Victoria Chemicals Plc(a)

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Case 22:   Victoria Chemicals
The Merseyside Project

Table of Contents
Executive Summary 3
Problem Statement 3
Key Decision Criteria 4-5
Data Analysis 5-6
Alternatives Analysis 6-7
Recommendations 8
Action and Implementation Plan 8-9
Exhibits 10
References 11
Executive Summary
Victoria Chemicals is a major competitor in the worldwide chemicals industry.   They are a leading producer of polypropylene, which is a polymer used in products such as: medical products and carpet fibers.   Victoria Chemicals purchases the propylene from four refineries in England, as it is a byproduct of the refining of crude oil into gasoline.   Two divisions compose Victoria Chemicals: Intermediate Chemicals Group (ICG) and the Transport Division.   Intermediate Chemicals Group is divided into two plants, Merseyside Works and Rotterdam.   James Fawn, the Vice President and Manager of Intermediate Chemicals Group, is in charge of both plants.   Merseyside Works is located in Liverpool, England, and the second plant is located in Rotterdam, Holland.   Both plants were constructed in 1967 and the production process has since slowed compared to competitors with newer and updated equipment.   These plants supply to both Europe and the Middle East.   The Transport Division is a cost center that oversees the transporting of raw, intermediate, and finished materials throughout the company.   The Division is also responsible for the managing of the company’s tank cars. Due to the outdated production process of polypropylene at Victoria Chemicals, the production costs are some of the highest in the industry.   This has placed Victoria Chemicals under heavy pressure from investors to improve their financial performance.   Recently, a well-known corporate raider, Sir David Benjamin, accumulated all of the firm’s common shares.   (Bruner, 2008) Problem Statement

Should Victoria Chemicals make an investment into the renovation of the polypropylene production line at the Merseyside Works plant? Key Decision Criteria

The current production capabilities of Victoria Chemicals have become outdated and fallen behind the industry standards set by competitors in the polypropylene industry.   The current process is more labor intensive and thus more expensive then other producers within the industry.   Therefore, the newly appointed plant manager Lucy Morris, who had assumed the responsibility of Merseyside Works only 12 months before, has proposed a GBP12 million renovation to the plant.   Under this proposal, the plant would be thoroughly renovated to account for the many projects that where previously neglected in order to increase the operating profits of the plant.   Also, the project hopes to take advantage of opportunities that would save energy and improve the process flow.   The project proposes: (1) relocating and modernizing tank-car unloading areas, which would enable the process flow to be streamlined; (2) refurbishing the polymerization tank to achieve higher pressures and thus greater throughput; and (3) renovating the compounding plant to increase extrusion throughput and obtain energy savings. By taking these renovation steps the Merseyside Works plant will achieve:   (1) 7% greater manufacturing throughput; (2) improve gross margins from 11.5% to 12.5%; and (3) energy savings would be realized of 1.25% in years 1-5 and 0.8% in years 6-10.   After this ten-year period the energy efficiency of the plant would revert back to current levels.   (Bruner, 2008) When evaluating capital-expenditure proposals at Victoria Chemicals the projects initiator has to identify it as belonging to one of four categories: (1) new product or market, (2) product or market extension, (3) engineering efficiency, or (4) safety or environment.   The Merseyside Project was determined to be an engineering efficiency project, and to be approved it has to meet at least three out of four performance “hurdles”.   These hurdles define that the project must have:  ...
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