Group 8:

Anish Majumder 19PGP159

Bipul 19PGP165
Nishant Goswami 19PGP197
Suyash Loiwal 19PGP218

OS PRESENTATION
Prepared by:
5th Term
Group 8 - Section A
 1. Study Exhibit 2 in the case carefully. Can you explain why overhead costs vary so greatly
from plant to plant in Michigan Manufacturing's system?

The main reasons why overhead costs varied between plants in Michigan Manufacturing System
are
• Absenteeism, high degree of polarization within age groups, demotivated labour force – all
these problems led to lower asset utilization ultimately making operations unprofitable
• Lack of proper investment led poor maintenance & bad condition of machine tools
• The large changeover times of products, processes increased the operational costs as the
plant operated on low product volume per model.
• Some plants were operated with lower number of product lines
• The plant had inadequate electrical systems, water system sprung leakages and was much
below standards of the insurance underwriter
• The plant had two product lines: 60% of sales came from on-highway axles product line, 40%
of sales came from off-highway axle product line

Group 8 OS Section A
 2. Why have managers in the Heavy Equipment Division underinvested in the Pontiac
Plant?

To stay up to date with the customers’ new product launches, the Pontiac plant had to launch
new products each year.

• Absenteeism & turnover of labour force caused very poor performance & low asset utilization
at Pontiac Plant.
• The machine tools at the Pontiac Plant were very old and in poor working condition with
average age of 33.1 years for axle while 15.9 years for HED.
• Investment: Higher return on assets were achieved when high-volume products were
transferred to other plants. This resulted in poor incentive to invest in the Pontiac Plant.
• The buildings in the Pontiac plant were antique with pipe leakages, severely undermaintained
& inadequate electrical system, poor column spacing & ceiling heights.
• The production costs at Pontiac were much higher when compared to modern plants.
• The overhead costs of production at the Pontiac was higher than the rest mainly because of
increasing maintenance cost of the old buildings and machines.

Group 8 OS Section A
3. Should Noelle Allen close the Pontiac Plant? If so, what should she do with the products currently manufactured
in Pontiac? Should she follow the recommendations of her task force? If you believe she should continue to
operate the plant, what, if anything, should she do to transform it into a profitable operations?

• By looking at the report from study group, it can be seen

that plant has been generating losses overall, plus shifting
the items to other plants might be much cheaper
providing a better profit.
• On analysing the whole situation critically, here are some
pros and cons of closing the plant:
PROs:
• Cost Savings
• Products can be transferred to cheaper plants
• Lower cost of employee termination right now as there are
no obligations currently, but might be implemented in near
future.
• These are the numbers that were analysed and presented by the
CONs:
• Bad publicity, and bad effect on employee union. study group. The numbers call for closing of Pontiac plant, in
• Still have to keep paying the pension total it shows a loss of $522,000.
• Considering that pension of ex-employees whose products have
• Pontiac plant provided with lot of R&D, post which the
been shifted to other plants is also paid by Pontiac plant of
new products were shifted to another plant.
• Some old products are manufactured in this plant, closing $648,000, if this pension is distributed properly to the newer
plants, the Pontiac plant might come in profit.
down this plant would lead to loss of customer trust and
customers might switch.

Group 8 OS Section A
3. Should Noelle Allen close the Pontiac Plant? If so, what should she do with the products currently manufactured
in Pontiac? Should she follow the recommendations of her task force? If you believe she should continue to
operate the plant, what, if anything, should she do to transform it into a profitable operations?

• Further, analysing the costs involved which would come by closing the plant and shifting the products. Sale of plant will get $2 Million,
termination of employees will cost $3 Million, Additional tooling for group 1 and group 2 will cost $8.5 Million and $5.5 Million that
leaves them with an additional required capital investment of $14 million, after which also group 3 products would not be produced,
which are low volume but very important to maintain the customer relationship.
• If they choose to keep the plant running, they will have to renovate the plant and spend $1-2 Millions each year, apart from that the
additional costing if they do not shift their operations are shown
Current Cost % Savings if shifted Savings if shifted (in '000)
in table. From table, we can see an approximately additional Additional Labour Cost 296 5% 14.8
2.5 million can be saved by moving the operations to another plant, Group 1 Material Cost 3195 2% 63.9
hence totalling it to 4.5 million $. Overhead 2759 50% 1379.5
• Continuing the plant, will lead to increased cost of $4.5 Million $. Additional Labour Cost 258 6% 15.48
Group 2 Material Cost 2170 1% 21.7
Though, on improving the tooling, these costs can be offset. Overhead 1970 50% 985
2480.38

• The plant is very near to headquarters as well and has been one of the centrepiece in helping the company to attain success.
• In our opinion, the plant should continue to run and new machines should be installed. Plant conditions should be improved and R&D
should be continued more vigorously in this plant.
• To make the operations profitable, plan the plant to run with a ratio of 50-30-20, where 50% products are high volume products and
generate profit, 30% is R and D products and 20% low volume products which are usually for customer satisfaction.
• Invest in improving the machinery in plant so that labour cost can be reduced, leading to decrease in the burden rate.
• Pensions should be considered according to the plant which is manufacturing that particular product.

Group 8 OS Section A
 PUNCH LINE

All units need not generate profit, some units are strategically placed and binds all other plants together to
generate a bigger profit as a whole.

Group 8 OS Section A
THANK YOU!

QnA