Applichem Case

OM 888
Supply Chain Modeling and Analysis

Applichem
Produces Release-ease, a specialty chemical
6 plants that manufacture Release-ease

Gary, Indiana
Frankfurt, Germany
Mexico
Canada
Venezuela
Japan (Sunchem)

Competitive Situation
Applichem = Market Leader,
Revenues $ 75 Million (1982)
Main competitor has one large plant

What is the Objective?

Minimize cost?
What costs?
Transportation
Manufacturing
Fixed versus variable?

What are appropriate measures?

How to incorporate exchange rate changes?
What about different sizes and capabilities of
plants?

Compare Plants

What measurement should we use?

What is a fair comparison? (economies of scale,
different technologies)

Cost per pound to manufacture? (different costs)

Total labor/volume? (labor costs, packaging issues)
Capital/volume? (capacity issues)
Cost before packaging per pound?

Costs at different plants

Frankfurt

Sunchem

Mexico
Venezuela
Canada

Gary

Too Much Capacity?

Total Demand = 79.9 M lbs; Total Capacity = 100.7 M lbs

Should we close a plant?

Which one?
Might there be reasons for having excess capacity or keeping all
plants open? Safety problems (chemical), transport costs/time, hedging

One Approach: LP Model

Purpose
Conduct what-if analysis to find better network supply chain
structure

Objective
Minimize costs measured in some common form (1982 U.S. $)

Decision Variables
How much to make at each plant; how much to ship between
regions

Constraints
Capacity constraints, demand limitations, non-negativity (import
restrictions, etc.)

Data
Costs, import tariffs, exchange rates, capacity/demand info

How to Solve?
Basic what if analysis
Trial-and-error
Inefficient, not guaranteed to get optimal solution

Excel Solver
Still, is this necessarily the best (or even a
good) solution?
Things change (exchange rates, inflation,
etc.)
http://www.oanda.com/convert/classic
http://www.sunshinecable.com/~eisehan/V80-10en.htm
International Monetary Fund: International Financial Statistics Yearbook.

Is there a better way to solve?

S ta rt
S im u la t e S p o t E x c h a n g e R a t e s & D e m a n d
R e c a lc u la t e S p r e a d s h e e t I n p u t
R u n O p t im iz a t io n o f S u p p ly C h a in N e t w o rk
G e t G l o b a l A f t e r - T a x P r o f it
S h o w D i s t r i b u t i o n o f S i m u l a t io n R e s u l t s

Whats the Point?

Conclusion:

Recourse actions from excess

capacity can improve expected
profit while reducing risk!
Recourse actions capacity decisions made
before demand realized; production decisions
made after demand realized.

Other Actions Spadaro Could Take?

Sharing technology and innovations across
plants
Improve Garys yield
Reduce costs in Venezuela
Sunchem is high-cost, but also extremely efficient
What is impact of closure?

Changing management structure

Ensure technology and improvements transfer
If we close our most technologically advanced plant, what
does this tell others about priorities?

Just Cant Get Enough Applichem

Check out:
Lowe et al. Screening Location Strategies to Reduce
Exchange Rate Risk. European Journal of
Operations Research. 2002.
Cohen and Huchzermeier. Global Supply Chain
Management: A Survey of Research and
Applications. Chapter 21 in Quantitative Models for
Supply Chain Management. Eds. S. Tayur, R.
Ganeshan, M. Magazine. 1999.