Hadco construction is a major contractor for large-scale

Question

HADCO Construction Preventive Maintenance Strategy

Hadco Construction is a major contractor for large-scale residential, commercial and government projects.  It operates a fleet of heavy duty construction equipment, for which repair and maintenance are major costs.  Much of the maintenance expense is associated with the transmissions that are common to many of their major pieces of equipment.  Hadcois evaluating four alter­native strategies for maintaining these transmissions at the lowest monthly cost:

1. Do no scheduled preventive maintenance and repair transmissions when they fail.

2. Take oil samples at regular intervals and perform preventive maintenance when indicated by the oil analysis

3. Change the transmission oil on a regular basis and perform repairs when failures occur.

4. Change the oil at regular intervals, and also take oil samples regularly, and perform maintenance repairs as indicated by the sample analysis.

Strategy 1 (no preventive maintenance) costs nothing to imple­ment and results in two possible outcomes: There is a .10 probability that some componentfailure will occur, requiring emergency maintenance at an average cost of $15,000, and a .90 probability that no defects will occur and no repairs will be necessary.

Strategy 2 (take oil samples) costs $50 to implement (i.e., take a sample), and the probability of a component failure is the same as with Strategy 1.  If there is actually a part that is failing, there is a .70 probability that the sample will correctly identify it, resulting in preventive maintenance at a cost of $2,000. However, there is a .30 probability that the sample will not identify the pending failure and indicate that everything is okay, resulting in emer­gency maintenance later at a cost of $15,000. On the other hand, if there are actually no defects, there is a .20 probability that the sample will erroneously indicate that there is some such defect, resulting in unnecessary exploratory maintenance at a cost of $1,200. There is a .80 probability that the sample will correctly indicate that there are no defects, resulting in no maintenance and no costs.

Strategy 3 (changing the oil regularly) costs $150.00 to implement and has two outcomes: a component failure or no failure, with the results and repair costs being the same as in Strategy 1.  The effect of the regular oil changes is to reduce the probability of a component failure to one half of what it would be without regular changes (e.g.: .05 as opposed to .10).

Strategy 4 (both changing the oil and sampling) costs $200.00 to implement and results in the same probabilities of failures and lack of failures as strategy 3. If there is an impending failure, there is a .60 probability that the sample will detect it (if the oil is changed frequently, there will less of the trace materials that signal breakdowns, so they will be harder to detect) and $2,000 in preventive maintenance costs will be incurred. Alternatively, there is a .40 probability that the sample will not detect the defect, result­ing in emergency maintenance at a cost of $15,000. If there is no defect, there is a .20 probability that the sample will indicate that there is a defect, resulting in an unnecessary maintenance cost of $1,200, and there is a .80 probability that the sample will correctly indicate no defects, result­ing in no cost.

Managerial Report:

Prepare a report that summarizes your recommendations to Hadco management.  Your report should be a Word document and the first page should simply be a cover sheet with a title, date, team members' names and any other identifying information you think necessary.  Tasteful graphics are optional, but encouraged.  The second page should be an executive summary report.  You have one page to tell a busy reader everything they need to know about the situation.  The questions you should address are covered by the list below.

You need to convince your audience that your analysis was correct and comprehensive and it is assumed that there will be backup materials you can refer to as an appendix, but the reader should not have to go there to get the answers.  Remember: you only have one page!  I recommend a sans serif font like Arial or Calibri in 11 point size.  A line spacing of 1.15 and 6 point spacing after paragraphs gives a nice balance of readability and compactness (like this document). 

1. What strategy should Hadco pursue and what is the expected monthly cost?

2. Discuss the risks associated with this strategy - specifically in terms of the likelihood of $15,000 "surprises".

You have noticed that the manufacturer of these transmissions has been improving their reliability, with better materials and components.  The result is that the rate of "random" failures (the .10 probability cited in Strategies 1 & 2) has been declining.  What level would it have to drop to for another strategy to be preferred?  What is the strategy that would be recommended in this case, and what can you say about its riskiness (relative to other choices)?