Applichem’s Capacity Strategy

Applichem’s Capacity Strategy

Imagine yourself as the Vice President of Manufacturing, what would you do given the current capacity situation and information provided by the recent productivity study? Particularly what will you do with Gary?

Now independently think and provide your opinion on whether it is fair to compare plants this way?

Frankfurt is the most productive manufacturing facility among the 4. It’s consumes about half of what it produces, and exports the remaining to Gary and Sunchem areas. Mexico consumes about 75% of what it produces & exports the remaining.

Labour Productivity

Production inefficiencies do exist at Gary, Indiana. However, Gary serves an important market of United States. Further, Gary has a historical connect to its labours, since many generations of families have worked at Gary. Thus, labour loyalty would be high. Instead of stopping production, measures should be taken to remove these inefficiencies. Gary’s current labour productivity of 240,000 pounds per labour is lower compared to Frankfurt and Mexico. To improve labour productivity, the labours should be trained to map their skills with improved mechanisms to get efficient behaviour.

Cost – Benefit Analysis

From an overall cost-benefit analysis, Gary is currently profitable. (After Franfurt & Mexico). However, Sunchem production facility has really high costs associated with - Raw Material, utility and labour. Further, its Labour productivity is the really low. This makes Sunchem facility unsustainable. Since, these are not operational parameters, thus, uncontrollable from efficiency improvement perspective - i.e. no amount of improvement in operational efficiency can reduce the costs associated with labour (related to Japanese culture & laws) or raw material. Hence, production at Sunchem, Japan should be shut down.

Comparing the 4 plants?

Comparing plants across countries which have different labour laws, different work cultures and different environments appears to be an unfair practice, but it’s not! For a global organization to sustain, grow, generate employment and be profitable, it has to be both cooperative and competitive across its own branches. The manufacturing facilities should eventually shift to locations where labour costs are low, raw material is cheaper, and without compromising on the quality. Sunchem, Japan, for instance, has really high Yield on Raw Material A, however, the labour costs too extremely high and net productivity is too low to sustain itself.

Factor Mexico Frankfurt, Germany Gary, Indiana Sunchem, Japan

Design Capacity (m lb) 27 47 26 5

Packaging flexibility (# of sizes) 1 (50 kg bags) 1 (50 kg bags) 80 (1/2 kg & above) Multiple (1/2 & 1 kg bags)

Product families 6 12 19 2

Total Cost (US $ per hundred lb of R-E) 91.13 72.26 99.42 146.98

Raw Material Cost (including OH) 75.05 53 63.48 91.86

Operating Costs 13.7 15.91 22.16 50.56

Packaging & shipping 2.38 3.35 13.78 4.56

Labour (# of people) 45 86 58 31

Direct 20 46 24 14

Indirect 25 40 34 17

Total Utility Costs ($/m lb) 12012 11116 19365 36675

% Active ingredient in product 85.60% 84.40% 84.60% 85.40%

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