Group 2 - Case Study 5 - Plastech Answer

Chung Ngoc Hieu – Mai Thanh Thao

CASE STUDY /P.429 PLASTECH, INC.

Summary

PLASTECH, INC.

Plastech was a producer of plastic pellets for use as raw material in molded plastic products. It

was primarily a service firm. Its niche was that it has the specialized equipment and expertise for

blending a variety of ingredients.

It operated six machine-paced blending lines which had feeding hopper, blending machine, water

bath, and pelletizer. Others two lines had additional specialized equipment to properly handle

hazardous chemicals.

The orders were in small quantities because customers did not want to keep high inventory. Thus,

that necessitated relatively small production batch sizes and a large number of setups. In 1992, the

average batch size was 13,000 pounds and there were 320 setup. The average setup time was 24

hours.

In 1992, it lost 2 significant customers which comprised 46% total pounds of the plastic. Plastic

then devised a new marketing strategy seeking additional work from all of its existing customers

and broadening its product line.

To meet the challenges arose in 1993, a third shift was added to meet the increase in production

and setup volume.

Although the firm had increased revenue 20%, the profit were down 83% from fiscal 1992.

Smith, operation manager, wanted to find out the reasons for this.

Question 1: Which factors contributed to the decline in profits?

Answer:

The factors contributed to the decline in profits:

1. The expense of direct labor increasing

The expense of direct labor increased from 14.8% to 18.5%. The direct labor was resposible for

all production and setup. And it aligned with the addition of the third shift.

of 8

Chung Ngoc Hieu – Mai Thanh ThaoIn fiscal year 1992, 1993 we can see the details of some figures as follow:

The expense of direct labor in fiscal year

E(DL)1992 = 528,000/3,564,288 = 14.8%

E(DL)1993 = 792,000/4,283,288 = 18.5%

Another way to see the increasing of expense of direct labor in fiscal year is computing it on each

unit by devived with production.

E(DL)1992 = 528,000/4,193,280 = 0.126

E(DL)1993 = 792,000/5,069,173 = 0.156

2. The selling expenses increasing

The selling expenses increased from 22.9% to 27.9%.

In fiscal year 1992, 1993 we can see the details of some figures as follow:

The selling expenses in fiscal year

E(S)1992 = 819,786/3,564,288 = 22.9%

E(S)1993 = 1,199,366/4,283,288 = 27.9%

Or we can see the change by devived the selling expenses with production.

E(S)1992 = 819,786/4,193,280 = 0.195

E(S)1993 = 1,199,366/5,069,173 = 0.237

3. Average sales price dropping

Average sales price droped a little from 0.850 to 0.845. As a result, the net profit after taxes felt

the amount of $25, 346 in 1993.

Conclution:

The increasing in direct labor and selling costs and the decreasing in sale price are the reasons

explain for the decline in profits.

Question 2: What did Lincoln Smith find when he computed the direct and indirect labor

productivity figures?

Answer:

In fiscal year 1992, 1993 we can see the details of some figures as follow:

Ratio of productive time to total time in fiscal year

of 8


R1992 = 16,320/24,000 = 68%

R1993 = 18,360/36,000 = 51%

With the wage rates are not changed, the differential amount is µ= -3%

And,

The ratio between direct & indirect labor productivity as follow:

Direct labor productivity

1992 = 528,000/185,000 = 2.85

Indirect labor productivity

Direct labor productivity

1993 = 792,000/222,327 = 3.56

Indirect labor productivity

The differential amount is 0.71

Conclusion:

Linlcon Smith sees the increasing number of direct labor productivity from 528,000 to 792,000

( +33%). The indirect labor productivity increases 17%. With this increasing but the total set up

time is increasing too, ( nearly 56%) it proves that the time productivity is not efficiency.

of 8


QUESTION 3: Identify and describe the root cause of the decline in operating profits.

Recommend a plan of action for plastech.

of 8

Chung Ngoc Hieu – Mai Thanh ThaoThere are three problems which make operating profit is down:

1. Low gross profit margin

2. Poor expense control

3. Insufficient revenue volume

Details:

1. Low gross profit margin ( 1992 -1993)

In 1992, the annual gross profit is 1,709,428$, and in 1993, the gross profit is increasing than last

year 244,966 ( 13%). But, if we take a look in the total percentage, this value will be minus. We

can see in the charts as below:

1992

52.04, 46%

47.96, 43%

6.91, 6%

5.33, 5%

Depreciation Gross profit

Operating profit Net profit after taxes

1993

52%

45%

2% 1%

Depreciation Gross profit

Operating profit Net profit after taxes

The amount of -2.96% shows the reason why the decline in operating profits.

2. Poor expense control

In 1992, the annual gross profit is 1,709,428$, after tax, the net profit is 189,991$. But, in 1993,

the net profit after tax is 31,482$ while the gross profit is increasing than last year 244,966 ( 13%)

The new net profit after tax in 1993 in down to -86%, it is a big fail figure. This is affected by all

expenses are increasing continuously.

- Production cost increases by direct/indirect labor productivity increase. This increasing will

good for enterprise in case the total productive time is efficiency. But, parallel with the

increasing of productivity, the setup time is increasing while the productive time increases

insignificantly.

- Sales expenses: Sales expenses increase about 32% while sales revenue is up to 17% only.

With such a low revenue, it can not compensate for any other expenses or related expenses

like labor cost, other expenses….

of 8

Chung Ngoc Hieu – Mai Thanh Thao- Setup time: With 33% increasing in direct labor productivity, but the productive time

increasing amount is inefficiently, this thing explains why the setup time becomes bigger

and bigger. This proves for the reason why Plastech poor in controlling the expenses.

- General & administrative expense: The 33% amount of increasing direct labor, the

expenses give for administration is bigger. We can see the detail of Exhibit 5 and 6.

3. Insufficient revenue volume

In both 2 fiscal year, we can see the sales revenues are lower than production cost. We can

calculate the sales volume between 2 years and it shows that the differential amount is small,

nearly 875,893 products. Although Plastech has cut down the price for getting big volume in

selling, but the result is equally frustrated them.

Income statement of discal year 1992-1993 Unit: $

NoFigures 1992 1993 %Dif %value Explainations

1 Gross profit 1,709,428.000

1,954,394.000 244,966.00 13% Increasing

2 Selling expenses 819,786.000

1,199,366.000 379,580.00 32% Increasing

3General and administrative expense

643,228.000

678,459.000 35,231.00 5% Increasing

4 Total expense 1,463,014.000

1,877,825.000 414,811.00 22% Increasing

5 Operation profit 246,414.000

76,569.000

(169,845.00) -69% Decreasing

6 Less other expenses and taxes 56,423.000

45,087.000

(11,336.00) -25% Decreasing

7 Net profit after taxes 189,991.000

31,482.000

(158,509.00) -83% Decreasing

Fiscal year summary statistics

9 Sales($) 3,564,288.000

4,283,451.000 719,163.00 17% Increasing

10 Productions(ibs) 4,193,280.000

5,069,173.000 875,893.00 17% Increasing

11 Average sale price($/ib) 0.850 0.845 (0.01) -1% Decreasing

12 Average production cost($/ib) 0.442 0.459 0.02 4% Increasing

13 Average profit($/lb) 0.045 0.006 (0.04)

14 Total productive time 16,320.000

18,360.000 2,040.00 11% Increasing

15 Total setup time 7,680.000

17,640.000 9,960.00 56% Increasing

16 Total time 24,000.000

36,000.000 12,000.00 33% Increasing

17 Productive/total ration 0.680 0.510 (0.17) -33% Decreasing

of 8

Chung Ngoc Hieu – Mai Thanh Thao Recommend a plan of action for Plastech

We also know that

1. OPEX: A category of expenditure that a business incurs as a

result of performing its normal business operations.

2. REV:The amount of money that a company actually

receives during a specific period, including discounts and

deductions for returned merchandise

So, if Plastech needs to reconstruct the operating profit, they need to minimize the OPEX and

maximize the operating revenue. They also need a specific plan.

1. Minimizing the OPEX

a. Limit the setup time: Plastech loses time in setup time period, nearly 40%

productive time. They can combine the same order with the same material for same

order. Invest new technology in setup time ( longterm plan) or build warehouse for

stocking items with the longterm contract for traditional customer.

b. Limit the labor: The number of increasing direct labor is too high, HR should select

the skillful workers and fire unskillful workers. This step will cut down the cost for

both production & administration.

c. Variety the product but with reasonable volume: Select and kind deny for small kind

of new product. Keeping relationship with customers, diversifying the product

which has long life production.

d. Control expenditures: Keep the invested budget margin and flexible in solving cost.

2. Maximizing the REV

a. Blooming in sales revenue: from 1992 to 1993, the price is cut down for launching

volume, it makes sense. So, Plastech should keep this solving and goes ahead with

it. MKT team is doing very good in their strategies.

b. Sourcing new customers: This will help Plastech improves their customers and

revenue.

of 8

Chung Ngoc Hieu – Mai Thanh Thaoc. Widen view for technology: In plastic market, investment on machinery and

technology is the best solution for surviving and developing. Plastech could invest

technology in setup time, replace using human being power by machinery power.

of 8

Group 2 - Case Study 5 - Plastech Answer

Documents

Transcript of Group 2 - Case Study 5 - Plastech Answer