Case Write-up: Comparison of plant productivity – Applichem

Submitted by: Suyog Shukla

In this write-up we are trying to explore weather it makes sense for Applichem to
keep their production of Release-ease within their current plants or move
production to another location. This could be one, or more, of Applichems’
production locations including: Gary (Indiana/USA), Mexico, Frankfurt
(Germany/Europe), Sunchem (Japan). To determine this, a cost analysis must be
conducted to verify the benefits of keeping production of Release-Ease in their
current locations, or moving production to another location. When determining the
cost benefits, transportation and production cost differences must be considered

In the current scenario, Applichem has a lot of excess capacity available at its
current locations. This can be leveraged to redistribute its production in order to
meet the overall demand. At current level, it costs Applichem $83 million to
produce and ship its worldwide production. To shut down Gary, every other plant
would have to be used to its maximum capacity and total costs would increase by $4
million per year, assuming demand stayed constant. It would also be useful at this
point to take into account the exchange rate fluctuations that affect the overall
competitiveness of the plant (Exhibit 5).

While comparing the costs, it becomes evident that the Japanese plant should not
be used as the overall production costs are really high, driven by high labor and
utility costs (Exhibit 3). The cost decrease generated by the plant closure would be
around $4 million. At the same time, production from the Mexico plant should be
shifted to the Gary plant to reduce the overall costs. To compensate for the lost
production, Gary and Frankfurt plants would have to be operated at full capacity
(Exhibit 2). This arrangement also provides Applichem with additional idle capacity
in Mexico to tackle any future demand growth.

While comparing the productivity of different plants (Exhibit 3 and 4), the choice
to shut down Japanese plant becomes clearer. The plant has the lowest productivity
ratio and the highest utility costs per unit production. As the Gary plant has the
second lowest productivity ratio, it would be important for the management to
improve the plant in this aspect. Frankfurt leads the pack in this regard.

However, it is highly recommended that the Japanese plant continue production of

their second product, as this will mitigate the risk of losing approval to sell Release-
ease in Japan. Going forward the plant can be used as a Research & Development
facility by Applichem. This is highly recommended as the employees of this location
do more research & development than any other location driven by the presence of
a product test laboratory and a plastics engineering lab on-site. This can also serve
as a means to improve the productivity of the Gary plant that is driven down by the
prototype production for development of new product improvements.

Finally, the Gary plant can assimilate process efficiencies that are used in
Frankfurt and Japan to benefit from increased productivity and waste recovery. Joe
Spadaro’s suggestions of bringing together managers from other factories around
the world would really help sharing of best-known methods.

The Gary plant also runs 8 formulations of Release-ease and sells them in 80
different sized packages. Applichem should seriously consider reducing the number
of combinations to a more manageable figure and streamline the production
process. Consideration to customer demands for shelf life and concentration of
active ingredient should be taken when making this decision.

Summary of Recommendations

 Maintain the Gary plant and improve efficiency through better technology
from Japan plant. As one third of the overall demand is in USA, maintaining
Gary plant would protect Applichem from exchange rate fluctuations.
 Create a dedicate production line for Release-ease at the Gary plant as
currently the plant is designed to run batches of one product at a time.
 Stop production of Release-ease in Japan. Although the plant in Japan is
more technologically advanced, its high production costs and low
productivity levels are valid reasons for eliminating the Release-ease
production lines. It is recommended, however, that the plant continue its
current production of the other product it manufactures.
 Utilize the Japan plant for conducting R&D for other Applichem products
because of its advanced technology. Also, deploy the technological
improvements to improve efficiency levels at other plants.
 Change the production volumes at different plants as depicted in the Exhibit
2 – Optimal supply arrangement. Most notably shift production from Mexico
to Gary plant due to high production costs.
Exhibit 1: Comparison of plants

Factor Gary Canada Frankfurt Mexico Venezuela Sunchem,

Japan
Plant Design, 1905+ 1955+ 1960s ‘68, similar to ‘64, no frills 1957
Size, Capacity 18.5M Cap. = 3.7M lbs Cap. = 47M lbs Gary design Cap = 5M lbs
Maintenance, lbs Cap. = 22M lbs Cap. = 4.5M lbs
etc

Product 20 product 5 product 13 products 7 products 2 products 2 products

Variety & families families 2 formulations 50 kg packages 50 kg bags many ½ kg, 1
Packaging 8 formulations Only 50 kg bulk shipments; kg, etc.,
(of Release- packages 50 kg packages packages
ease) & 80
package sizes

Sales Volume 14M lbs or 75.7 2.6M lbs or 38M lbs or 80.9 17.2M lbs or 4.1M lbs or 4M lbs or 80.0
& Utilization % 70.3 % % 78.2 % 91.1 % %
(1982)
Product Cost 102.93 97.35 76.69 95.01 116.34 153.80
$/CWT
Raw Mat’l A 90.4 % & 84.6 91.1 % & 84.7 98.9 % & 84.4 94.7 % & 85.6 91.7 & N/A 98.8 % & 85.4
Yield
& % Active
Ingredient
Others (Labor, 1000 non-union Non-union 600 workers, Low worker Low worker Technically
etc.) workers, loyal workers, quality two different education, education, old excellent, have
conscious processes, serves Far East equipment test labs, no
computer + local mkt union but more
control workers.
Exhibit 2: Costs under current supply v/s optimized supply

Current Supply Arrangement

Current Costs
United
Plant/Country Mexico Canada Venezuela Europe Japan
States
Mexico City $95.01 $106.41 $153.02 $116.08 $110.78 $115.55
Windsor, Ontario $108.35 $97.35 $159.53 $119.19 $108.00 $116.97
Caracas, Venezuela $123.34 $126.34 $116.34 $141.63 $132.44 $138.48
Frankfort, Germany $86.69 $88.19 $133.79 $76.69 $91.85 $95.39
Gary, Indiana $112.93 $108.93 $170.90 $123.66 $102.93 $122.36
Osaka, Japan $167.80 $166.80 $249.45 $183.96 $174.31 $153.80

Candidate United Total Idle

Mexico Canada Venezuela Europe Japan
Solution States Shipped Capacity
Mexico City 3.0 6.3 7.9 17.2 4.8
Windsor Ontario 2.6 2.6 1.1
Caracas, Venezuela 4.1 4.1 0.4
Frankfort, Germany 5.6 20.0 12.4 38.0 9.0
Gary, Indiana 14.0 14.0 4.5
Osaka, Japan 4.0 4.0 1.0
Requirements 3.0 2.6 16.0 20.0 26.4 11.9 79.9

Cost United
Mexico Canada Venezuela Europe Japan
Calculations States
Mexico City $285.03 $0.00 $963.99 $0.00 $0.00 $912.85
Windsor, Ontario $0.00 $253.11 $0.00 $0.00 $0.00 $0.00
Caracas, Venezuela $0.00 $0.00 $476.99 $0.00 $0.00 $0.00
Frankfort, Germany $0.00 $0.00 $749.20 $1,533.80 $1,138.88 $0.00
Gary, Indiana $0.00 $0.00 $0.00 $0.00 $1,441.02 $0.00
Osaka, Japan $0.00 $0.00 $0.00 $0.00 $0.00 $615.20
$8,370.07

Optimized Supply Arrangement

Cost Analysis
United
Plant/Country Mexico Canada Venezuela Europe Japan
States
Mexico City $95.01 $106.41 $153.02 $116.08 $110.78 $115.55
Windsor, Ontario 108.35 97.35 159.53 119.19 108.00 116.97
Caracas, Venezuela 123.34 126.34 116.34 141.63 132.44 138.48
Frankfort, Germany 86.69 88.19 133.79 76.69 91.85 95.39
Gary, Indiana 112.93 108.93 170.90 123.66 102.93 122.36
Osaka, Japan 167.80 166.80 249.45 183.96 174.31 153.80

Candidate United Total Idle

Mexico Canada Venezuela Europe Japan
Solution States Shipped Capacity
Mexico City 3.0 0.0 0.0 0.0 3.2 0.0 6.2 15.8
Windsor Ontario 0.0 2.6 0.0 0.0 1.1 0.0 3.7 0.0
Caracas, Venezuela 0.0 0.0 4.5 0.0 0.0 0.0 4.5 0.0
Frankfort, Germany 0.0 0.0 11.5 20.0 3.6 11.9 47.0 0.0
Gary, Indiana 0.0 0.0 0.0 0.0 18.5 0.0 18.5 0.0
Osaka, Japan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0
Requirements 3.0 2.6 16.0 20.0 26.4 11.9

Cost United
Mexico Canada Venezuela Europe Japan
Calculations States
Mexico City $285.03 $0.00 $0.00 $0.00 $354.50 $0.00
Windsor, Ontario $0.00 $253.11 $0.00 $0.00 $118.80 $0.00
Caracas, Venezuela $0.00 $0.00 $523.53 $0.00 $0.00 $0.00
Frankfort, Germany $0.00 $0.00 $1,538.53 $1,533.80 $330.64 $1,135.13
Gary, Indiana $0.00 $0.00 $0.00 $0.00 $1,904.21 $0.00
Osaka, Japan $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
$7,977.28
Exhibit 3: Productivity and Utility cost analysis
Productivity Analysis Per Employee

  Plants
Utility Cost Analysis
Labor
(Number of Frankfu Sunche
Workers) Mexico rt Total Gary
Utility m
Volume Per
Direct Plant20 Costs ($ per
46 24 Utility
14 Cost
Indirect Production
25 million
40 pounds)
34 Dollar
17
Mexico Total17,200,000.00
45 86$12,012.00
58 1,431.90
31
  Frankfurt 38,000,000.00 $11,116.00   3,418.50
Gary
Production 14,000,000.00 $19,365.00 722.95
Volume
Japan (In 4,000,000.00 $36,675.00 109.07
millions) 17.2 38 14 4

Volume Per 0.38222 0.24137 0.12903

Employee 2 0.44186 9 2

Exhibit 4: Yield v/s production at different plants

Exhibit 5: Exchange rate risks

Plants Costs in Exchange Rate in Exchange Rate in Costs in

1982 1982 1979 1979
Mexico 95.01 96.5 22.8 402.13
Canada 97.35 1.23 1.17 102.34
Venezuel 116.34 4.3 4.3 116.34
a
Frankfurt 76.69 2.38 1.73 105.50
Gary 102.93 1 1 102.93
Sunchem 153.8 235 239.7 150.78