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 PlantsFactor 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 ½ 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 Mat’l 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 PackagingMexico 95.01 92.63Canada 97.35 93.25

Venezuela 116.34 112.31Frankfurt 76.69 73.34

Gary 102.93 89.15Sunchem 153.8 149.24

Cost (1982 $ per cwt)

Total Before PackagingMexico 121.88 118.82Canada 66.31 63.51

Venezuela 67.16 64.83Frankfurt 66.81 63.89

Gary 64.27 55.67Sunchem 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

Yie

ld o

n R

aw M

at'l

A

Frankfurt

Mexico

Gary

Sunchem

Venezuela

Canada

Too Much Capacity?

Production Idle CapacityMexico 17.2 4.8Canada 2.6 1.1

Venezuela 4.1 0.4Frankfurt 38 9

Gary 14 4.5Sunchem 4 1

Should we close a plant?

Which one?

Might there be reasons for having excess capacity or keeping allplants 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

ObjectiveMinimize costs measured in some common form (1982 U.S. $)

Decision Variables How much to make at each plant; how much to ship between regions

ConstraintsCapacity constraints, demand limitations, non-negativity (import restrictions, etc.)

DataCosts, 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 h o w D is trib u tio n o f S im u la tio n R e su lts

G e t G lo b a l A fte r-T a x P ro fit

R u n O p tim iza tio n o f S u p p ly C h a in N e tw o rk

R e ca lcu la te S pre a d sh ee t In p u t

S im u la te S po t E xch a n g e R a tes & D e m a nd

S ta rt

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.