SUBJECT: Wriston Manufacturing Corporation
DATE: June 9, 2011
Wriston Manufacturing Corporation (WMC) is faced with a Detroit plant that is no longer viable because of underinvestment, labour issues, and product-process mismatch. This has lead to low sales figures, low return, and high burden rates (as calculated by the company). The issues at the Detroit plant will be reviewed and options will be presented. A recommendation to address the Detroit plant will be be made based on this review.
Investment in the Detroit plant has lagged significantly from other plants in the corporation. As a result, the infrastructure and machinery is outdated, haphazard, and inefficient. The working environment is poor, with an unplanned collection of buildings that have received little attention over the many years of use. The plant produces multiple product lines, often of low volume, because of the transfer of higher volume products to more efficient plants. Set-up times are longer, because of outdated machines, small batch sizes, and high variability. Routing of products through the plant remains complex, because of the differing requirements for small volume products, and because of single machine operator training. Poor working conditions have lead to prominent labour issues, including increasing levels of absenteeism and turnover. Options:
1. Plant Closure and Product Line Transfer
As seen in Appendix 1, closure of the Detroit plant and transfer of product lines results in the best NPV of the three options, using the financial information provided in the case. However, the financials in isolation do not consider the impact of the transfer of product lines to the other plants, as well as the impact of Group 3 product line discontinuation. The other plants in the WMC system are generally high volume, flow-shop style plants. The transfer of lower volume products with variable manufacturing requirements to high volume plants will lead to a similar product-process mismatch that exists in Detroit. Appendix 2 provides a breakdown of the burden rates attributable to the three product groups. Group 1 and 2 have higher burden rates than Group 3, and transfer of these product lines will impact the burden rate, and likely the ROA, of the receiving plants.
Appendix 3 graphically displays the ROA versus overall burden rate of the plants in the WMC system. Transfer of Group 2 in particular will need to be carefully considered as the Lima plant already has a high burden rate and negative ROA. Transfer of Group 2 to Lima will further inflate that plant’s burden rate and further push down the ROA. WMC should evaluate the processes at the Lima plant to gain a better understanding of the low capacity and negative ROA, particularly of a high volume plant. Because of the high capacity of the Saginaw plant, transfer of the product line to this plant may not be achievable despite its low to medium volume processes.
2. Plant Retooling
Retooling the Detroit plant results in the worst NPV of the three options, even with ongoing losses eliminated through the retooling investment. With this option the company would continue to have a negative ROA at the Detroit plant.
3. New Plant Construction
Construction of a new plant results in an NPV that lies between the previous two options. However, construction of a new plant may provide the company with opportunities to address present manufacturing and labour issues in Detroit, and allow the company to continue to produce the low volume product lines that are used as replacement parts by its customers and by other plants in the WMC system.
Because of the high degree of variability in the product lines produced at Detroit, the introduction of a flexible system of manufacturing (job-shop) into the new Detroit plant will allow the company to continue to produce low volume, specialty product lines more...