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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 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.
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)
Total Before Packaging
Mexico 95.01 92.63
Canada 97.35 93.25
Venezuela 116.34 112.31
Frankfurt 76.69 73.34
Gary 102.93 89.15
Sunchem 153.8 149.24

Cost (1977 $ per cwt)


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

1 Sunchem Frankfurt

0.98
Yield on Raw Mat'l A

0.96 Mexico
0.94
Venezuela
0.92
Canada Gary
0.9
0.88
0 10 20 30 40
Production Volume
Too Much Capacity?
Production Idle Capacity
Mexico 17.2 4.8
Canada 2.6 1.1
Venezuela 4.1 0.4
Frankfurt 38 9
Gary 14 4.5
Sunchem 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?

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
What’s 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 Gary’s 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 Can’t 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.

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