Mapleleaf Case

MAPLELEAF: DESIGNING OPTIMAL CAPACIT CAP ACITY Y PLANNI PLANNING NG STRA STRATEGY  TEGY  : Amritansh Amrit ansh Ahuja (PGP/20/13 (PGP/20/131) 1) Baviris Ba virisett ettyy Durg Durga a Chan Chandra dra Sekh Sekhar ar (PGP (PGP/20/1 /20/14 41) Kartike Karti keya ya Mehr Mehra a (PG (PGP/2 P/20/1 0/15 51) Nikhil Sikaria (PGP/2 (PGP/20/1 0/161 61)) Raj Sagar (PGP/ (PGP/20/1 20/17 71) Shashank Shas hank Shek Shekhar har (PG (PGP/2 P/20/1 0/18 81) Vivek Viv ek Mura Muraleed leedhara haran n Nair (PGP/20/19 (PGP/20/191) 1)

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Mapleleaf Corporation is a midsized midsized manufacturer and distributor distributor of paper products products

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Firm has four production facilities located throughout North America

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Products are shipped to seven distribution centers

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Forecasts suggest that the demand for goods in the next 5 and 10 years, it has been found that the demand would outstrip the current capacity of 10,000 cartons per day Hence, a new capacity expansion plan was designed.

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Plan is to develop a new production plant adjacent to the current distribution centre, Guadalajara, Mexico because demand has increased in Mexico

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Estimated initial investment = $30 million

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Production costs = $10 per carton

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Proposed capacity = 4000 average daily cartons

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Construction Time = 2 years

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Depreciation Method: Straight line method with 10 year useful life and no salvage value

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Operating Schedule: 300 day/year operating schedule

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Discount rate = 10% for NPV calculations

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Tax rate = 40% for Cash flow calculations

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Selling price of one carton = $20

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All the goods that are produced are also sold

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Production facility Denver is the same as K.C. in exhibits

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Demand forecasts are projected

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Linearly from year 1 to year 5 based on 5 th year forecast

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Linearly from year 6 to year 10 based on 5 th and 10th year forecast Forecast Year

Demand

1 2 3 4 5 6 7 8 9 10

8000 8500 9000 9500 10000 10600 11200 11800 12400 13000

Capcity 10000 10000 10000 10000 12000 14000 14000 14000 14000 14000

16000 14000 12000 10000

8000 6000 4000 2000 0 1

2

3

4

5

Demand

6 Capcity

7

8

9

10 10

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Estimating the production quantity in each of the production centres from year 1 to year 10 using Linear programming such that the production costs are minimized Based on data obtained in Step 2, production costs are calculated for all the 10 years An assumption is made on the selling price per car ton and revenues are forecasted for the entire 10 years. Discounted cash flows are estimated for all the 10 years and NPV and Break-even period are calculated.

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Table of demand forecast and product distribution costs for 5 year and 10 year

0.75 2.5

2.5 1

4.5 2.5

4.75 2.75

5.25 3.25

1000 750

1000 1000

4.5

2.5

0.5

2.25

1.75

2500

3000

4.75 1.5 3 5.25

2.75 1.5 2.25 3.25

2.25 3.75 3 1.75

0.75 2.5 3.5 3.75

2.5 3.75 3.5 0.5

1500 1500 750 2000

2000 2000 1000 3000

10000

13000

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Total Capacity during Year 1 to Year 4 is 10000 daily cartons and during Year 5 is 12000 units and Year 6 to 10 is 14000 units Yearwise Projected Demand per Distribution Centre Year

1

2

3

4

5

6

7

8

9

10

Toronto

1000

1000

1000

1000

1000

1000

1000

1000

1000

1000

60 6 00

650

675

700

750

800

850

900

950

1000

L.A.

2100

2200

2350

2400

2500

2600

2700

2800

2900

3000

Seattle

1200

1275

1350

1450

1500

1600

1700

1800

1900

2000

Chicago

1200

1275

1350

1450

1500

1600

1700

1800

1900

2000

Atlanta

600

650

675

700

750

800

850

900

950

1000

Guadalajara

1300

1450

1600

1800

2000

2200

2400

2600

2800

3000

Total Demand

8000

8500

9000

9500

10000

10600

11200

11800

12400

13000

K.C.

 

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Table in the next slide shows cost associated

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Guadalajara comes in 5 th year in the model

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Total Cost in one year = Production cost + Distribution costs

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Production Cost = No. of units produced * Cost per unit (in each production facility)

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Distribution costs = No. of units to be distributed from one facility to one distribution centre * Costs associated in that particular route

Production Cost Production Cost/Carton

14

19

Unit cost* No of Units its

35000

28500

13

17

10

45500 42500 30000 Total Production   181500 Cost

Distribution Cost toronto K.C. L.A. Seattle Chicago Atlanta Guadalajara

Toronto 750 0 0 0 2250 0 0

K.C. 0 1000 0 0 0 1125 0

L.A. 0 0 1500 0 0 1500 0

Seattle 0 0 0 1500 1250 0 0

Dist Distri rib butio ution n Cost Cost

Gu G uadalajara 0 0 0 0 0 0 1500 1237 2375

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Distribution costs is different for different dif ferent years, depending on the forecast for that year Total distribution costs are calculated using the Linear programming model using forecasts from different distribution centers The following table gives the total cost per day incurred every year from year 1 to 10

Year

1

2

3

4

5

6

7

Daily Cost   128425 128425 136418.7 136418.75 5 145656.25 145656.25 14313 143137.5 7.5 150312. 150312.5 5 158600 158600 166887.5 166887.5 (In $/year)

8

175175 175175

9

10 10

184312. 184312.5 5 193875 193875

Refer the Excel File for Calculations

Microsoft Excel Worksheet

Before 5th year new plant is not present • Utilization from 5th year shows new plant presence year, the new plant runs at half (2000 units) of its capacity • In the 5th year, •

10000 10000 2000

1500

80.00% 80.00% 85.00 85.00% %

10000 1000

10000 12000 14000 14000 500

2000

3400

2800

14000 2200

14000 14000 1600

1000

90.00% 90.00% 95.00%83.33 95.00%83.33% % 75.71%80.00 75.71%80.00% % 84.29% 84.29% 88.57%92.86 88.57%92.86% %

NPV Analysis Assuming Selling Price per Carton = $20 0

Year

1

2

3

4

5

6

7

8

9

10

Capital Expenditure   3,00,00,000

Revenue

160000

170000

180000

190000

200000

212000

224000

236000

248000

260000

Cost

128425

136418. 75 75

145656. 25 25

143137.5

15 150312.5

158600

166887.5

175175

184312. 5

193875

Gross Margin

31575

33581.25

34343.75

46 46862.5

49687.5

53400

57112.5

60825

63687.5

66125

Gross Margin yearly (300 days)

947 9472500 2500

1007 100743 4375 75

10303 030312 125 5

1405 140587 8750 50

14 149062 906250 50

160 16020 2000 000 0

1713 171337 3750 50

18247 824750 500 0

19106 910625 250 0

19837 983750 500 0

Depreciation

3000000

3000000

3000000

3000000

3000000

3000000

3000000

3000000

3000000

3000000

PBIT

647 6472500 2500

7074 707437 375 5

7303 730312 125 5

1105 110587 8750 50

1190 119062 6250 50

130 1302000 20000 0

1413 141337 3750 50

1524 15247 7500 500

16106 610625 250 0

16837 683750 500 0

PAT PAT

3883500

4244625

4381875

6635250

7143750

7812000

8480250

9148500

9663750

10102500

Discounted CFs NPV

 

 

3530454.54   3292167.54   4435706.70 4409670.34 4351709.13   3507954.545   4531965.03 4267842.76 4267842.768 8 5 3 2 2 2

1,03,20,795

Break Even will occur between 7th and 8th Year

4098373.36 4098373.36

3894951.081 3894951.081

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Strategic Capacity Planning 

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Effective Capacity

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Facility Utilization

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Capacity Cushion

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The company should build the plant at the end of 2 years in order to use it from 5 th year

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Mapleleaf Corporation should start start with new plant to to meet the demand demand forecast

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Profit continues to increase even after new plant is built

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The breakeven is achieved between 7 th and 8th year