Case Study Assignments – Case Study attached. 

Exercises must be presented in a neat, well organized and professional manner as follows:

The problem statement should include the essence of what is given and what is to be determined, not the question as provided to you. Include figures as appropriate.

Problem solution presented in a logical, orderly fashion, and enough but brief text (such as headers) to clearly explain the procedure used. All calculations shown separately, including units and conversions; and four decimal places. 

BOX your Answer and Recommendation.  (VERY IMPORTANT)

Chapter-10 1) Case Study # 23 page 383: Washing Away (www.oup.com/us/newnan)

One-page report of your Proposal to answer customer needs on:

a) Introduction & Summary Question(s); Concerns; or problem at hand (25%)

b) Assumption; Calculations (50%)

c) Recommendation (25%)

Chapter-12: 2) Case Study # 53 page 450: Problem in Pasta Land  (www.oup.com/us/newnan)

  One-page report of your Proposal to answer customer needs on:

d) Introduction & Summary Question(s); Concerns; or problem at hand (25%)

e) Assumption; Calculations (50%)

f) Recommendation (25%)

120

Case 23
Washing Away

Seaview is a small resort community on the Gulf of Mexico. Blessed with nice beaches and a
good location, Seaview has grown rapidly over the last decade. The growth has not been
explosive, so that Seaview has maintained a semblance of “good taste.”

Seaview’s city engineer, Ramon Martinez, had a number of sleepless nights during
Hurricane Harvey last year. His biggest concern was a seawall that protects the first row of
hotels, motels, inns, and restaurants from waves and storm tides. The seawall withstood the
onslaught, but it was close. Ramon vowed to analyze the city’s vulnerability along the seawall
before the next hurricane season. He has gathered a first cut at the data, and it is now time to
begin the analysis.

The seawall was designed to withstand a 50-year storm with an additional cushion
through safety factors. Analysis has shown that Harvey was a 40-year storm for Seaview.
Now after 20 years of storm damage, minor maintenance, additional data gathering, and
improved design and modeling capabilities, the seawall seems to still be matched to the 50-
year level. Barring destruction by a major storm, the seawall with proper maintenance and
repair seems likely to last for a century or two.

During the same 20 years, the growth rate has averaged 4% annually (adjusted for
inflation), rather than the 1% that was originally expected. The consequences of a large storm
have increased with the rapid growth. Ramon believes that the 50-year standard is probably
inadequate for the larger consequences. This inadequacy will increase as Seaview’s growth is

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not slowing, and the beachfront property that relies on the seawall continues to be the most
prized.

Ramon has identified three types of alternatives for the city. First, future risks could be
reduced by restricting development along the seawall. In an extreme version this could
include condemnation of existing buildings and purchase by the city. Second, the city could
mitigate the financial consequences through insurance. Seaview could require that property
owners be insured for hurricane damage. Third, Seaview could increase the level of
protection by strengthening the existing seawall.

Ramon plans to use an 8% interest rate in the evaluation. This is relatively high, because
Seaview’s rapid growth has created many needs and overstretched facilities. He is planning
on using a long horizon, at least 100 years. The seawall has a long life, and the higher
severity storms have even longer return intervals.

As strengthening the seawall is his “natural” reaction to the problem, Ramon started his
analysis with it. The seawall is about 2.3 miles long and is located between the beach and the
first row of buildings. It is readily accessible from the beach, and the strengthening project
could easily be completed during the off-season.

The seawall’s size and cost increase with the severity of the storm that it is designed to
withstand. Strengthening the seawall from a 50-year design standard to a 100-year standard
would cost $3.15 million. Each doubling of the return interval costs another $3.15 million.
Rebuilding to the 50-year standard would cost $4 million, and larger seawalls would cost the
same $3.15 million per increase in the design interval.

Table 23-1 summarizes the translation of return intervals into probabilities that Ramon
plans to use.

Table 23-1 Probabilities for Storm Severity

Return interval 50 100 200 400 800 etc.

Inverse cumulative probability .02 .01 .01/2 .01/4 .01/8 etc.
Probability .01 .01/2 .01/4 .01/8 .01/16 etc.

The expected damages depend on the difference between the storm’s severity and the

design standard (interval) used. If the storm’s severity is less than the design standard, then
there is no damage. If the storm’s severity matches the design interval, then damages will

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122

equal about 10% of the protected structures’ value. If the storm’s intensity is one interval
higher, then damage will approximate 30% of the structures’ value. For two intervals higher,
the damage increases to 70% of the structures’ value and complete destruction of the seawall.
For three intervals higher, the first row of buildings would be completely destroyed (salvage
value = cost of cleanup). (See Condominium by John D. MacDonald). There would still be
no damage to structures on the land side of Beach Boulevard, because the four-lane divided
parkway and the first row of buildings will act as a bulwark.

The condemnation alternative is politically difficult at best. First, most owners would not
want to sell their property. Second, the appraised value of the buildings along the beach is
nearly $200 million, and they sit on land worth $60 million. Another $30 million in
beachfront land has not yet been developed. This $290 million in property provides only 15%
of the property tax revenue that supports Seaview’s services, but Seaview cannot afford to
“buy it out.” It is probably easier for Seaview to acquire the $30 million in undeveloped land
through condemnation proceedings than to significantly restrict the value of ensuing
development if it remains in private hands. It may also be easier for Seaview to condemn
undeveloped rather than developed property.

The head of the city’s legal department responded positively to Ramon’s query about the
city’s ability to require “hurricane” insurance. So Ramon conducted a small survey of
building owners along the beachfront to check their insurance coverage. After the first fifteen
interviews, he called the city attorney and said, “The situation is far worse than we suspected.
All of the buildings are insured, but not one policy allows for failure of the seawall. In fact,
six of the policies specifically disallow damage if the seawall fails.” The city attorney
reassured Ramon with the comment that “At least Seaview can’t be sued if the seawall fails.”
Buying insurance to cover the damages for these extreme floods would cost 50% more than
the expected level of damages. Seaview could require it and act as a central coordinator in
obtaining coverage.

Ramon has asked you to prepare a report for his review, which emphasizes the economic
analysis. He also encouraged you to consider the political factors that may dominate the
economics. He asked you specifically to include a table summarizing the trade-offs between
the four alternatives. (There are two versions of the condemnation alternative).

Case 23 Washing Away

123

Option
It is nine months later, and Hurricane Clara has just destroyed Seaview’s seawall and
beachfront property. Clara was a 400-year storm, and the actions Ramon had suggested were
still wending their way through the political process.

Disaster relief funds have been approved, but they are only covering about 60% of the
loss for the private property owners. Seaview appears likely to fare somewhat better, as the
governor has promised $13.5 million for a seawall designed to the 200-year standard.

The same alternatives as before exist with some modifications in their expected cost. For
example, the insurance costs have gone up by a third. On the other hand, condemnation
would now only require that Seaview pay for the value of the land, without the beachfront
structures.

223

Case 53
Problems in Pasta Land

by
Andres Sousa-Poza

Old Dominion University

The Food Factory has been operating in an underdeveloped country for approximately 10
years.1 Its parent corporation specializes in wheat milling, and it started the pasta factory as a
“side-line” operation to process lower quality wheat flour, which is a by-product of the
normal milling process. This low-gluten flour is generally not suitable for the production of
bread or for direct sale to consumers.

In 2009, the pasta division is confronted with a major problem. It is too successful!
The factory was designed around the mill. Production capacities matched the amount of

effluent from the mill rather than coming from a sound marketing strategy. As shown in
Table 53-1, by 2006, the pasta plant was no longer able to effectively serve existing
customers. The plant that was designed to produce 600 tons of pasta per month on two
production lines is now facing average monthly orders of approximately 800 tons.
Furthermore, the corporate director of marketing estimates that orders could easily be
increased to 1400 to 1800 tons per month.

1 All monies used in this case are in the local currency, which is one of the more than 40 countries in
the world that use the $ symbol and most of which are called dollars.

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Table 53-1 Average Monthly Orders/Production

0

100

200

300

400

500

600

700

800

900

Year

A
ve

ra
ge

m
o

n

th
ly

o
rd

er
s/

pr
od

uc
tio

n

Orders 200 280 360 490 450 580 620 710 760 800

Production 200 270 365 500 440 575 590 610 580 570

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Another challenge facing the factory is that the initial equipment was refurbished, not
new, and it is now antiquated and seriously dilapidated. Unless the plant is shut down,
equipment replacement is going to be required. The existing equipment was already a
technological generation behind when it was bought. During the last 10 years a new
generation of equipment has been developed based on high-temperature drying. The new
technology is much more suited for use with low-quality (low-gluten) flour and semolina.
New machinery is significantly more efficient. It requires fewer workers, has lower relative
energy consumption, and produces less waste. The pasta plant still maintains a price lead
through the low cost at which it is able to obtain raw materials from the corporate wheat mill,
but this barely compensates for the plant’s low efficiency.

The new technology is also enabling competitors to use low-quality, low-cost raw
materials and still produce a reasonably high-quality end product. Ultimately, this means that
the cost of higher quality pasta has dropped significantly in price, and the quality of the low-
cost pasta is increasing significantly. The pasta factory’s market is customers with a

Case 53 Problems in Pasta Land

225

preference for low cost. Serious threats that the marketing director is possibly not including in
the potential sales forecast include (1) the encroachment of traditionally high-quality
producers into the low-cost markets, and (2) the increase in the quality expectations of
customers that traditionally have been classified as “cost-conscious consumers.” In general,
the plant’s cost advantage is no longer enough to secure a strong market niche. Only the most
steadfast price-oriented consumers can be counted on as a stable market group.

Expanding the factory would mean that the mill would no longer be able to supply
sufficient raw materials. Production above 600 tons per month would require the purchase of
flour or semolina from the open market, at market prices. It is suggested that some of this
increased cost could be dissipated through internal accounting practices, namely by charging
the pasta division less for the use of the mill’s low-quality flour. The mill’s manager is
strongly opposed to this, even though it has been done in the past. He argues that a further
decrease in the costing of low-gluten semolina would seriously distort the mill’s operating
figures. He argues that the effluent flour should be sold to pig farmers, since they are willing
to pay more than the pasta plant is now being charged.

While everyone (the board of directors and managers) concurs that something has to be
done, little analysis has been done. The board of directors has traditionally made major
investments based on a heuristic of keeping the initial capital costs low. The logic behind this
is that it tends to reduce risk, since the time needed to achieve a net positive cash flow is
shorter (short payback period). The general manager is not convinced that this is the best
approach now. He feels that the threat introduced by new technologies, the deviation from the
initial intent, the stance taken by the milling manager on costing, the cost and quality
demands being placed by customers, as well as operational efficiency and effectiveness
considerations, make it imperative that new technology and a new decision approach are
used.

The general manager needs to develop a solid business case for each alternative. He
needs to present these in a manner that would be accepted and understood by the board of
directors for his recommendations to be considered. He is sure that this will require better
financial metrics. The inclusion and consideration of so many “soft” and barely quantifiable
variables is confounding him.

General Alternatives
At a very high level, there are not too many alternatives. Continuing the operation “as is” is
not possible. While shutting down is possible, it is very undesirable. The use of the factory as

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226

a value-added function within the firm is still very positively viewed, and even though the
mill manager is definitely not in favor of reducing the cost of the low-gluten semolina, at the
organizational level there are considerable cost benefits. Furthermore, the factory provides
jobs in a community where alternate employment is not possible. The corporation as a whole
is the largest local employer, hiring approximately 40% of the eligible workers. This is the
basis of the company’s good reputation, and, possibly more importantly, the reason that no
local taxes are being levied on the firm. The buildings to house the mill and the pasta factory
are also being provided for free. The firm as a whole is better off given the benefits the pasta
plant provides the mill—even if the pasta division runs at a mild loss.

Therefore, something must be done to replace the existing equipment. The main
questions seem to lie in the technology and the organizational objectives. Associated with the
technology alternatives are issues related to employee skills that would be required for the
new production systems, customer expectations, and whether the expected performance
promised by new technology could be achieved. Associated with the organizational goals are
customer demands. The organizational intent for the pasta plant did not place the customer in
a central position. Customers expect that, at the least, orders that are accepted will be
adequately serviced. The factory’s original intent to use the mill’s effluent doesn’t match
customer demands that exceed the approximately 600 tons per month of low-grade semolina
provided by the mill. Furthermore, customer expectations of pasta quality are changing
drastically. Operating the pasta factory as a “side-line” operation is deterring the organization
from making customer-centric decisions.

Technology and Equipment
Pasta is made with a process that has remained virtually unchanged for hundreds of years.
What has changed over the centuries is the manufacturing technology. Pasta is made by
mixing durum wheat semolina with water to achieve a moisture content of about 32%. Durum
semolina is in essence coarse flour made from hard-grained wheat. It has a high gluten
(protein) content, approximately 11% moisture, a distinctive “nutty taste,” and an appealing
yellow color. This mixture is kneaded and formed. Finally, the pasta is allowed to dry in
drying rooms or in the outdoors.

In modern facilities, continuous feeding/dosing apparatus and paddle troughs accomplish
mixing. Kneading and shaping is carried out using screw extruders and extrusion molds to
give the pasta its characteristic shapes. Short pastas, such as elbow macaroni, penne, and
fusilli, are cut short at the extruder. Long pastas, such as spaghetti and linguine, are draped

Case 53 Problems in Pasta Land

227

over rods and cut to length once dry. The extruded pasta is dried in a series of dryers that
bring the moisture content down to approximately 11.5% to 12%. The pasta is then cooled
and stored before being packaged.

Figure 53-1 Short Pasta Production Line

Possibly the greatest advances in the last decades have been made in the manner that

pasta is dried. In older operations, the drying cycle can take 24 hours or more. This extended
drying period is required to ensure that drying takes place evenly across the profile of the
pasta. If drying takes place unevenly, stresses are caused in the pasta, causing it to crack and
discolor. New technologies that rely on very well controlled drying environments use high
temperatures that are moderated by adequate humidity levels. Drying time has been reduced
to as little as 3 hours for specific pasta shapes. In addition, these high-temperature techniques
can produce pasta with good coloration, texture, and cooking characteristics using flour with
low gluten content (~10% or less), grayish color, and lacking the “nutty” taste of the durum
wheat.

The use of flours with lower gluten content has a strong financial implication, since it is
significantly less expensive than durum semolina. In most countries it is now common
practice to include at least a portion of flour with the durum semolina. Many companies
maintain at least a token amount of durum semolina content to be able to claim its use. In
Italy this practice has been curtailed due to the “purity” laws that exist for pasta.

The general manager has found that there is a considerable difference in the prices of
refurbished and new equipment. Refurbished equipment costs only 25% of the new

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228

machinery cost when transportation, installation, and start-up are included. As shown in
Table 53-2, the price does not vary as much with the machinery’s capacity.

Table 53-2 Equipment Costs

New Refurbished
1000 tons/month $3,560,000 $730,000
2000 tons/month 4,800,000 1,100,000

As shown in Table 53-3, new equipment, although it requires less frequent maintenance,

uses parts and labor that are significantly more expensive. Refurbished equipment is more
expensive to maintain as wear increases. However, power consumption is lower for the new
equipment.

Table 53-3 Operating Costs

Equipment Maintenance costs

Power consumption/ton

New 7% of equipment cost $69
6% of equipment cost 72 Refurbished

& 1% increase per year

Labor and Skills
A factor of great concern to the general manager is the changes that new technology would
bring to the organization. According to the equipment’s manufacturers, the new technologies
(which include advanced process control equipment, automated product testing, and
integrated machinery testing) would require fewer employees than the refurbished equipment.
The high-capacity equipment requires only a few more employees than the low-capacity
machines, and the manufacturer argues that this is a good reason to implement a high-
capacity facility.

As shown in Table 53-4, all options employ fewer than the 80 to 90 people that currently
work in production. The existing equipment has very limited packaging machinery, and the

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229

current process is very labor intensive, particularly for the first step where individual 500g
boxes of pasta are put into case packs. Adjusting the labor force size to that required for the
high-capacity refurbished technology could probably be accomplished by regular attrition.
The other options would very likely require some layoffs. This concerns the general manager,
who realizes that a strong component of the firm’s good reputation is due to the number of
local people that it employs.

Table 53-4 Labor Requirements by Equipment Type

Capacity
Equipment Skill Level 1000 tons/mo 2000 tons/mo

New Supervisory 1 2
Skilled 34 41
Unskilled 2 8
Refurbished Supervisory 1 2
Skilled 2 5
Unskilled 48 67

The new equipment also requires more skilled employees, who cost more (see Table 53-

5). Even more important is that the local labor force does not have enough skilled employees.
Hiring outsiders would exacerbate the loss of jobs for the local population. Extra training
costs if locals are used are summarized in Table 53-6.

Table 53-5 Labor Costs per Month

Supervisory $6700
Skilled 5300
Unskilled 3800

Note: Costs include benefits and training.

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230

Table 53-6 Extra Training for New Technology

Year 1 2 3 4-10
Extra training
as % of labor costs 22% 15% 8% 5%

The greatest problem in overhauling the factory, and in particular for the new equipment

option, lies in the attitude and perceptions that exist within the factory—all the way from the
employees to the board of directors. The following represent some of the basic attitudes that
the general manager has encountered over time:

1. “If it isn’t broke, why fix it?” Even initiatives aimed at improving conditions for

employees have met with stiff resistance. For example, an attempt at starting a
day-care facility failed. Management was not convinced that it would provide a
tangible benefit. When several employees complained about the incursion on
their privacy, the initiative was laid to rest.

2. “This is the way we have always done it.” The installation of conveyor belts to

move end product to the warehouse turned into an expensive fiasco. The
employees refused to use it, and possibly even sabotaged equipment to support
the claim that it was worthless. The employees seemed to fear that the workforce
would be reduced.

3. “There is nothing that technology can do that a person cannot do better.” When

an attempt was made to introduce computers in the warehouse to log movement
of incoming and outgoing materials, there was nearly an open revolt. Finally, the
computers were removed from the warehouse, and the old paper system was
reinstated. The loading dock supervisor would record everything on a clipboard
and later enter it into the tracking spreadsheet.

4. “You cannot make cheap products on expensive equipment.” It seemed that there

was nearly a phobic fear of purchasing anything new. The usual excuse was that

Case 53 Problems in Pasta Land

231

it cost too much. In several cases where the general manager had been able to
demonstrate (using sound financial and economic techniques) the benefits of
adopting new equipment, other alternatives had been chosen.

5. “Training is for dummies.” The Human Resource manager would complain that

the only way he could get employees to attend even the most mandatory of
training, such as training on hygiene techniques in the food industry, was through
coercion. He would, in effect, threaten to have people fired.

6. “If the customer does not like the service, does not like what they get, does not

like the quality, etc., let them find it cheaper somewhere else!”

Not surprisingly, concepts such as quality control, improvement, customer focus,

hygiene, empowerment, participation, or, for that matter, customer and product are not really
well understood.

Based on experience and research, the general manager also has found that introducing
new equipment (particularly when new technologies are involved) requires a learning curve
to realize the machinery’s full capabilities (see Table 53-7).

Table 53-7 Learning Curves for Production (% of capacity)

Year 1 2 3 4 5+

Refurbished 90% 95% 98% 100% 100%
New 45% 65% 90% 95% 100%

Customers
Existing orders (some unfilled) amount to approximately 800 tons per month. The director of
marketing predicts the sales levels shown in Table 53-8 for the new equipment if not limited
by the equipment’s capacity or the learning curve.

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232

Table 53-8 Forecast Sales for New Equipment

Year
1 2 3+

High sales target 1200 1600 1800
Low sales target 1200 1400 1400

The general manager feels that, under the present conditions, both the target range and

market growth rates are feasible. He foresees some serious threats emanating from the new
technologies being used. Based on past sales records, he finds that the company has six retail
customers with which it has dealt on a regular basis. Of those six, one of the retailers has
placed more than half of all orders (54%), with the second largest one placing another 30%,
and the other four placing nearly equal portions of the remaining 16% of total orders.
Independently, the general manager has talked to the customers and has found that both of the
two most significant customers have plans for expanding sales, which bodes well for
expanding the company’s production.

These two customers are, however, quite specific in their expectations for service and
indicate that they have been receiving offers from other suppliers who seemed to be in a
better position to provide them with the required product. Furthermore, they indicate that
consumers are beginning to show a preference for higher quality pasta. The largest customer
in particular states that pasta quality would have to be increased; otherwise, they would have
to seriously consider switching suppliers.

This makes it clear to the general manager that he has serious quality issues. Using the
refurbished technology, he could only match competitors’ quality if he uses a blend of high-
quality semolina (which he would have to purchase from the open market) with the current
low-quality flour. The blend would have to be approximately a 50:50 mix. This blend would
obviously greatly dilute the beneficial effect of using very low-cost raw materials on the
overall product costing. As shown in Table 53-9, semolina and flour are the greatest of the
direct costs.

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233

Table 53-9 Direct Costs per Ton of Product

Semolina from milla $770
Market low-grade semolina 940
Market high-grade semolinab 980
Other materials 128
Transportation 145

aA maximum of 600 tons is available.
bThe refurbished technology requires a 50% inclusion of high-grade
semolina.

The general manager is concerned with using a blend of flour and semolina since

operators with the new technologies could do the same and have other advantages in market
maneuvers. Since the retail customers were showing a strong preference for the product from
the new technologies, he feels that he (and his competitors) could charge a small premium for
the increase in product quality (see Table 53-10).

Table 53-10 Price of end product

Present price & price using refurbished technology $1,450
Price of product using new technology 1,470

After discussing cost and quality issues in depth with the customers he feels that although

the target values of 1400 to 1800 tons/month are reasonable, there is in effect a very high
likelihood that he might lose at least one of the major customers if he uses the refurbished
technology. If this occurs, the most likely scenario would be that he would have to revert to
competing on a cost basis. The limitation on this is of course the amount of flour that he can
obtain at a discounted price from the mill. Consequently, he feels that with the refurbished
technology the likelihood of having a long-term sales outcome of approximately 600
tons/month is nearly as likely as the higher targets. Furthermore, there seems to be the danger

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234

of losing all the anticipated increase should the trend in pasta consumption shift further
toward quality and away from price, although he feels that this is not quite as likely.

On the other hand, with the new technology it is much more likely that he can compete
with other producers on a “level playing field” and achieve sales between 1200 and 1800 tons
per month.

Financing
The finance director states that loans are available at 8% over 10 years to cover the full cost
of equipment purchases. The director has used this leverage to its full extent. In general,
projects hava been financed by paying 10% of the investment using retained earnings
(although the director expresses reservations about exceeding $100,000 in this case).

The company pays taxes at approximately 35% of net earnings. Net losses for the project
would reduce the firm’s overall income and its tax burden. This type of equipment is
depreciated to a salvage value of zero at 8 years with straight-line depreciation.

Finally, the director of finance informs the general manager that it is common for the firm
to expect a minimum return of 20% on a project of this duration and scope, and that a 10-year
planning horizon could be used. With this horizon it is reasonable to assume that the
equipment’s salvage value approximately equals the cost of removal.

The Problem
The general manager’s overall impression is that the greater cost of new equipment will make
the alternatives that included it more sensitive to fluctuations in the eventual sales. On the
other hand, the refurbished technologies risk failing to meet rising quality expectations. This
could easily curtail any sales growth and even put this plant out of business altogether.

He also sees that no matter what the outcome, he is going to have serious labor issues to
deal with, and a lot of discussion with the board of directors to determine the future focus of
the pasta plant. What are your recommendations?