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Aldens Products Group Report

By Daniel Doherty, Elliot Moir, Kaiwen Lin and Avinash Haorongbam

Table of Contents
........................................................................................................................................1 Table of Contents...........................................................................................................2 Introduce.........................................................................................................................3 API early 1960s.............................................................................................................4 Performance in 1980s...................................................................................................6 Future Strategy for API..................................................................................................8 Location for additional filling capacity.....................................................................8 Option 1: Uniplant.....................................................................................................8 Recommendations........................................................................................................13

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Introduce

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API early 1960s


Looking back, do you agree with the logic that led Alden products international in 1962 to consolidate its continental European production into one single facility? In the early 1960s, API had several subsidiary plants across Europe. They were responsible for their own products and distribution networks in there own country. At this time the company was going through great changes and was expected to be growing at a rate of 40% a year. This growth would put their current arrangements in Europe at great strain and if nothing was done to meet this increase in demand the company would lose out on this great opportunity. At the time there were two options, to increase capacity at each of their regional subsidiary plants or to consolidate all European production to one single production centre. A decision was made that API that it would consolidate all its European ventures into one single operation and turn the existing factories into regional distribution centres. The site for the new factory was Nijmegan in Holland and this site opened in 1962. I believe the decision to change the structure of the company to a single production centre was the correct decision. I came to this finding by analysing this choice in terms of operational strategy, I looked at operational strategy in terms of quality, speed, dependability, flexibility and cost. This gave me the basic strategy and determining the success of the 1962 plant. Our most Differentiable factor is our quality, this allows us to charge 15% more than mass-market products. So, hence the quality is fundamental to our success. In moving to one factory API were able to cut out their variation in they products. This variation was caused by API factories using different equipment: having staff with different levels of ability using this equipment and sourcing raw materials from different suppliers. This caused huge variation in the same product that was produced by different factories and would affect our customers enjoyment of there product. This variation would be cut down to a minimum by using new equipment and having highly trained staff to run such equipment in the one factory. It would also protected the security of our secret recipes by having a limited amount of people who had access to this. This would keep our product safe from competitors. The speed of the operation was greatly increased by economies of scale. It was now possible to create production lines that could produce a large volume of goods in a short space of time that could meet the needs of customers across Europe. This speed and scale of production allowed the company to expand at an intense rate which allowed us to increase our market share and keep competition at bay. The speed of production would never be possible in smaller regional factories and markets would not be big enough to utilise their equipment fully. Having the factory based in Nijmegan in Holland gave the company excellent access to raw materials and effective distribution network through excellent road and rail connections to the rest of Europe. This helped to reduce the lead time for customers and suppliers. Dependability was increased when API moves a single factory for its continental European operations. It allowed the company to meet large orders and the pressures of Aldens Products Page 4

growing customer demand from all across Europe. This ability to meet large orders improve customer satisfaction and built-up trusts between the different suppliers helping our company to grow. Conversely, flexibility was actually increased when moving to a single factory by increasing the range of different products that the factory could produce. This allowed regional subsidiaries to create their own separate products that were not available to other regions and also allowed them to modify formulations to meet the needs of their own region. They could also have their own labelling and style of bottle to meet the needs of their customers. All this flexibility allows the company to customise its products and take advantage of niches in the marketplaces and in different regions. The cost was a major factor in the decision; it was far cheaper to build one factory than to expand their operations in many smaller regional factories. It also cut out duplication that was happening in different factories, with each factory had their own procurement, finance and administration systems. These functions could be put under one roof and would cut out wastes and cut overheads. It also allowed the company to have a greater bargaining power in buying raw materials from supplier, thus reducing the overall cost. These were clear benefits of a single factory. In conclusion, I feel the decision to consolidate all there production needs into one factory in Holland was the right decision for the company. It allowed the company to grow very fast and expanded over 20 times its original sales. In analysing all the factors that affect operations I feel each factor had the benefit from this move. Thus, having a more effective operation has enhanced the customers experience and has added value to our in product.

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Performance in 1980s
The decision from a multi production unit to a single unit production centre, Uniplant was built in 30 Hectares property and in operation by mid 1964. As the sales forecast grew in Europe, Uniplant was expanded six times, latest in 1982. With reference to the exhibit 3, after the expansion in 1982, the European sales are increase by just 11% and numbers of units produced by 5% only but the Overhead cost/unit (mfg. & admin.) is suddenly raised by 33%. This is mainly due to the expansion which leads to the initial chronic syndrome of plant following the same work flow everyday and then suddenly the expansion changing the work schedule. So, even after initial expansion investment of 200 million Dfl., the Uniplant face the high over head cost. But in later part upcoming year, with the increased in sales, the overhead cost was maintained within the range of 24-27 % with reference to 1981. In the European recession of 1970-1988, the Uniplant performance of was not that much affected even after the increase of Hollands living cost by 70%, the average cost per unit is only increase by 50% only. This is mainly due to the fact that Uniplant sources its material from a number of different countries and only about 35% of it comes from Holland. This can also be illustrated from Exhibit 2, that materials cost play one of the vital factors in total cost of sales and marketing by 62.6 % and the remaining are quit minimal percentage i.e. for direct labor the percentage is just 6.2% which is like 10% of the cost of material. So, even after the primary rise in the living cost of Holland, the sales cost is not that much affected. In 1982, one of the fastest subsidiary units, Alden-Italy stated that due to difference in the exchange rate between Dutch guilder and Italian lira, the transportation cost from Uniplant to Italian subside is very high. It was costing subside, 6% of his total cost which is half as Alden-Europes other subside, and leading not to be in a position to competitive of the other products in Italy. This leads to loosing the Italian market of the Alden products, and hence the alternative was to use local Contract Fillers company which will perform the filling function. The others was to reduce Uniplants Marks to 5% from 10% or equalize the transportation cost to all the subsidiaries i.e. charging the north European subside more and the Italian less. But as per the Alden top management, the Italian Subside was given freedom for using Local Contract fillers. Hence lead to decrease in operation was reducing to 70% of the capacity. Aldens Products Page 6

In 1988, Uniplants inventory turnover increases by the factor of 10 (both for raw materials and packing material), which lead to high turnover of finished goods. Hence the Overhead cost of production is at the minimal point of 1% from the previous year. According to van Zweiten, the performance can be increase by avoiding short production runs. Short production runs usually took an hour to change over from one high speed filling to another product or container, frequency of short and changeovers should be neglected as it reduce the throughputs and increases the average cost. In the current operation schedule, the fillers was operated 2 shift of 8 hours, 5days a week and also in weekend in the peak hour. The remaining 8 hours was used for periodically cleaning the fillers. The other way of improving the performance was to increase the no of shift to 3 rather than 2, but the only thing was that to face was the cleaning time of the fillers.

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Future Strategy for API


Capacity requirements According to the projections produced by management at Alden-Europe, there will be substantial growth in sales between 1988 and 2000. Further break down of this growth indicates the following:
An average rate of growth of 5-6% per year is expected during the 1990s This growth is expected to be most rapid up from 1990-1995, to be followed by more steady growth from up to the year 2000. Sales in Europe expected to almost double between 1988 and 2000.

It has been suggested that Alden-Europe will require a further 8-10 high speed filling lines to be in place by the year 2000 to enable them to meet the demand forecasted through these projections. A single high speed modern filling line is expected to cost approx Dfl 6 million ($3 million), and provide capacity of 40 million units/year. At present capacity between the two European plants (UK & the Netherlands) totals 440million units/year, based on two-shift operations and 100% utilisation. In actuality, the optimum utilisation has been recognised as being an average of 85%, this allows for improved short-term market-responsiveness and the ability to resolve any production bottlenecks. Therefore, to align with the projected double in demand expected by 2000, it is justified that the company would require investment in 8-10 high speed filling lines to approximately double capacity; adding an extra 320-400 million unit/year production capability.

Location for additional filling capacity


The main strategic decision that now faces Alden-Europe is where the additional filling lines should be located. The two main options that are being suggested are either to expand the existing Uniplant facility or open a new facility in Italy or Southern France.

Option 1: Uniplant
Feasibility

According to the sales projection in 1990s, a total 8 to 10 high-speed filling lines were needed in order to cope with the expected demand coming from 1988 to 2000. Uniplant in Holland was a single, industrial area, which allows adding additional filling lines without buying new land. Furthermore, once in the future, Uniplant have to expand again, an optional 10 hectares would cost only $250K per hectare. The effect of land investment for Alden-Europe was very significant. Another aspect was the equipment cost. A newly high-speed filling line could support a 40-million-unit capacity per year, and the expected cost for Uniplant just about 10 million. In addition, with plant expansion it enabled Uniplant could have its own blow-molding facility that would also save the cost for its own plastic bottles.

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Per Roland van Zwieten, manager of Alden Products Uniplant, pointed out that due to the automated production, it allowed Uniplant could hire less labors doing repeated work, and whats more, to employ part-time labors from university students supporting specific high-peak period or short request demand. Another solution would distribute the production to contract fillers. By increasing products number on outside fillers, it can give some relief on Uniplant and save direct manufacturing cost at a range of 5% to 30% depended on different countries and product types.
Acceptability

By expanding Uniplant, due to its locational advantages such as near the major harbors for easy approaching to the petrochemicals and packing material, close to rail lines and highways which were beneficial for raw material purchase and finished products delivery. It can be seen that Alden-Europe looked for the return revenue from the raw material bargain power and the reduced direct manufacturing cost for the expected sales units from the combined demand in Europe. It was also noticeable that, in 1982, by using contract fillers in Italy, the Alden-Italy would not worry about the changeable exchange rate between two currency, guilder and lira, while it could still provide competitive price during the hard time in Europe. And the contract fillers were also a positive choice for a short term recovery for Uniplant.
Vulnerability

Turn to look at some risks, even though the preferred option in Uniplant expansion got more advantages than disadvantages, however, there were still some potential risks which may affect the final decision. Firstly, the Uniplant supported the majority of the Alden-Europes production, within its rapid growth from 1962, the faster it grows the risky it brings. For example, per static economies of scale, some big companies developed too fast, even though in the beginning the unit price decreased to a lower level due to mass production. However, when companies keep growing, it may led to management problems, such as quality issue, capacity shortage and furthermore, poor customer service. Secondly, for the risk of enhancing percentage on contract fillers, the obvious concern was the quality may not easy to control like in house production in Uniplant. Since the qualified products were the reason of APIs higher cost in the industry. Once the quality issue happened, it would defect company reputation. Thirdly, for high-technology products, the top management of Alden-Europe was unwilling to release ingredient and formulations to contract fillers. It would be sensitive for outside fillers know about the product secrets.
Recommendation

For the best decision of whether expanding capacity filling lines in Uniplant, it must be compatible with API competitive guideline. As the attached chart shows, a lower investment cost including land, equipment, labors, raw material and components, Uniplant got the most benefit on investment, which meets the company guideline focusing on cost competitive and manufacturing flexibility, and furthermore, a better customer service in an appropriate level on manufacturing, distribution, inventory Aldens Products Page 9

costs. Also, the automated production in Uniplant keeps higher product quality by reducing employees in monotonous jobs. It is recommended that, to expand filling capacity in exist Uniplant could positively save investment cost. Another option of increasing contract fillers, the manufacturing cost could lower at maximum 30% if choosing Italian fillers, however, it caused direct manufacturing cost risen in Uniplant. To evaluate the possible long term benefits, it is recommended that only distribute low-value and low-technology products to outside fillers. Since it considers avoid telling 100% products formulation and ingredients to others and even if any unexpected case happened, API could still take the high-technology on hand and not losing control of the product exclusive. This is to protect the expertise in process technology and maintain state-of-the-art capabilities. Option 2: New Plant in Southern Europe Feasibility Introducing a major new plant in Italy or Southern France will see Alden-Europe move away from the mainly centralised system that they have operated from Uniplant in the Netherlands. This shift will require effective change management, as operational strategy will change fairly significantly. The potential feasibility of a new plant in this part of Europe is driven primarily by the majority of European market being located in this area. Locating in this area of Europe will allow products to be brought nearer to some of the major markets in Alden-Europes sales region. The French subsidiary currently accounts for over a third of Alden-Europes sales (the largest subsidiary in Europe), followed by Italy, accounting for around a sixth of European sales. In recent times there has been increasingly negative feedback from these countries in relation to market-responsiveness and late deliveries. These problems have derived primarily from deterioration in exchange rates (most notably the Dutch Guilder Italian Lira) and the high transportation costs from Uniplant. The manager of Alden-Italy has stated that, due to these problems, they are unable to continue to price competitively in the Italian market, consequently if action is not taken to tackle these issues soon then Alden-Europe are going to begin to lose large shares in the European market to their competitors. This has fuelled the argument within Alden-Europe that locating new production capacity near these markets would alleviate the majority of the aforementioned problems and enable the company to maintain and develop their strong market share in these countries. In particular, the key benefits of this new plant would be substantial cost reduction in labour and transportation as well as enabling Italy and France to manage and control their own markets more effectively. However, as can be expected, there is a trade-off in terms of capital investment requirements. As has been pointed out by Roland van Zwieten, Uniplant would be able to begin expansion without purchasing extra land, and if required had the option under contract to purchase an additional 10 hectares of nearby land for approximately a mere $250,000/hectare. Compare this with the price of equivalent land in Southern Europe, which would cost 4 times as much; in the region of $2million/hectare. Vulnerability The main risk to Alden-Europe will be the high level of initial capital investment that is required if it is decided to proceed with the development of a new plant in Southern Europe. It will have to be ensured that if the company are to proceed down this route Aldens Products Page 10

that full company-wide, backing is given to the inevitable change in operational strategy that will arise from decentralising production. It appears for example that van Zweiten, who is highly valued by Alden-Europe, is extremely sceptical about this approach, although he has accepted that his opinions are to some extent bias due to his strong links with Uniplant. Earning the backing of the likes of van Zweiten, for example, could prove a barrier to the success of this shift in strategy. Additionally, in terms of committing to this investment, although there would be substantial knowledge transfer available from the existing plants, there would be high levels of investment required in the training and development of staff at a new plant. Further complexity arises in the transfer of skills and knowledge to a new country due to differences in culture, not least the use of a different language.
Alignment with corporate strategy

API Competitive Guidelines Advantages Meeting well-defined customer needs through the identification of unserved niches and the use of creative marketing is the overruling factor of success. In coming years, we must be able to develop and introduce large numbers of new products in a timely manner We must be able to respond quickly to changes in market needs and competitive actions. Our product quality should be clearly distinguishable as superior to the competition in terms of performance, packaging and design finish. Customer service is the critical success factor in the market place. It must be competitive - or better. Exceptional customer service could be a major success factor, but generally the appropriate level of customer service should be determined by balancing marketing requirements with manufacturing/distribution/inventory costs. We must develop/maintain expertise in process technology across an important share of our product line. We should maintain state-of-the-art capabilities in some manufacturing areas to ensure a degree of technical pre-eminence in the organisation. We want both a very high degree of Aldens Products

Disadvantages

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manufacturing flexibility to respond to changing market conditions, and landed costs that are competitive with those of important local competitors.

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Recommendations

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