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,
Size,
Maintenance,
etc

1905+
Capacity 18.5M
lbs
1955+
Cap. = 3.7M lbs
1960s
Cap. = 47M lbs
68, similar to
Gary
Cap. = 22M lbs
64, no frills
design
Cap. = 4.5M lbs
1957
Cap = 5M lbs
Product
Variety &
Packaging
20 product
families
8 formulations
(of Release-
ease) & 80
package sizes

5 product
families
Only 50 kg
packages
13 products
2 formulations
bulk shipments;
50 kg packages
7 products
50 kg packages
2 products
50 kg bags
2 products
many kg, 1
kg, etc.,
packages
Sales Volume
& Utilization
(1982)
14M lbs or 75.7
%
2.6M lbs or
70.3 %
38M lbs or 80.9
%
17.2M lbs or
78.2 %
4.1M lbs or
91.1 %
4M lbs or 80.0
%
Product Cost
$/CWT
102.93 97.35 76.69 95.01 116.34 153.80
Raw Matl A
Yield
& % Active
Ingredient
90.4 % & 84.6 91.1 % & 84.7 98.9 % & 84.4 94.7 % & 85.6 91.7 & N/A 98.8 % & 85.4
Others (Labor,
etc.)
1000 non-union
workers, loyal
Non-union
workers, quality
conscious
600 workers,
two different
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
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 (1982 $ 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
Cost (1977 $ per cwt)

Volume versus Yield
0.88
0.9
0.92
0.94
0.96
0.98
1
0 10 20 30 40
Production Volume
Y
i
e
l
d

o
n

R
a
w

M
a
t
'
l

A
Frankfurt
Mexico
Gary
Sunchem
Venezuela
Canada
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
Should we close a plant?
Which one?
Might there be reasons for having excess capacity or keeping all
plants open?
Total Demand =79.9 M lbs; Total Capacity =100.7 M lbs
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?
Show Distribution of Simulation Results
Get Global After-Tax Profit
Run Optimization of Supply Chain Network
Recalculate Spreadsheet Input
Simulate Spot Exchange Rates & Demand
Start
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.