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
Factor Plant Design, Size, Maintenance, etc Product Variety & Packaging Gary Canada Frankfurt Mexico 68, similar to Gary Cap. = 22M lbs Venezuela 64, no frills design Cap. = 4.5M lbs 1905+ 1955+ 1960s Capacity 18.5M Cap. = 3.7M lbs Cap. = 47M lbs lbs Sunchem, Japan 1957 Cap = 5M lbs

20 product families 8 formulations (of Releaseease) & 80 package sizes

5 product families Only 50 kg packages

13 products 7 products 2 formulations 50 kg packages bulk shipments; 50 kg packages

2 products 50 kg bags

2 products many kg, 1 kg, etc., packages

Sales Volume & Utilization (1982) Product Cost $/CWT Raw Matl A Yield & % Active Ingredient Others (Labor, etc.)

14M lbs or 75.7 2.6M lbs or % 70.3 % 102.93 90.4 % & 84.6 97.35 91.1 % & 84.7

38M lbs or 80.9 17.2M lbs or % 78.2 % 76.69 98.9 % & 84.4 95.01 94.7 % & 85.6

4.1M lbs or 91.1 % 116.34 91.7 & N/A

4M lbs or 80.0 % 153.80 98.8 % & 85.4

1000 non-union Non-union 600 workers, workers, loyal workers, quality two different conscious processes, computer control

Low worker education, serves Far East + local mkt

Low worker education, old equipment

Technically excellent, have test labs, no union but more workers.

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

Cost (1982 $ per cwt)
Mexico Canada Venezuela Frankfurt Gary Sunchem Total 95.01 97.35 116.34 76.69 102.93 153.8 Before Packaging 92.63 93.25 112.31 73.34 89.15 149.24

Cost (1977 $ per cwt)

Mexico Canada Venezuela Frankfurt Gary Sunchem Total 121.88 66.31 67.16 66.81 64.27 119.95 Before Packaging 118.82 63.51 64.83 63.89 55.67 116.39

Volume versus Yield

1
Yield on Raw Mat'l A

Sunchem

Frankfurt

0.98 0.96 0.94 0.92 0.9 0.88 0 10 20 Production Volume 30 40

Venezuela Canada Gary Mexico

Too Much Capacity?

Mexico Canada Venezuela Frankfurt Gary Sunchem Production Idle Capacity 17.2 4.8 2.6 1.1 4.1 0.4 38 9 14 4.5 4 1

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?

Start Simulate Spot Exchange Rates & Demand Recalculate Spreadsheet Input Run Optimization of Supply Chain Network Get Global After-Tax Profit Show Distribution of Simulation Results

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.