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MBA Department, Kardan University, Kabul, Afghanistan

Case Exercise - 01

Rochem Limited

Dr. Rhodes was losing his temper. It should be simple

enough decision. There are only two alternatives. I just

cant understand why its all blown up into such a big

issue. You are only being asked to choose a machine.The

Management Committee looked abashed.

The problem had been brewing for several weeks now,

and although John Rhodes had seen it coming, his anger

was real enough. For the last thirteen years, since he had

founded the company as a young research chemist, the

company seemed to have avoided major arguments over

policy. That it should happen over such a trivial issue

puzzled and upset him, especially now that the company

was so well established.

Rochem Limited were one of the largest independent

companies supplying the food processing industry. Their

initial success had come in the late 60s with a food

preservative, used mainly for meat-based products, and

marketing under the name of Lerentyl. Other products

were subsequently developed in the food coloring and

food container coating fields, so that now Lerentyl

accounted for only 25% of total company sales.

THE DECISION

The problem over which there was such controversy,

related to the replacement of one of the process units

used to manufacture Lerentyl. Only two such units were

used, both of the same make, Chemex, a local company.

It was the older of the two Chemex units which was giving

trouble. High breakdown figures, with erratic quality

levels, mean that output level requirements were only

just being reached. The problem was, should the company

replace the ageing Chemex with a new Chemex, or should

it buy the only other plant on the market which was

capable of the required process, the German AFU unit.

The Chief Chemists staff had drawn up a comparison of

the two units, shown below.

Chemex AFU

Capital cost 590,000 880,000

Unit cost of

processing at capacity

185 183

Design capacity 2200 kg/month 2800 kg/month

Quality 98% 0.7% purity

Manual Testing

99.5% 0.2% purity

Auto Testing

Maintenance Adequate but needs

regular servicing

Not knowprobably

good

After sales service Very good Not knowunlikely to

be good

Delivery 3 months Immediate

The body considering the problem was the newly formed

Management Committee. John Rhodes had recently

decided that the company was now of a size where the

rather autocratic (albeit friendly) decision process he had

adopted should be formalized. The committee consistedof the four senior managers in the firm. The Chief Chemist

and the Marketing Manager, who had been with firm

since the beginning, together with the Production

Manager and Accountant, both of whom had joined the

company only six months ago. This was only the second

meeting of the committee, and Rhodes was already

starting to regret its formation.

THE MARKETING MANAGER

This year the market for this type of preservative had

reached a size of some 20 million, of which Rochem

Limited supplied approximately 48%. There had, of late,

been significant changes in the market in particularmany of the users of preservatives were now able to buy

products similar to Lerentyl. The result had been the

evolution of a much more price sensitive market.

Future market projections were somewhat uncertain. It

was clear that the total market would not shrink (in

volume terms), and best estimates suggested a market of

perhaps 24 million in four years time (at current prices).

However, there were some people in the industry who

believed that the present market only represented the tip

of the iceberg as far as the real potential in food

preservation was concerned, especially in the export

market which was hardly exploited at all.

Lerentyl was sold in ether solid, powder or liquid form,

depending on the particular needs of the customer.

However, despite this complication, prices tended to be

related to the weight of chemical used. Thus, for example,

this year the average market price was approximately 200

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MBA Department, Kardan University, Kabul, Afghanistan

per kg. There were, of course, wide variations depending

on order size, etc.

At the moment I am mainly interested in getting theright quantity and quality of Leventyl each month, and although

production have never let me down yet, Imworried that unless

we get a reliable new unit quickly, they soon will. The Germanmachine can be on line in a few weeks, giving better quality, too.

Furthermore, if demand does increase, but Im not saying it will,

the AFU will give us the extra capacity. I will admit that we are

not trying to increase our share of the preservative market as

yet. We see our priority as establishing our other products first.

When thats achieved, we will go back to concentrating on the

preservative side of things.

The CHIEF CHEMIST

An old friend of John Rhodes, and together they had been

responsible for every product innovation. At the moment,

the major part of budget was devoted to modifying basic

Lerentyl so that it could be used for more acidic food

products such as fruit. This was not proving easy, and as

yet nothing had come of the research, although the Chief

Chemist remained optimistic.

If we succeed in modifying Lerentyl, the market

opportunities will be doubled overnight, and we will need the

extra capacity. I know we would be taking a risk by going for the

German machine, but our company has grown by gambling on

our research findings, and we must continue to show faith.

THE PRODUCTION MANAGER

The Lerentyl Department is virtually self-contained as a

production unit. In fact, it is physically separate, being in a

building a few yards detached from the rest of the plant.

The department has its own raw material store and its

own packing section, although finished goods are stored

in the main store in the main building. Production

requirements for Lerentyl were currently at a steady rate

of 4150 kg per month. The four technicians, who staff the

machines, are the only technicians in Rochem who do all

their own minor repairs and full quality control. The

reason for this is largely historical, since when the firm

started the product was experimental and qualified

technicians were needed to operate the plant. The four

had been with firm from its beginning.

Its all right for the Marketing Manager and Chief

Chemist to talk about a big expansion of Lerentyl sales, they

dont have to cope with all the problems if it doesnt happen. The

catalyst (fixed) costs of the German unit are nearly three timesthose of the Chemex. Just think what that will do to my budget at

low volumes of output. As I understand it, there is absolutely no

evidence to show a large upswing in Lerentyl. No, the whole idea

of the AFU plant is just too risky.

Not only is there the risk, I dont think it is generally

understood what the consequences of the AFU would mean. We

would need twice the variety of spares for start. But what really

worries me is the staffs reaction. As fully qualified technicians

they regard themselves as the elite of the firm. If we get the AFU

plant, all their most interesting work, like the testing and the

maintenance, will disappear or be greatly reduced. They will

finish up as highly paid process workers.

THE ACCOUNTANTThe company had financed nearly all its recent capital

investment from its own retained profits, but would be

taking out short-term loans this year for the first time for

several years.

At the moment, I dont think it wise to invest extra

capital we cant afford, in an attempt to give us extra capacity

we dont need at the moment. This year will be an expensive one

for the company. We are already committed to considerably

increased expenditure on promotion of our other products and

capital investment in other parts of the firm, and Dr. Rhodes is

not in favor of excessive funding from outside the firm. I accept

that there might eventually be and an upsurge in Lerentyl

demand but if it does come, it probably wouldnt be this year and

it will be far bigger than the AFU can cope with anyway, so we

might as well have three Chemex plants at that time.

John Rhodes intervened in the discussion:

Look I know that to some extent we are arguing in the

dark. But this isnt a perfect world and we never will have all the

information we want. Furthermore, I think that at this stage any

decision is better than just letting things drift.

QUESTIONS (Total Marks = 10)

1. What form do the:

a.

Decision body (01 Mark)

b. Decision options (01 Mark)

c. Uncontrollable factors and (01 Mark)

d. Consequences of the decision options take in this particular case? (01 Mark)

2.

Classify the decision and the context of the decision, using the framework discussed in chapter 04. (03

Mark)

3. Which machine should the company buy, and why? (03 Mark)