Case Memo Wriston
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Dec 6, 2023
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Uploaded by SuperTiger3944
Core Code: FT10211
Memorandum
To: Mr. Richard Sullivan, VP, HED, Wriston
From:
Subject: HED Plants Issue
Date:
Issues:
HED is growing continuously and the product line is increasing. At the same time main
Detroit plant of HED is witnessing negative profits, ROA and high burden rate. The main
issue faced by HED is:
1)
What to do with Detroit plant. Close and shift production to other plants or invest in
retooling or build a new plant.
Company Analysis:
HED has 9 operational manufacturing facilities. From BCG matrix of the HED (
Exhibit 1)
it
can be seen that facility at Detroit falls in category of
Dogs.
Another interesting fact about
this is that it has highest level of complexity (in terms of product models). The reason for this
is: Detroit plant is responsible for low volume products and replacement parts for all its
products, including out of production models. It basically acts as a cost center and help in
providing synergies to other business units. From numbers it can be seen that it is not
profitable but it is the nerve centre of the company. It’s helps HED in providing the best after
sales services by producing spare parts, helps in retaining customers and maintaining
goodwill.
Core Code: FT10211
Other plant of HED at Lima also falls under
dogs
category of BCG matrix. The reason for
this is low utilization. From (
Exhibit 2)
it can be seen that Lima plant is only achieving 20%
utilization. This is resulting in ROA of –ve 12%.
Plants at Fremont, Saginaw, Tiffin and Maysville are the stars for the company with high
sales volume and high ROA.
The plants which are growing rapidly are the ones in Lebanon, Sandusky and Essex. They
have the potential to become a star by gaining market share or cash cows when the market
will slow.
Scenario Analysis:
Exhibit 7
gives the scenario analysis of various options which HED can have:
1)
Option 1
: Shifting group 1 production of Detroit to Fremont and group 2 production
of Detroit to Saginaw.
Exhibit 5
and
Exhibit 6
shows that by doing so although the
company will generate around $3 m of positive cash flow in total every year but this
shift will require a total of $27 m in
retooling of both plants and paying termination
of old employees at Detroit. Also this move will take HED 8.5 years to reach break
even. Other interesting fact to note is that this plan is not feasible from operations
point of view. The plant utilization of Fremont will reach 95.5% (
Exhibit 3
) and for
Saginaw it will be at 103.5% (
Exhibit 4
). To control the variability of a process the
plant utilization should be ideally at 80-85%. This would also have a huge loss on the
goodwill and public reputation of the company. Under this plan the company intend to
close the spare parts production. This will affect the old customers as they won’t be
able to get their old product serviced and also the new customer because a customer
not only look for excellent product they also want excellent after sales service. Also
Core Code: FT10211
the employees won’t be happy with this move because they would have to relocate to
new production facility or they would have to opt for early retirement. In both the
cases it will lead to labour unrest.
2)
Option 2
: This option is same as option 1 but here the company intend to shift its
Group 1 production of Detroit to Maysville and Group 2 production to Lima. This
option is feasible from operations view point as the utilization of Maysville and Lima
plants will increase to 82.5% and 35.4% respectively (
Exhibit 3 & 4
) which is under
permissible limits of keeping variability low. In this new option the break even will be
reached in 10 years.
3)
Option 3
: The third option is to close the present production at Detroit and opening
up a new production facility. The new production facility will cost around $32 m and
it will take around 10 .5 years to breakeven. The biggest advantage of this will be
better low cost products for the customer and huge profits for the company. Other
than huge cost, major drawback of this option is that the company will face huge
problem in transitioning the old employees to new processes. This will further
decrease the work efficiency of already lazy labour force. From operations view point
the system will become more lean and efficient.
Recommendation:
Option 4 given in the scenario analysis (
Exhibit 7
) is our recommendation. Complete
analysis of company financial and BCG matrix says that company should keep on operating
for its current plant at Detroit. It should be treated as cost center for the company and this
plant should be assigned all common costs. The first step towards making HED more
efficient would be the sale of 1/3 plant of Lima. This will increase the utilization of the plant
to 30% and will generate $14.4 million from the sale (
Exhibit 8
). Operational risk would be
still be minimum as we would be having abundance capacity left unused at Lima which can
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Core Code: FT10211
be used during sudden increase in demand. This money generated should be used in retooling
and up gradation of existing facilities of Detroit plant year on year basis. Step by Step phase
out should be planned and construction of new plant should be initiated. Strong emphasis
should be given to improve work conditions by providing better hygiene and facilities like
cafeteria. Since it’s a cost centre many products produced here are supplementary to products
at other facilities. This should be taken into aspect while calculating the profit from Detroit
plant.
As it would be difficult of old employees to make a transition into new plant their
retirement process should be started with full care being given to their retirement benefits.
Training on new production technology for new younger workforce should be started so that
when the new plant is operational they are ready to take the challenge.
Word Count: 1000
Core Code: FT10211
Exhibit 1: BCG Matrix of HED
a)
Area of circle represents the Complexity of the plant
b)
Y axis represents ROA and X axis represents Sales of each plant
Core Code: FT10211
Exhibit 7: Scenario Analysis
Factors
Option 1
-
Shifting
Group 1 to Fremont
and Group 2 to
Saginaw and closing
the rest
Option 2
– Shifting
Group 1 to Maysville
and Group 2 to Lima
and closing the rest
Option 3
- Closing
the Detroit plant
and buying a
setting up a new
plant
Option 4
– Doing 1/3 sale of
Lima plant and upgrading the
Detroit facility year on year
and phased transition to new
plant
Financials
Cost of shifting $27
m. Will have positive
cash flow of $3M.
Will take 8.5 yrs to
break even
Cost of shifting $27
m. Will have positive
cash flow of $2.7M.
Will take 10 yrs to
break even.
Will cost $32 m.
Positive cash flow
of $ 3M. Will take
10.5 Yrs to break
even
Sale will generate $14.4
million.
Will turn Lima into
positive ROA.
Retooling and
transition of Detroit plant will
be financed by this.
Marketing/
Sales and
service
Huge loss of market.
Goodwill will be lost.
Huge loss of market.
Goodwill will be lost.
. Low cost products
and better service.
Huge profits
Cost effective.
Goodwill be
retained. Detroit is treated as
COST CENTRE
Employee
responsibility
Employee unrest will
rise.
Negative
publicity in
community
Employee unrest will
rise.
Negative
publicity in
community
Difficult to
transition older
workers to new
processes.
Need to
give them buyout.
Unrest will increase
Employees will be happy.
Unrest will decrease as the
condition will improve. Carry
out employee training for
helping them transition into
new plant.
Operational
implication
Fremont Utilization
95%. Saginaw
utilization 104%. Not
feasible
operationally.
Maysville utilization
82.5%. Lima
utilization 35.4 %.
Operationally feasible
Will improve
performance and
efficiency.
Operational efficiency will be
reached. Lima utilization will
increase to 30%.
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