthrough. The cost includes 2 engineers and 1 assistant working for 2 months. Estimated Marketing Introduction Cost • Marketing introduction costs assume that this products share some of the existing marketing facilities of the company. Estimated Tooling and Ramp-Up Cost • Staff hiring and training costs assume the company mainly reallocates staff and does the complete hiring/training process for just a few workers. Unit Price • Sale price was estimated based on the retail cost the team paid for the sharpener and then deducting an estimated retailer margin. Unit Production Cost • Transportation cost refers to shipment from China to the U.S. Estimate is based on a $5000 cost of a standard shipment container, which can roughly accommodate 50,000 packaged sharpener units.

8. Estimated Yearly Rate of Return Model Input Data • Discount rate per time period corresponds to the monthly rate that compounded monthly yields annual rate of 20%. • Units sales comes from the information collected at the actual manufacturer company. They produce 250,000 units a year. • Testing was estimated as done by 1 technician during three months($4000/month). • The product is scheduled to be 4 years in the market.

9. Analysis Results • The project cash flows have an NPV of $1.285 K, using an annual rate of return of 20%. • During the 8th month the project recovers its investment. From that period on, every cash flow is positive (not discounted). • These figures show that the business is quite attractive, however it is important to notice that there are still some relevant costs that are missing , such as cost of capital, depreciation and taxes. Still, we believe that it is worthwhile to continue this analysis using the figures we have estimated so far, in order to arrive to an approximation of what the manufacturer’s (HUNT’s) business is.

10. Analysis Results (cont.) • Including cost of capital, we can see that investment recovery takes around one year. Therefore, under these conditions the investment is attractive as long as the the product can be sold beyond month 12 and the volume and price are as estimated. • Now the question is what is the rate of return that makes NPV=0 (IRR), under this favorable conditions. Raising step by step the rate of return in the spreadsheet we found that this rate is 11.88% a month. • The team has also thought of the case in which the manufacturer might face powerful retailers and have to lower the price, which we consider a realistic setting. In this case we found that the breakeven price was two dollars per unit.

11. Internal Rate of Return Including Tax and Depreciation

12. Final Thoughts on Economic Analysis • When calculating the IRoR including taxes (34%) and depreciation of assets subject to it*, we found that the results were not as good as without taking into account those two factors but the project still shows quite healthy figures. • Including taxes and depreciation we obtain IRoR=120.88%, which is close to what we got without these factors (11.88% a month). • Even though the above described landscape looks very attractive, there are previous investments that are not included for not being relevant cost in which the company has already incurred. • Architecting and design • Market capture • Brand name • Manufacturing facilities… and others. • There also exist some long term consequences to consider: • By not “doing” in-house, the company is transferring knowledge that it might not be able to recover in the future as its absorptive capacity gets affected. We do not have much information in this regard, but HUNT might be outsourcing the whole process, which would be a mistake in the long run. • Unfortunately, what we know is that this family of pencil sharpeners is completely manufactured in China, thus we suspect the company may be doing the same with more sophisticated products. Then, it runs the risk of becoming dependent for knowledge rather than for capacity. • All in all, our opinion is that HUNT is doing a very good business with this product but has to be careful with the way it manages the supply chain. • * We have depreciated all costs related to machinery, tooling, and a portion of its installation. We have not considered the engineering labor included in manufacturing and assembly fixed costs.

13. Part B: Discrete Time Simulations • CellSim software code used to for discrete time simulations for assembly process flow#1 and #3, as described in Project Report#3 • Assembly Flow#2 comprises a different set of assembly tasks, which would obfuscate the comparison analysis • Each model requires approximately 12 “Machines” and 14 “Storage Areas” as defined by the CellSim code • CellSim “machines” actually correspond to manual workstations • Individual processes, as enumerated in Part Handling and Insertion Times (see appendix), consolidated to 1 CellSim process/machine • Incorporating each of the 52 individual processes as listed in the appendix makes the CellSim much too slow to simulation 8 hours of work flow • Additional process detail adds little to overall simulation insights • Simulations bypass “run-in” initialize • To determine daily start-up and completion requirements • Setup times included in process times (batch size = 1) • Did not account for machine down times (repair or maintainence) • Results from the simulation code can be used to: • Determine most efficient work flows and operating guidelines • Determine minimum acceptable process variations • Establish minimum holding capacities and manufacturing production rates

14. Assembly Flow#1 Description • Model Description • Assembly Flow#1 implements each of the 52 assembly tasks as defined in the table of Parts Handling and Insertion Times • As provided in Project Report#5 (see appendix) • Model based on parallel operations of similar tasks (ie, riveting ops) for non-bottle-neck assemblies • Features 4 separate workstations, with either 2 or 3 workers per workstation • Work flow and task allocations established to keep throughput times for each worker sub-station less than 28.85 seconds/unit • Bottleneck operation is identified as SA1b/Sharpener Final Assembly • SA1b throughput time estimated to be 28.54 sec/unit • Substation SA5a/Gearbox Pre-Assembly is a close second (28.09 sec/unit) • CellSim model description • Implements Flow#1 model as shown, except for additional output bins to collect simulation data for units which failed either of the two tests (2% Unit fail rate) or the final inspection (1 % fail rate) • 13 machines (work stations) and 15 storage areas (part bins) • Batch size of 1 unit/machine • Capacity of parts bins (inventory size) set to 20 units for each machine output, except package & ship (final task) set to 2000 units

15. Assembly Process Flow #1 Note: Test, inspection and packaging times are SWAGS 3 Workers 27.06 sec/unit Workstation A A1 A1 SA 7 Cutter Unit Assy SA 7 Cutter Unit Inspect Workstation B 3 Workers 77.99 sec/unit Workstation C SA5 Motor/Gearbox Assy Workstation D 18.25 sec 5 sec C1 C2 C3 SA5a Gearbox Assy SA5b Gearbox Solder SA5c Gearbox Test Workstation E A2 A2 SA6 Gearbox Cover Assy SA 6 Gearbox Cover Inspect 25.00 sec 24.90 sec 28.09 sec 5 sec 22.06 sec 2 Workers 56.16 sec/unit D2 A3 A3 D1 SA4 Battery Comp. Assy SA 4 Battery Comp. Inspect SA1a Final Assy SA1b Final Assy 19.62 sec 5 sec 28.54 sec 27.62 sec 2 Worker 58. 12 sec/unit D3 SA1 Final Test B1 B1 B2 SA3 Battery Cover Assy SA 3 Battery Cover Inspect SA2 Base Assy 25 sec 1 Worker 19.62 sec 5 sec 20.0 sec E1 Package & Ship D4 SA1 Inspect Throughput = 28.54 sec/unit Cycle Time = 236.21 sec/unit 13 Workers 20 sec 25 sec/unit 2 Workers 50.0 sec/unit

16. CellSim Model for Flow#1 24.62 sec 20.0 sec Final output stage: package and ship Storage bins for test and inspection failures

17. Example Results: CellSim File Sharpener_1b Storage bins for test and inspection failures Final output stage: package and ship

18. Summary of Flow #1 Simulation Results • Summary: • Each workstation must complete the day with a full output bin • Overall throughput is largely insensitive to the amount of variability on process time • Work flow bottleneck is SA1a • Up to three workstations become starved for parts • Overall utilization exceeds 74%

19. Assembly Flow#3 Description • Model Description • Assembly flow is a modification of Flow#3 as described in Project Report#5 • Places 10 workstations in parallel to perform complete assembly assembly operations (was 12 work stations in parallel) • Utilizes a single workflow line to perform final test, inspection, packaging and shipping • Increases overall workforce from 12 to 13 employees • Model changes implemented as a result of insights gained during modeling and simulation with CellSim • Reduces overall capital investment by eliminating duplicate test stands • Simulation model follows the modified flow as described above

20. SA5 Motor/Gearbox Assy SA5a Gearbox Assy SA5b Gearbox Solder SA5c Gearbox Test 53.07 + 25 sec Assembly Process Flow # 3 (per Report #5) Note: Test, inspection and packaging times are SWAGS SA 7 Cutter Unit Assy SA 7 Cutter Unit Inspect 18.25 sec 5 sec SA6 Gearbox Cover Assy SA 6 Gearbox Cover Inspect 5 sec 22.06 sec SA4 Battery Comp. Assy SA 4 Battery Comp. Inspect SA3 Battery Cover Assy SA 3 Battery Cover Inspect 19.62 sec 5 sec 19.62 sec 5 sec SA2 Base Assy SA1 Final Assy SA1 Final Test SA1 Final Inspection Package & Ship 20.0 sec 56.16 sec 25 sec 20 sec 25 sec Throughput = 26.98 sec/unit (parallel ops) Cycle time = 323.78 sec/unit 12 Workers (12 identical workstations in parallel)

21. Modified Assembly Flow#3a: Single Test, Inspect & Ship line Final output stage: package and ship

22. Simulation Results for Assembly Flow#3a: Final output stage: package and ship

23. Summary of Flow #3 Simulation Results • Summary: • The assembly-complete part bin (pre-test) must contain at least 10 units at the end of the day • Process throughput and sensitivity to time variation similar to Flow#1 • Work flow bottleneck is the overall assembly (process time = 273 sec)

24. Appendices • Mold Cost Estimation • Shop Floor Layout • Cad Exploded View • Product Structural Decomposition • Pencil Sharpener Disassembly Photo • Parts and Materials List • Pencil Sharpener Indentured Parts List • Adjusted Part Handling and Insertion Time

25. Mold Cost Estimation* • From a survey of available prefabricated mold bases, it has been shown by Dewhurst and Kuppurajan that mold base cost is a function of the surface area of the selected mold base plates and the combined thickness of the cavity and core plates. The graph below shows mold base cost plotted against a single parameter based on area and thickness values. The data in the graph can be represented by: *Source: Class Notes MIT Course 2.810 Manufacturing Processes in Systems(Fall 2000)

26. Shop Floor Layout

27. CAD Exploded View [ Model developed using Autodesk Inventer Version 3.0 ]

28. General Assembly Sub- Assembly Part Product Structural Decomposition Complete Assembly Pencil guide Base screws Motor Gearbox Bat. Comp. screws Shavings receptacle Battery Compartment Sharpener case Base Sharpener base Bat. Comp. housing Black wire Gearbox cover screw Rubber foot Gearbox housing Electric motor Bat. Comp. contacts Output gear Safety lever Battery Comp. cover Bat. install. guide Intermediate gear Lubrication Contacts battery Comp. cover Driven gear Gearbox cover Battery Comp. cover Cutter Unit Gearbox cover contacts Rubber foot Red wire Blade nut and bolt Blue wire Blade Gearbox cover Blade holder

29. Photo of Product Disassembly 9 14 24 15 25 5 8 4 12 11 23 2 7 21 11 20 27 17 26 3 18 19 1 28 29 16 Pencil sharpener parts numbered as in the Part List

30. Parts and Material List

31. Pencil Sharpener Indentured Parts List

32. Adjusted Part Handling & Insertion Times Note: Changes indicated in red font

33. Adjusted Part Handling & Insertion Times (con’t) Note: Changes indicated in red font