APPLICHEM

Case Analysis
Presented to
Professor D. Krishna Sundar
Indian Institute of Management, Bangalore
On
December 20th, 2005
In Partial Fulfilment of the
Requirements of the course

Operations Management
Submitted By

Abhishek Singh Rana (0511071)

Ajit Phadnis
(0511074)
Alok Pande
(0512003)
Bhanu Pathak
(0511081)
Rahul Mehta
(0511112)

Section B

Applichem
Introduction
Applichem is a manufacturer of speciality chemicals, one of its unique products being
Release- ease. The company has 6 manufacturing plants: 3 in North America (Gary,
Canada and Mexico), 1 in Western Europe (Frankfurt), 1 in Latin America (Venezuela)
and 1 in Pacific and Rest of the world (Sunchem). Each of these plants has unique
characteristics of number of product lines manufactured, number of packaging varieties,
capacities of plants, plant redesigns and regional laws. Due to these differences, the
overall performances of the plants differ in terms of average yield of raw material and
profitability.
In this report we have analysed the effects of these differences between the plants and
we recommend a model that Applichem can use to minimise its total costs.
Figure 1: Current Production status in Plants
Market
Gary
Canada
Mexico

North America
Western

Designed
capacity
18.5
3.7
22

1982
Production
14
2.6
17.2

Idle
capacity
4.5
1.1
4.8

Yield
94.7%
91.1%
91.7%

Last update in
Equipment
1964
1955
1978

Frankfurt
Venezuela

Europe
Latin America
Pacific
and

47
4.5

38
4.1

9
0.4

98.9%
90.4%

1974
1964

Sunchem

ROW

98.8%

1969

Process Flow
The figure below illustrates the process flow followed by Applichem for manufacturing
Release- ease.

Figure 2: Process flow for Production of Release-Ease

Case Analysis
As per the case facts, we have listed the following factors affecting the performance of
the manufacturing plants:

Laws in Japan which increase the number of employees on the plant

Worker productivity potential which can be assumed to be a result of

educational levels and training of staff

Higher number of product lines (other than Release- ease) may result in
sharing of resources both physical and financial

Number of packaging types which results in additional setup costs.

Improvements in plants and machinery/ Process redesign completed/

Automation of processes/ Good Maintenance of plant and machinery

Emphasis on Quality

Factors influencing the performance of plants:

There are two factors which have an overwhelming influence on overall performance of
two plants Gary and Sunchem:

Gary was designed to manufacture prototype samples for customers and thus for
development purposes spent 0.97 U.S. dollars per hundred pounds (second
highest) of Release- ease(as indicated in Exhibit 2 of the case) and has the
highest Number of people working for development as a percentage of total
people of 3.77 %.

Due to Japanese regulations Sunchem has a very large number of direct and
indirect labour (from Exhibit 3 of the case) i.e. 310 much more than the second
largest 86.1 of Frankfurt even though Frankfurt produces nearly 10 times the
amount of Sunchem.

(a)Labour Productivity
We have used the level of education, skill and training as a measure of labour
productivity. A highly skilled labour is more likely to be paid a higher wage. In line with
this data we have analysed the wage/per hour in USD of the plants as per 1982 data.
Plant
Average Gross Money Wages/ hour

Mexico

Canada

Venezuela

Frankfurt

Gary

Sunchem

in USD as per 1982 figures

1.03

8.33

3.34

6.15

8.50

6.06

Figure 3: Wages at Various Plants

We find that as expected, due to lower skilled labour in Mexico and Venezuela their
corresponding wages are also lower. Lower skilled labour can be one of the causes of
lower yield in plants such as Mexico and Venezuela.
As opposed to them, the Frankfurt plant has skilled labour which can be a reason for its
high yield.
(b)No. of package types
With 80 package sizes and a cost of 13.78 US dollars per hundred pounds of Releaseease, Garys number of packages could have an effect on yield. As mentioned in the
case Changing the size of a bag in the packaging line frequently took a day. With
such high setup costs for packaging, the yield is likely to reduce.
(c)Volumes/ Capacity

Canada has the lowest annual design capacity of 3.7 million pounds and a capacity
utilisation of 70.27 %. On the other hand the Frankfurt plant has the largest capacity of
47 million pounds and a capacity utilisation of 80.85 %. Therefore the larger the
capacity of the plant and its utilisation, the higher the average yield for the plant
(Given in the case). Deducing from this, the Frankfurt plant should have a higher yield
than average while the Canada plant will have a lower than average yield.
(d)Plant Redesign/ Maintenance and Automation
Among the plants Mexico, Canada, Venezuela and Frankfurt; Canada spends the
highest i.e. 2.75 USD per hundred pounds of Release- ease. Also processes in the
Frankfurt plant have a high level of automation (mentioned in the case). A high level of
maintenance and automation will have a positive effect on the overall yield.
(e)Emphasis on Quality
As mentioned in the case, the Canada plant was well-regarded for the quality of its
products. Also the large expenditure of the Canada plant of 1.30 USD per hundred
pounds of the product shows an emphasis on quality. An increase in quality control
requires more number of checks in the process thereby reducing overall yield.
The effects of the number of product lines, though present are not substantial to change
the yield.
We have summarised all the factors that affect the average yield and overall
performance of the firm in figure 4 (Following page).
Each of these characteristics has been rated as Low (L), Medium (M) and High (H)
relative to the other plants:

Plant
Mexico
Canada
Venezuela
Frankfurt
Gary
Sunchem

Worker
Productivity/
Training
L
M
L
M
M
H

No.
of
product
lines
M
M
L
H
H
L

No.
of
package
types
L
L
L
L
H
M

Volumes/
Capacity

Plant
Redesign/
Maintenance
M
H
L
H
M
H

M
L
L
H
M
L

Product
Development

Emphasis
on Quality

Laws

L
M
L
M
H
H

M
H
H
M
H
H

M
L
M
M
M
H

Figure 4: Factors affecting average yield and overall performance

Measures of Performance
On the basis of our evaluation of the parameters we can separate the Sunchem plant
and the Gary plant in our comparative analysis. They should have a lower measure of
performance due to a batch operation for research and development in Gary and the
Japanese laws in Sunchem.
Among the four other plants, Frankfurt is the most efficient, followed by Mexico (high
capacity), Venezuela or Canada
We have taken two parameters to evaluate our analysis:
Plant
No. of pounds/ per worker
Average Yield

Mexico
1061
94.7%

Canada
257
91.l%

Venezuela
470
91.7%

Frankfurt
1209
98.9%

Gary
658
90.4%

Sunchem
35
98.8%

Figure 5: Efficiency at the plants

Based on the above analysis, we find that:
Factors within the control of management-No of package types, Plant
Redesign/Maintenance and Automation, Emphasis on quality
Factors

outside

the

control

of

management-Labour

productivity,

Volumes/Capacity

HANDLING THE OVER CAPACITY AT DIFFERENT PLANTS

The learning from Goldratts book The Goal is that having idle capacity is preferable to
locking money in inventory. We find that in the present case, the six plants are producing
exactly as per the demand and therefore there is no finished goods inventory. Also, since
demand for Release ease is expected to remain constant for the next five years, we

recommend that the plants with excess capacity may explore the possibility of exporting
and meeting demands of other plants where the cost of production is higher than the
production plus the transportation costs of these plants. The table below brings out the
cost of producing and importing from plants with excess capacity.

COSTS OF IMPORTING RELEASE-EASE VS. LOCAL PRODUCTION

From / To
Mexico
Canada
Venezuela
Frankfurt
Gary
Sunchem

Mexico
95.0
173.4
197.3
138.7
180.7
268.5

Rank
1
3
5
2
4
6

Canada
106.4
93.3
126.3
88.2
108.9
166.8

Rank
3
2
5
1
4
6

Venezuela
153.0
159.5
116.3
133.8
170.9
249.5

Rank
3
4
1
2
5
6

Frankfurt
116.1
119.2
141.6
76.7
123.7
184.0

Rank
2
3
5
1
4
6

Gary
110.8
108.0
132.4
91.8
102.9
174.3

Rank
4
3
5
1
2
6

Sunchem
115.6
117.0
138.5
95.4
122.4
153.8

Figure 6: Cost of Importing vs Producing at various plants (In cents)

Plants which are the cheapest to procure from have been ranked as 1.
POSSIBILITY 1: Assumption: Frankfurt has the packaging facility required to pack half a
kg and one kg material.
The cost of production at Sunchem is high due to its high overhead costs and energy
costs. From the above table, we can observe that it is cheaper to produce and export
from Frankfurt rather than produce at Canada, Gary and Sunchem. The differential
features of the Frankfurt plant that make it such a low cost of production have been
outlined earlier in the report.
We can also observe that it is cheaper to produce at any plant and export to Sunchem
than produce there. Frankfurt, which has an excess capacity of 9 Mn pounds, is best
suited to export to Sunchem. However, shifting of production to Frankfurt would lead to
additional packaging costs for half a kg and one kg packs, which sizes are currently not
available in Frankfurt. Our analysis does not incorporate these costs for want of data
from the case.

Rank
2
3
5
1
4
6

POSSIBILITY 2: Assumption: Production process is such that packaging capability in

the plants is limited and hence half a kg and one kg are either produced or imported
from plants which have packaging facility of the desired size
The sales in Pacific are 11.9 Mn pounds while the production in Sunchem is only 4 Mn
pounds. The balance is being imported from other plants. Since Sunchem and Gary are
the only plants which have 0.5 and 1 kg packages, it can be inferred that Gary exports
the remaining (11.9 less 4 Mn pounds) to the Pacific region.
The total exports of North America are 14.2 out of which 7.9 is exported to Pacific. The
balance cannot be exported to Europe whose requirements are already being satisfied
by the Frankfurt plant. Hence, the balance 6.3 Mn pounds are exported to Latin America
which has an excess demand of 11.9.
The remaining import requirements to the tune of 5.6 Mn pounds of Latin America are
met by Europe (Frankfurt plant)

Total
From / To

North Am.

W Europe

Latin Am.

Pacific

production

North Am.

19.6

6.3

7.9

33.8

W Europe

12.4

20

5.6

38

Latin Am.

4.1

4.1

Pacific

Total sales

32

20

16

11.9

79.9

Figure 7: Consumption and Export by plants

POSSIBILITY 3: Assumption: Production process is such that each plant has the
capability of producing different varieties of release ease and in every possible package
size and also there is no additional cost involved in such packaging then what the plants
are currently spending.
In such a case we have developed a Linear Programming model as follows:
A linear programming model was made minimizing the total Cost of production across all
plants such that the total demand across all plants is satisfied. The Cost function

includes the cost of production in each plant as well as the cost of exports from one plant
to another. For example suppose Frankfurt is producing 100 units while exporting 30 to
Mexico. The cost function will include the cost of producing 100 units in Frankfurt and
also the cost of exporting 30 units to Mexico. This is done with all possible combinations
of productions and exports among the plants and the cost function is minimized.
While developing the Linear programming model, certain assumptions were made:
1. All the different varieties of release ease can be manufactured in any of the six
plants without any significant increase in the total cost of production. This is
based on the assumption that the existing plants and machinery at every location
can be used to manufacture Release Ease of different formulations and
packaging without a major redesigning.
2. The exchange rates and inflation does not affect the production costs
significantly.
3. Production costs are independent of capacity utilization.
The LP formulation is as follows:
VARIABLES

Cap i = The capacity of plant i

( i =

1 for Mexico, 2 for Canada, 3 for

Venezuela, 4 for Frankfurt, 5 for Gary, 6 for Sunchem)

Pi = Amount of release ease produced in pounds at Plant i

Tij = Amount of release ease exported in pounds from plant i to Plant j.

Cpi= Cost of production at Plant i

CTij= Cost of transportation from plant i to Plant j.

Cdj= Duty Cost at Place j

Binary Variables are:

Xi=
Yij=

if Release Ease has to be produced at plant i

If no Release Ease need to be produced at plant i

If Release Ease has to be exported from plant i to plant j

if no Release Ease needs to be exported from plant I to plant j

amount is being exported from plant i to place j

OBJECTIVE FUNCION: Min (Total production cost + Total Transportation cost)

= Min. ( [Pi - { (Tij * Yij)}] Pi*Xi + Tij*(CTij + CPij) * (1+Cdj) * Yij)
(For i=1 to 6) For j=1 to 6)

(For i,j=1 to 6)

CONSTRAINTS

Production constraint: Total production <= The capacity of the plant

Therefore,

Pi <= Cap i

Demand constraint: The demand for Release ease in any region is equal to
(Total production in the region + the total import to the region the total export
form the region)
The demand constraint for Western Europe is formulated below for illustration,
X4*P4 + (Ti4 * Yi4) - (T4j * Y4j) = 20, 000,000.
Similarly, we formulated demand constraints for each region.

Export/Import Constraints
o

Total export from a plant cannot exceed the total production at that plant.
For example the constraint for Mexico plant is:
T1j <= P1

A plant cannot both export as well as import from the same plant
Therefore, Yij + Yji <= 1

When, ij

Yij + Yji = 0

When, i=j

We have simulated the linear programming model to get minimum costs. This cost
includes Production cost, transportation cost as well as duty cost.
The results of the linear program are part of the Appendix.

Exchange rates and their impact on make/buy decision:

10

USD has been steadily appreciating vis--vis the yen since 1978. The exchange rate
was 194.6 yen / one USD in 1978 which has increased to 235 yen / one USD in 1982.
This has had a negative impact on the attractiveness of exporting from Gary to
Sunchem. This corroborates the statement made by Tom Schultz.
As we observed from figure 6, the cost incurred by Sunchem in importing from Gary is
1.224 USD and the corresponding cost of manufacturing in Sunchem is 1.538 USD.
In yen terms, this works out to be 1.224*235 = 287.536 for importing from Gary along
with transportation costs and 1.538*235 = 361.43 for production at Sunchem.
Hence under this condition, it is advisable to import from Gary than to produce at
Sunchem.

FUTURE STRATEGY FOR THE GARY PLANT

Our above analysis brings out that if the Frankfurt plant is not capable of meeting
Sunchems packaging requirements, the Gary plant can be used to produce for
Sunchem. This would ensure that out of the excess capacity if 4.5 Mn pounds at Gary, 4
Mn pounds will be utilized leaving only 0.5 Mn pounds of excess capacity.
However, if Frankfurt plant meets the requirements of Sunchem, other alternatives need
to be evaluated for Gary plant:
Shifting Garys production facility for Release ease to Frankfurt
This option does not appear viable to us for the following reasons:

Frankfurt has excess capacity of only 5 Mn pounds (after meeting Sunchems

demands) whereas the demand from the Gary plant is 14 Mn pounds.

11

The research and Development facility will also have to be shifted to Frankfurt.
Due to its R&D facility the efficiency is lower and labour requirement is higher at
Gary than Frankfurt.

There is also an issue of relocating labour involved in production of Releaseease from the Gary plant.

Recommendations:

The management needs to decide on the operability of Sunchem, as operating

there does not seem viable at current costs
Improvement in processes and Technology

Have a centralized R&D team which works on product improvement, rather than
having a team in each area

Improve

the

information

exchange

between

plants

&

enable

the

implementation of best practices in process execution across plants.

The process improvements made in Frankfurt plant should be

implemented everywhere.

Frankfurt uses computer control in reaction step, this should be used

everywhere.

Also, Frankfurt does extensive solids recovery & waste treatment, this should be
taken everywhere.

According to the managements expectations, any machinery in this field has an

expected life of 20 years. However there are cases where machinery installed in
1959 continues to be used in 1982. This is impacting the productivity and
efficiency of these plants.

The yield increases with volumes, small plants should be scaled up.

The volumes at many plants (e.g. Sunchem) were constrained by low drier
capacity, such bottlenecks should be removed

12

Appendix

Costs per plant

Mexico

Canada

Fixed Costs (per hundred

pounds)
Production in 1982
Total Fixed Cost

17.58
17,200,000
3,023,760

24.55
2,600,000
638300

Variable Costs (cents per

pound)

77.43

72.8

Venezuela

Frankfurt

Gary

Sunchem

25.02
4,100,000
1025820

20.34
38,000,000
7729200

25.67
14,000,000
3593800

57.38
4,000,000
2295200

91.32

56.35

77.26

96.42

Analysis with Linear Programming on Excel

Transport data
Ctij
Mexico
Canada
Venezuela
Frankfurt
Gary
Sunchem

Mexico

Duty Cost
1+ Cdj

Mexico

Plant
Variable cost
Fixed Costs

Mexico

Production
Decision
Xi=

Optimal Prod.
Pi

Plant Capacity
Capi
Capacity
Constraint

Canada

77.26
3,593,800

Sunchem
96.42
2,295,200

Frankfurt
11.0
11.5
13.0
0.0
10.0
14.2

Frankfurt
1.095

Gary

1.000

Venezuela
1.500
Venezuela
91.32
1,025,820

Frankfurt
56.35
7,729,200

Gary

72.8
638,300

Venezuela

Canada
1.600
Canada

Mexico

1.045

(percentage)
Sunchem
1.060

Venezuela
7.0
9.0
0.0
12.5
11.0
12.5

Gary

11.4
0.0
10.0
11.5
6.0
13.0

0.0
11.0
7.0
10.0
10.0
14.0

77.43
3,023,760

11.0
6.0
10.4
11.2
0.0
13.0

(cents/
pound)
Sunchem
14.0
13.0
14.3
13.3
12.5
0.0

Frankfurt
0.573412838

Gary

Canada

22000022

Canada
3700000

Venezuela
4500000

Frankfurt
26950403.39

Gary
18500018.5

Sunchem
5000000

Mexico

Sunchem

22,000,000

Canada
3,700,000

Venezuela
4,500,000

Frankfurt
47,000,000

Gary
18,500,000

(pounds)
Sunchem
5,000,000

22,000,000

3,700,000

4,500,000

26,950,403

18,500,000

5,000,000

Mexico

13

Optimal export
Tij
Mexico
Canada
Venezuela
Frankfurt
Gary
Sunchem
Total Imports
Total Exports

0
0
0
19181572.35
0
0
19181572.35
214842903.3

Venezuela
614360264.5
5371.683933
0
0
7477340.783
0
621842977
231244154.9

Frankfurt
344112673.6
5371.683933
0
0
0
0
344118045.3
273607879.6

Gary
93443884.92
64550204.69
92808062.84
106110533
0
0
356912685.4
165795563.2

Sunchem
159794103.5
4434837.382
2274780.514
9387069.369
4434837.381
0
180325628.2
629234575.5

Cost of Production and Transportation of Exports

Mexico
Canada
Mexico
77.4
88.8
Canada
83.8
72.8
Venezuela
98.3
101.3
Frankfurt
66.4
67.9
Gary
87.3
83.3
Sunchem
110.4
109.4

Venezuela
84.4
81.8
91.3
68.9
88.3
108.9

Frankfurt
88.4
84.3
104.3
56.4
87.3
110.6

Gary

Sunchem
91.4
85.8
105.6
69.7
89.8
96.4

Constraints
Demand
Demand Constraint

WE
97,460,569
20,000,000

LA
395,098,822
16,000,000

Pacific
-443,908,947
11,900,000

Canada

Venezuela

Frankfurt

Gary

Sunchem

-1.5371E+10
25275127268

20706276226
31539742080

13899148782
24233494932

-1.138E+10
22896463091

60188697771
1.11168E+11

Plant wise Costs

Costs
Same region
Exports
Objective Function

Mexico

Canada

0
145847117.9
136161311.6
138928704.9
153883385
629234575.5
1204055095
1211710927

NA
32,000,000
32,000,000

Mexico
-92119315344
1.35248E+11

88.4
78.8
101.7
67.6
77.3
109.4

136,711,312,363

14