To: Richard Sullivan From: im79111 Date: Jun. 1, 2011 Re: Detroit Plant – Heavy Equipment Division (HED) This memo is to identify and analyze the key issues of Detroit plant in Heavy Equipment Division and provide reasonable solutions to the management team. 1， Background Heavy Equipment Division (HED) of the Wriston Manufacturing Corporation is a large axle and brake manufacturer, which accounted for approximately 11.2% of the Wriston’s total revenues. There are 9 on-stream plants in the division and a new one is still under construction. The Detroit plant, the first plant of the division, was facing finance and productivity problems for several years. To address this problem, we are trying to review the situation to assess the feasibility of whether the plant should be closed, and what corresponding actions should be taken. 2 , Issue The Detroit plant acts as an incubator in the division, almost all the products have been developed in Detroit, but when the products became mature, it will be transferred to other plants. As a result, the Detroit plant currently produces 3 categories of low-volume products, on-highway axles, off-highway axles and the replacement parts for all three of the division’s product line. It is operated as a job shop, the complex 20-product-families compounding reduce the producing efficiency and limit Detroit to generate enough profit. Since the plants will be reviewed separately by ROA, Detroit could not compete with other flow shops like Saginaw, the investment was kept on declining for 8 years. Compare with other plants, Detroit has a very heavy overhead burden. Many of the machine tools are out of date. The facilities are unplanned and may need to be repaired or replaced in a short term.
Except the hardware problem, the Detroit plant also have big problem with their labor. The hourly employee ages were polarized into either below 30 or above 50, the absenteeism and turnover rate is high, which will reduce the effectiveness for no doubt. According to the data provided, the Detroit has the highest Variable Burden Rate (2.13) and Total Burden Rate (6.00), which means the product costs are much higher than the other plants. Moreover, base on the Financial Performance data, the low performance on Inventory Turnover Rate, negative cash flow and high account receivables all point to the weak capability on profit generation. 3 , Analysis There are 3 options for Detroit’s future operation. Option 1, Close the plant and transfer the products to other plants. When thinking about whether we should close the plant, many aspects should be considered other than the financial implications, the capacity of receiving plants, responsibilities to the employees, customer satisfaction, social impact and so on. According to the study group’s suggestion, the group 1 products could be transferred to Fremont, Maysville or Lancaster. However, since the volume of the Group 1 products is quite low, all these 3 plants are not familiar to handle this kind of operation; the transfer may result in productivity decrease and even bring negative impact to the current work flow. Study group also suggest transferring the group 2 products to Saginaw or Lima. Although Saginaw is working on low-med volume products, the capacity is already 94% and may not to afford more production. Base on study group’s analysis, Group 3 is the only non-profitable product in the plant. But this bundle of products is necessary to keep the customer satisfaction by provide the “service” part. More than that, it helps to enhance the customer loyalty and prevent the competition for further business. Furthermore, close the plant will also lead to a negative social impact. Layoff will cause many employees out of job, negative reported by the public media will decrease the customer’s confidence on the whole company. Even more, it may result in a stock price drop-down.
According to all the above analysis, although this option may result in a positive...
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