Slide Set 5 Comparison of alternatives

1. 1 Slide Set 5 – Comparison of alternatives IEM 3503/IEM3513 Dr. Baski Balasundaram Industrial Engineering & Management

2. 2 Review: Chapter 5 Defining alternatives Determining planning horizon Comparison of alternatives: PW/FW Comparison of alternatives: AW/CW Comparison of alternatives: SIR Specifying MARR Spring break! Comparison of alternatives: IRR Comparison of alternatives: ERR

3. 3 Purpose To compare mutually exclusive and collectively exhaustive alternatives based on economic measures of worth, under the assumption that each alternative is expected to provide the same service. Generally, the cash flows to be considered are: first cost, annual costs, non-recurring costs, revenues, and salvage value. The cash flow series can be finite or infinite.

4. 4 Economic measures of worth: Recap PW(MARR), FW(MARR), AW(MARR), SIR(MARR) a single alternative is considered viable (better than do-nothing) if PW(MARR) > 0 PW/FW/AW/SIR analyses will always be consistent with each other CW(MARR) simply the PW of an infinite life alternative PBP for two alternatives, one with a shorter PBP is better supplementary method, not always consistent with PW analysis

5. 5 Economic measures of worth: Recap IRR a single alternative is considered viable if IRR > MARR Consistent with PW under certain conditions Recall issues with multiple roots ERR a single alternative is considered viable if ERR > MARR Designed to avoid multiple roots

6. Approach Define the set of mutually exclusive and collectively exhaustive alternatives Define the planning horizon Develop the cash flow profiles for each alternative Specify the MARR to be used Compare alternatives using a specified measure of worth Perform supplementary analysis Select preferred alternative 6

7. Mutually exclusive, and exhaustive alt. When we say alternatives A, B, C, ... are mutually exclusive, it means if any one is chosen, all others are eliminated i.e., these alternatives are competing with each other to provide the same service, so we don’t select two or more of these When we say alternatives A, B, C, ... are collectively exhaustive, it means one of these must be chosen (there is no alternative that has been left out from consideration, if do-thing is an alternative, it must be included in that list) When we say alternatives are mutually exclusive and collectively exhaustive it means exactly one of these must be chosen 7

8. Options to alternatives: Example 1 A distribution center receives pallet loads of product, stores the product, and ships the product to various customer locations. If a new distribution is constructed, the following options (proposals) have been identified: Moving materials from receiving to storage and from storage to shipping lift trucks automated guided vehicles (AGVs) conveyor systems 8

9. Options to alternatives: Example 1 Placing and retrieval from storage lift truck automated storage and retrieval systems (ASRS) operator driven S/R vehicle operator driven, guided S/R vehicle Storage block stacking pallet loads conventional pallet rack, type 1 conventional pallet rack, type 2 conventional pallet rack, type 3 conventional pallet rack, type 4 9

10. Options to alternatives: Example 1 Alternative designs for the material handling system at the distribution center can be obtained by combining options identified under 1,2, and 3. one option (out of 3) for moving materials from receiving to storage area, one option (out of 4) for placing materials in storage, one option (out of 5) for the storage system, one option (out of 4) for removing materials from storage, and one option (out of 3) for moving materials from storage to shipping 10

11. Options to alternatives: Example 1 If every combination of options was permissible, we would have: 3 x 4 x 5 x 4 x 3 = 720 mutually exclusive and exhaustive alternatives. If do-nothing was an option then we have 721 mutually exclusive and exhaustive alternatives Typically not every combination is feasible For example, a particular choice of a storage system might rule out certain options under placement/retrieval from storage. This will render some of the alternatives infeasible and they are eliminated Budget limitations might further eliminate some combinations whose total initial investment exceeds the available budget 11

12. Planning horizon Alternatives are treated as mutually exclusive under the assumption that any one can substitute for any other That is, they all provide the same service A planning horizon (number of years/periods) is first determined over which the alternative will be in service Economic comparison is carried out over this period 12

13. 13 Different-life Alternatives Machine A Machine B First Cost $11,000 $18,000 Annual Operating Cost 3,500 3,100 Salvage Value 1,000 2,000 Life 6 years 9 years

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