W8-David King-Statistical Process Control – Mentor AN and CN

Problem Recognition, Definition, and Evaluation

Life in Indonesia gets more expensive by the day as the Indonesia Rupiah gets stronger and the US Dollar gets weaker. A problem that I face living in Indonesia is that when I work I get paid in US Dollars and I am always at the mercy of the exchange rate when I make a purchase. Since I have arrived in Indonesia in 2009 with an exchange rate of 12000 IDR to 1 USD, to the current rate of 8500 IDR to 1 USD and experienced a great loss in purchasing power.

Development of the feasible alternatives

  1. Gold Price as a constant to see if gold is out of control.
  2. Monthly Averages to see if the price of gold is out of control.

Development of Outcomes and Cashflows for each criteria

Selection of the criterion

  1. Rule of 7 – PMBOK
  2. One point falls outside the control limits
  3. Two points, out of three consecutive points are between Sigma +2 and Sigma+3 or Sigma -2 and Sigma -3.
  4. Four points out of five consecutive points are between Sigma +2 and higher or between Sigma -2 and lower.
  5. Nine consecutive points are on the same side of the average.
  6. Six consecutive points increasing or decreasing
  7. Fourteen consecutive points alternating up and down.
  8. Fifteen consecutive points between Sigma +1 and Sigma -1.

Analysis and comparison of the alternatives

One the annual price of gold, in 1976 it falls outside the control limit as per criterion 2. From 1975-1977 it meets criterion 3. From 1975-1978 it meets criterion 2. From 1981-2005 there are 24 points on the same side of the average as per criterion 5 and meets the rule of 7 from criterion 1. From 2001 to 2010 there are 9 consecutive points decreasing as per criterion 6. From 1980 to 2006 there are 26 consecutive points in the same range as per criterion 8.

For the monthly price of gold it is in control and within acceptable ranges; however when June comes around, the process will be out of control if the monthly average price of gold exceeds $1510.83 per oz.

Selection of the preferred alternative

The price of gold annually is out of control. The price of gold monthly is in control, but still needs more data. I feel the price of gold monthly is the best way to measure gold currently.

Performance monitoring and post evaluation results

The Indonesia Rupiah was relatively strong up to 1997 when the Asian markets crashed. From that point on, the Indonesia Rupiah lost its purchasing power and is struggling to get back to its original value of 2400 IDR to 1 USD. Currently the Indonesia Rupiah is gaining momentum and value against the dollar. The impression I have based on the numbers is that as long as the value of the dollar continues to go down and the value of gold increases, the value of Indonesia Rupiah will increase as well. The only way for me to gain increase in purchasing power is for the US dollar to gain value against gold.





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1 Response to W8-David King-Statistical Process Control – Mentor AN and CN

  1. DrPDG says:

    Hmmmmm…….. Not wrong, David, but not clear from your posting if you really grasp yet where we are going with this…….

    OK, so the price of gold is out of control……. So what? What does that mean? Does that prevent us from using the price of gold to establish purchasing power parity? What is the mean ounces of gold required to purchase $1,000 worth of goods in 2011? What is the standard deviation? What comfort level would you require in order to prevent you from losing money?

    Asked another way, if you had to hedge the risk of the cost of your MBA going up by buying gold, how many ounces of gold would you use to protect or cover each $1,000? Why did you choose that number?

    And why would you only look to the MONTHLY price fluctuations of gold? Knowing we are going to be using this data to identify long term trends, do you think using only one month’s worth of data is sufficient?

    I will accept this posting (barely!!) but you really need to invest more time understanding Chapter 8 in Engineering Economics.

    For the current (W9) posting I am going to expect to see a better understanding of how to use the long term trend of the purchasing power (not just exchange rates!!) in predicting costs into the future.

    Dr. PDG, Jakarta

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