Subject

Management

Topic

Project Cost and Finance

Case Study

Submitted By
No. 11

Zaheer Alam

Submitted To

Ahsan Maqbol

Submission Date:

11thApril , 2015

Roll

1.How did ABI handle forecast risks?

ABI has faced many of its risk but the main risk was one that newly formed
engine's line of having high efficiency would be replaced the current
conventional engines in both new and existing tractors.
Installing Flexible Manufacturing System:
ABI handled the risk to install a flexible manufacturing system (FMS) in the
new Iowa plant which will reduce the risk as the flexible manufacturing plant
would be able to produce other versions of engine pistons. Also the
equipment would be capable of working with other metals like aluminium.
This would help to produce different pistons for other manufacturers if the
BIG RED line fails

2. were abis stanhope site costs in table 2

derived by a top-down or bottom-up
process? why?

ABIs Stanhope site costs in table 2 are derived by a bottom-up process.

Team members are invited to participate in every step of the management
process. The decision on a course of action is taken by the whole team. Bottomup style allows managers to communicate goals and value, e.g. through
milestone planning.

3. what are the answers to steve whites

questions?

ABI IS ALREADY ACHIEVING AN EXCELLENT RETURN ON INVESTMENT (ROI).

?WONT THIS INVESTMENT SIMPLY TEND TO DILUTE IT
The investment in the Stanhope Project would not tend to dilute the excellent
ROI achieved by ABI because it was in accordance with the new business
strategy of the company.
The strategy was to bid only on high margin products capable of sustaining their
margins over a long time.

ABI bid on BIG RED engines which would result in in 100 percent sourcing in
both the original equipment market (OEM) as well as the replacement market
with its high margins.
WILL THE COST IN NEW EQUIPMENT BE RETURNED BY EQUIVALENT REDUCTION
?IN LABOUR? WHERES THE PAYOFF
Yes the cost in new equipment will be returned by equivalent reduction in labor
as the company believes in maintaining small plants having maximum 480
employees.
WHAT ASSET PROTECTION IS THERE? THIS PROPOSAL REQUIRES AN INVESTMENT
IN NEW FACILITIES BEFORE KNOWING WHETHER A LONG TERM CONTRACT WILL
BE PROCURED TO REIMBURSE US FOR OUR INVESTMENT
According to ABIs strategic plan new products would be pursued only when their
production process and design are of a proprietary nature and exist in areas
where its technical abilities help to maintain a long-time position.
ABI had a competitive edge in engineering of producing diesel engine
components combined with the flexible manufacturing system which would help
in producing engine components of other types with the same equipment.
Hence, in this manner, assets would be protected.
?DOES THIS PROPOSAL MAXIMIZE ROI, SALES POTENTIAL OR TOTAL PROFIT
This proposal will maximize the sales potential in the future for increased
volumes and other products that can be run on these machines.
Through time and experience, this equipment may also be used to manufacture
other versions of pistons for tractor engines

4. what are other factors relevant to this

issue?
Factors like new business strategy of the firm, variation in demand forecasts,
manufacturing plan, operation & organization of the plant and certain financial
considerations.
Also factors like high tax-margins, loss of substantial volume to competition,
innovation and creativity, capital resource allocation, product designs are factors
may be relevant to this issue.

5. how do changes in assumptions

mentioned by the other managers affect the
proposal?

The first manager makes assumptions that the sales forecasts may not be
accurate. The first manager is worried about the success or failure of the project.
This would not affect the proposal as one of the main characteristics of the new
plant is the flexibility offered by the FMS manufacturing system, thus it will be
able to work with a number of other materials, operational conditions,
productions rates and some other versions of the engine pistons.
According to the second manager the assumption of market loss to the Japanese
competitors seemed unlikely. Considering the increasing quality and competitive
prices, this hypothesis should be considered, although even in the worst scenario
the project is still profitable. Thus, it has not a great impact on Stanhope project.
The second manager is worried about the after-tax margins.

6. what position should jim take? why?

Jim should recommend the project to Steve White. There will be the chances of
risks and failure, but ABI needs to protect their existing successful business, and
to pursue more such business so they need to invest in the Stanhope Project. The
risk will be managed up to that level where expectations of success and large
profits are very high. The project will also meets the business objectives of the
company, and will helps ensure that ABI will stand in a good technological and
strategic position in the market of diesel engine components.