Applichem Case Study

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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 Plant Design, Size, Maintenance, etc Product Variety & Packaging Gary Canada Frankfurt Mexico ‘68, similar to Gary Cap. = 22M lbs Venezuela ‘64, no frills design Cap. = 4.5M lbs 1905+ 1955+ 1960s Capacity 18.5M Cap. = 3.7M lbs Cap. = 47M lbs lbs Sunchem, Japan 1957 Cap = 5M lbs

20 product families 8 formulations (of Releaseease) & 80 package sizes

5 product families Only 50 kg packages

13 products 7 products 2 formulations 50 kg packages bulk shipments; 50 kg packages

2 products 50 kg bags

2 products many ½ kg, 1 kg, etc., packages

Sales Volume & Utilization (1982) Product Cost $/CWT Raw Mat’l A Yield & % Active Ingredient Others (Labor, etc.)

14M lbs or 75.7 2.6M lbs or % 70.3 % 102.93 90.4 % & 84.6 97.35 91.1 % & 84.7

38M lbs or 80.9 17.2M lbs or % 78.2 % 76.69 98.9 % & 84.4 95.01 94.7 % & 85.6

4.1M lbs or 91.1 % 116.34 91.7 & N/A

4M lbs or 80.0 % 153.80 98.8 % & 85.4

1000 non-union Non-union 600 workers, workers, loyal workers, quality two different conscious 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
Cost (1982 $ per cwt)
Mexico Canada Venezuela Frankfurt Gary Sunchem Total 95.01 97.35 116.34 76.69 102.93 153.8 Before Packaging 92.63 93.25 112.31 73.34 89.15 149.24

Cost (1977 $ per cwt)
Mexico Canada Venezuela Frankfurt Gary Sunchem Total 121.88 66.31 67.16 66.81 64.27 119.95 Before Packaging 118.82 63.51 64.83 63.89 55.67 116.39

Volume versus Yield
1
Yield on Raw Mat'l A

Sunchem

Frankfurt

0.98 0.96 0.94 0.92 0.9 0.88 0 10 20 Production Volume 30 40 Venezuela Canada Gary Mexico

Too Much Capacity?
Mexico Canada Venezuela Frankfurt Gary Sunchem Production Idle Capacity 17.2 4.8 2.6 1.1 4.1 0.4 38 9 14 4.5 4 1

Total Demand = 79.9 M lbs; Total Capacity = 100.7 M lbs

Should we close a plant? Which one?
Might there be reasons for having excess capacity or keeping all plants open? 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?
Start Simulate Spot Exchange Rates & Demand Recalculate...
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