applichem
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Applichem Case
OM 888Supply 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 PlantsFactor Gary Canada Frankfurt Mexico Venezuela Sunchem,
Japan Plant Design, Size, Maintenance, etc
1905+ Capacity 18.5M lbs
1955+ Cap. = 3.7M lbs
1960s Cap. = 47M lbs
‘68, similar to Gary Cap. = 22M lbs
‘64, no frills design Cap. = 4.5M lbs
1957 Cap = 5M lbs
Product Variety & Packaging
20 product families 8 formulations (of Release-ease) & 80 package sizes
5 product families Only 50 kg packages
13 products 2 formulations bulk shipments; 50 kg packages
7 products 50 kg packages
2 products 50 kg bags
2 products many ½ kg, 1 kg, etc., packages
Sales Volume & Utilization (1982)
14M lbs or 75.7 %
2.6M lbs or 70.3 %
38M lbs or 80.9 %
17.2M lbs or 78.2 %
4.1M lbs or 91.1 %
4M lbs or 80.0 %
Product Cost $/CWT
102.93 97.35 76.69 95.01 116.34 153.80
Raw Mat’l A Yield & % Active Ingredient
90.4 % & 84.6 91.1 % & 84.7 98.9 % & 84.4 94.7 % & 85.6 91.7 & N/A 98.8 % & 85.4
Others (Labor, etc.)
1000 non-union workers, loyal
Non-union workers, quality conscious
600 workers, two different 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
Total Before PackagingMexico 95.01 92.63Canada 97.35 93.25
Venezuela 116.34 112.31Frankfurt 76.69 73.34
Gary 102.93 89.15Sunchem 153.8 149.24
Cost (1982 $ per cwt)
Total Before PackagingMexico 121.88 118.82Canada 66.31 63.51
Venezuela 67.16 64.83Frankfurt 66.81 63.89
Gary 64.27 55.67Sunchem 119.95 116.39
Cost (1977 $ per cwt)
Volume versus Yield
0.88
0.9
0.92
0.94
0.96
0.98
1
0 10 20 30 40
Production Volume
Yiel
d on
Raw
Mat
'l A
Frankfurt
Mexico
Gary
Sunchem
Venezuela
Canada
Too Much Capacity?
Production Idle CapacityMexico 17.2 4.8Canada 2.6 1.1
Venezuela 4.1 0.4Frankfurt 38 9
Gary 14 4.5Sunchem 4 1
Should we close a plant?
Which one?
Might there be reasons for having excess capacity or keeping allplants open?
Total Demand = 79.9 M lbs; Total Capacity = 100.7 M lbs
Safety problems (chemical), transport costs/time, hedging
One Approach: LP Model
Purpose Conduct “what-if” analysis to find better network supply chain
structure
ObjectiveMinimize costs measured in some common form (1982 U.S. $)
Decision Variables How much to make at each plant; how much to ship between regions
ConstraintsCapacity constraints, demand limitations, non-negativity (import restrictions, etc.)
DataCosts, 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/classichttp://www.sunshinecable.com/~eisehan/V80-10en.htmInternational Monetary Fund: International Financial Statistics Yearbook.
Is there a better way to solve?
S h o w D is trib u tio n o f S im u la tio n R e s u lts
G e t G lo b a l A fte r-T a x P ro fit
R u n O p tim iza t io n o f S u p p ly C h a in N e tw o rk
R e ca lcu la te S pre a d s h ee t In p u t
S im u la te S po t E xch a n g e R a tes & D e m a nd
S ta rt
What’s the Point?
• Conclusion:
Recourse actions from excess capacity can improve expected profit while reducing risk!
Recourse actions – capacity decisions made before demand realized; production decisions made after demand realized.
Other Actions Spadaro Could Take?
• Sharing technology and innovations across plants – Improve Gary’s yield– Reduce costs in Venezuela– Sunchem is high-cost, but also extremely efficient
• What is impact of closure?
– Changing management structure• Ensure technology and improvements transfer• If we close our most technologically advanced plant, what
does this tell others about priorities?
Just Can’t Get Enough Applichem…
• Check out:
Lowe et al. “Screening Location Strategies to Reduce Exchange Rate Risk.” European Journal of Operations Research. 2002.
Cohen and Huchzermeier. “Global Supply Chain Management: A Survey of Research and Applications.” Chapter 21 in Quantitative Models for Supply Chain Management. Eds. S. Tayur, R. Ganeshan, M. Magazine. 1999.
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