Operations Management ORMB11-1

Session 14 Capacity (continued)

Dipankar Bose - XLRI
Case Alden Products, Inc.
European Manufacturing
Company
Products and Pricing
Consolidating API Europe
Production process
Employees
Current Problems at Uniplant
API Competitive Guidelines and Uniplant
Justifying Uniplant Expansion
Justifying New Plant
Contract Fillers
3-Shift Operation
Other non capacity related issues
Dipankar Bose - XLRI
Company
Plants
Peoria, Illinois Headquarter
Nijmegen, Holland Known as Uniplant
Buxbridge, UK

Main Subsidiaries
France, Italy, Spain, Germany

Competitors
Proctor & Gamble, Unilever, Gillette



Dipankar Bose - XLRI
History API Europe
Before 1962 Production at subsidiaries including UK

Consolidation of European subsidiaries except UK
Uniplant became operational Mid-1964

From 1964 to 1982
Uniplant expanded 6 times

1989 Capacity expansion decision for Alden-Europe
The UK plant has capacity about 100 million units
Want to increase capacity based on export growth
African and Middle East export markets


Dipankar Bose - XLRI
Products and Pricing
Premium priced personal care products
Approx. 1500 products at 50 different countries
Skin creams/ Lotions/ Soaps/ Shampoos/ Toiletries/
Deodorants
Higher quality, innovative and unique
Products designed for specific season
Priced 15% above normal products
Gross margin around 60%
Part of this is needed to finance R&D, advertising and
channel support
Net profit around 5%

Dipankar Bose - XLRI
Products and Pricing Continued
Products vary in countries due to
Market size/ Relative popularity of product/ Trade
structures/ Pricing policies

Country managers has freedom to
Add/drop/reposition/emphasize products
According to perception of local market conditions

Major decision Executive Vice President, Alden Europe


Dipankar Bose - XLRI
Consolidating API Europe Operations
at Uniplant Advantages
Most of the production facilities were running near at
100% capacities
Many of these are inefficient
Difficult to locate and train adequate managerial and
staff personnel
Europe was planning to move to free trade among group of
common market countries
Tariffs and other discriminatory practices were about to
be abolished
Consolidating helps to reduce uncertainty
Cost of building central unit will give economies of scale
Existing plants can be used as regional warehouses

Dipankar Bose - XLRI
Consolidating API Europe operations
at Uniplant More Advantages
Easy for vertical integration with
On-site polymer plant
Sales processing and storage facilities
Reduced purchasing cost
Packaging cost is 150% of raw material cost
Standardizing quality
Speeding up the development and introduction to new
products
Why Holland?
Access to raw material/ Proximity to market via rail
and highways/ Labor cost/ Tax rate/ Political and
social stability

Dipankar Bose - XLRI
Production Process Uniplant
Storage tanks Mixing and processing Filling lines
Finished product storage Packaging Shipping
Currently the plant utilizes 17 of 30 hectares
12 high speed filling lines
Two 8 hour shifts/ 5 days a week
During peak season also weekends
Cleaning and equipment maintenance after each shift
Capacity depends on
Product mix and Size mix
Slightly below 90% capacity
Almost 300 million units a year
Possible to produce 340 million units a year
Dipankar Bose - XLRI
Employees at Various API Plants
Uniplant 420 employees
260 permanent production personnel
Temporary workers Students from nearby University
Less than 10% of total force
During peak season the number doubles

Buxbridge plant at UK
200 employees in manufacturing
Also have the flexibility of temporary workforce like
Uniplant
Peoria
1200 employees in three 8-hour shift



Dipankar Bose - XLRI
Capacity Issues for Alden Europe
Total expected sales is going to be double from 1988 to
2000
Unit sales growth 5-6% on an average

With 2-shift operation and 100% capacity utilization
Current capacity 440 million units
Called Peak Capacity

Plan was with 15% capacity cushion
Currently they are operating with 90% utilization

Another 8-10 high speed filling is required

Dipankar Bose - XLRI
Current Problems at Uniplant
Strategy
Between these two plants no standardization of
Cost system/ Inventory control techniques/ Quality
control procedures
One of the problems is short production runs
It takes about one hour to changeover from one high
speed filling line to another
Substantial discount were given to low volume products
If they accept a years sales in a single shipment
Uniplant resisted increase in SKU as
Both indirect and direct manufacturing cost depends
more on no of SKUs
Than on plants total production volume
Dipankar Bose - XLRI
Current Problems at Uniplant Other
Issues
Between 1970 -1988 Uniplant has gone through crises
Explosion in petrochemical price following oil shocks
Basic hourly wage at Holland increased from one of the
lowest to one of the highest
Series of European recessions
Less than 35% of raw material at Uniplant came from
Holland
Cost+10% was their pricing policy (mark-up 10%)
Plan to keep increase in product price within
80% of inflation rate in Holland

Dipankar Bose - XLRI
Current Problems at Uniplant Other
Issues Continued
Country marketing organizations Complaints about
Uniplant from
Late deliveries/ Poor responsiveness to
Marketing inquiries and requests

Problems related to exchange rate and transportation cost

Option
Utilizing local Contract Fillers
Renegotiating pricing arrangement with Uniplant (will
reduce Uniplants mark-up from 10% to 5%)
Equalizing unit transportation costs for all subsidiaries
Dipankar Bose - XLRI
API Competitive Guidelines and
Uniplant
Competitive guideline argues in favor of
Flexibility in product and volume
Better responsiveness
Quality and service are also important
Cost is having lowest importance

Uniplant manager was not in favor of increasing SKU
This is against Competitive guideline

Dipankar Bose - XLRI
Justifying Uniplant Expansion
Equipments are imported from United states or EEC
countries

A modern high speed filling line costs Dfl. 6 million
Adds 40 million units capacity per year

Uniplant requires additional 10 million investment
New facility requires 30 million

Expanded Uniplant can justify a blow molding facility for
producing its own plastic bottles
Dipankar Bose - XLRI
Justifying Uniplant Expansion
Continued
Direct manufacturing cost at France or Italy is estimated
slightly higher than Uniplant
They may not have access to temporary university
student workers

New plant will also require higher employees as they
require 20% as administrative worker
For 40 million unit additional 50-100 employees are
required

The problem is unpredictability of distribution cost at
various countries


Dipankar Bose - XLRI
Justifying New Plant
Diversify APIs risk

Better against exchange rate fluctuations

Danger of protectionism and other non-tariff barriers are
reduced
Dipankar Bose - XLRI
Contract Fillers
Allowed Italy to use contract fillers
By early 1989
15% of API Europe sales are filled by them
UK used 30% of them
France fillers charge 5-10% less
Italy charges 20-30% less
Why they charge less than Uniplant?

Estimate
50 million units will be potential candidates for filling
by 1990 (80% in France and Italy)
100 million units will be by 2000

Dipankar Bose - XLRI
Problem with Contract Filler
Loss of control over quality

Increased cost of inspection with increase in volume and it
increases indirect cost

Once a product line is stopped
It is difficult to build the capability again
It can reduce economies of scale
The secrecy of the formulas can be risked

Dipankar Bose - XLRI
3-Shift Operation Problems
Uniplant is reluctant to move to 3-shift operation
May decrease desired quality of work
Will increase congestion and confusion

Increasing no of shifts will increase only 50%
They are actually 9 hours in a plant
Cleaning and equipment maintenance is done off shift
3-shift will complicate worker schedule

Dipankar Bose - XLRI
Other Non Capacity Related Issues
What is your view on Uniplants performance from 1981
to 1988?

How is the option of transshipment between Uniplant and
UK operations?

What organizational issues can be important when
considering new facilities?
Should it be allowed to compete with Uniplant?

Dipankar Bose - XLRI




END OF CASE
Dipankar Bose - XLRI
Ways to Develop Capacity Alternatives
Design flexibility into system
Take stage of life cycle into account
Take System Approach to capacity planning
Prepare to deal with capacity chunks
Attempt to smooth out capacity requirements
Identify the optimal operating level
Choose a strategy if expansion is involved
Dipankar Bose - XLRI
Develop Alternatives Breakeven
Analysis
Assumptions of Cost-Volume Analysis
One product is involved
Everything produced can be sold
Variable cost per unit is the same regardless of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per unit

Cost-Volume Relationships
Break-Even Problem with Step Fixed Costs
Multiple Product break-even point

Dipankar Bose - XLRI
Breakeven Analysis Step Fixed Cost
A manager has options to purchase 1-3 machines. The
details are as follows:





Variable cost = 10/unit, Revenue = 40/unit

Determine BEP at each stage.
If annual demand is between 580-660 units, how many
machines should be purchased?
No of Machines Annual fixed cost (total) Range of Output
1 9,600 0 to 300
2 15,000 301 to 600
3 20,000 601 to 900
Dipankar Bose - XLRI
Breakeven Analysis Example
Homework
ABC Manufacturing intends to increase capacity by
overcoming a bottleneck operation through the addition of
new equipment. Two vendors have presented proposals as
follows:




The price for each product is 20.

What is the breakeven quantity for each proposal?
At what capacity would both plans incur the same cost?
Proposal Fixed cost Variable cost
A 50,000 12
B 70,000 10
Dipankar Bose - XLRI
Some Short-Term Capacity Options
Lease extra space temporarily
Authorize overtime
Staff second or third shift with temporary workers
Add weekend shifts
Alternate routings, using different work stations that may
have excess capacity
Schedule longer runs to minimize capacity losses
Level output by building up inventory in slack season
Postpone preventive maintenance (risky)
Use multi-skilled workers to alleviate bottlenecks
Allow backorders to increase, extend due date promises, or
have stock-outs
Subcontract work