Wac Tom 1 - Alden

IBA, KARACHI

Written Analysis of Case Alden Products, Inc. – European Manufacturing

Written by: Wasiq Mustafa (01245)

Course: Technology & Operations Management (MBA)

Instructor: Mr. Shakeel Jajja

WAC : Alden Products, Inc. – European Manufacturing

API early 1960’s Question: Looking back, do you agree with the logic that led Alden products international in 1962 to consolidate its continental European production into one single facility? In the early 1960s, API had several subsidiary plants across Europe each responsible for their own products and distribution in their own country as per the needs of the consumer in their country. In 1960s the company was going through great changes with a forecasted growth rate of 40% per annum. The forecasted growth would put their current capacity in Europe at great strain and would require expansion to meet this increase in demand. At that time there were two options, firstly to increase capacity at each of their regional subsidiary plants or secondly to consolidate all European production to one single production centres by eliminating the UK Plant. It was decided that it would consolidate all its European ventures into one single operation and turn the existing factories into regional distribution centres. The site chosen for the new factory was Nijmegan, Holland opened in 1962. In my opinion the decision to change the structure of the company to a single production centre was the best decision in the interest of the company as it was able to make better execution of its operational strategy in terms of quality, speed, dependability, flexibility and cost. 1. Quality: It is the most differentiable factor which allows API to charge a premium of 15% higher than mass-market products. With the decision of one factory, the standardization will increase and variation will decrease leading to using equipment, staff and suppliers of similar capabilities. This will also protect the secret recipes by having less number of staff access to it, thereby reducing competitors threat. 2. Cost: It was far cheaper to build one factory than to expand operations in small regional factories. It cut down the duplication through singular procurement, finance and administration systems resulting in low wastage and overheads. Bulk procurement allowed the company to have greater bargaining power in buying raw material, thus reducing cost. 3. Speed: The decision will enable the centralized manufacturing to upscale the speed of operation and avail economics of scale. Also the speed could not be tapped in smaller regional factories as markets would not be big enough to utilize the total installed capacity. The location of the factory in Holland gave the company access to raw material and effective distribution through road and rail to Page 1 of 6

WAC : Alden Products, Inc. – European Manufacturing

the rest of European market, resulting in reduced lead time for customers and suppliers. 4. Flexibility: Single Factory increased the range of different products and allowed regional subsidiaries to bring separate products to other markets that were not previously available. Flexibility in labeling and packaging allowed the region to customize its product and occupy the niches in the market. 5. Dependability: API move to single factory helped it meet larger orders, improve customer satisfaction and trust building towards suppliers. In conclusion, I feel the decision for a consolidated factory in Holland was the right decision for the company as it allowed the company to grow 20 times its original sales. In analyzing all the above factors that affect operations I feel each factor had the benefit from the decision. Thus, having a more effective operation through singular factory has enhanced the customer’s satisfaction and has added value to the in product.

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WAC : Alden Products, Inc. – European Manufacturing

Performance in 1980’s Question: What is your evaluation of the Uniplant's performance during the 1980s? The decision from a multi production unit to a single unit production centre, Uniplant was built in 30 Hectares property operational in mid 1964. With the growth in the forecasted Sales in Europe, Uniplant was expanded 6 times. After the last expansion in 1982 the European sales increases by 11% but on the othr hand the overhead cost/unit increased by 33% mainly because the initial work flow is was same and the expansion led to change in work schedules. Overhead cost was the prime problem which was there even in expansion. European recession of 1970-1988 During this time the Uniplant performance of was not that much affected by the recession with the 70% increase of Holland’s living cost, as the average cost per unit is only increase by 50% only. The reason was primarily attributed by the fact that the raw material comes from different countries and only 35% of it is from Holland. The contribution of raw material is 62.6%, and other costs are minimal. So, even the living cost increased in Holland, the sales was not much affected. Exchange rate parity & Transportation cost In 1982, Alden-Italy stated that the difference in the exchange rate between Dutch guilder and Italian lira, the transportation cost from Uniplant to Italy is very high (6% of total cost) twice than other European subsidiaries. This decreased the competitive advantage of Alden-Italy losing market share, leading to outsource the filling function to local “Contract Fillers”. Inventory Turnover In 1988, Uniplant’s inventory turnover increases by 10 folds both in packing material ad raw material, which eventually lead to high turnover of finished goods. Hence with is good performance the Overhead cost was kept at minimal of 1% to previous years. According to the CEO, the performance can be increase by:  Avoiding Short production run as it usually it took 1 hour to change over.  Neglect the frequency of short and changovers as it to reduce the throughputs and increase the average cost.  Current Operations of fillers are 2 shifts of 8 hours, 5dats a week. The remaining 8 hours are used for filler cleaning  Increase the number of shifts to 3 rather than 2 with reduction in cleaning time.

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WAC : Alden Products, Inc. – European Manufacturing

Future Strategy for API Question: What recommendations would you make to Mr Genet, API-Europe's Executive V.P., as regards the operations strategy his organization should follow in the future? Specifically, how much additional production capacity should be provided, where should it be located, and how should it be managed?

Capacity requirements As per the forecast the following can be said from 1988 to 2000:  Growth of 5-6% per year during 1990’s  Rapid Growth during 1990-1995, followed by steady growth till 2000  Sales expected to double between 1988 and 2000 With the growth almost doubling the company required additional 7-10 filling lines by 2000 to meet the forecasted demand. The filling line expected cost is around $3 million with a capacity of 40 million units/year. Current Capacity = 440 million units/year (UK & Holland Plant – 2 Shifts) Additional Requirement = 400/40 = 10 high speed filling lines The 2 options under considerations are whether to expand the existing Uniplant or open a new facility in Italy or Southern France.

Option 1: New Plant in Southern Europe Feasibility Launching a new plant in Italy or Sothern France will be a move away from the centralized strategy of Alden’s operated Uniplant. The change in strategy would require change management as operational strategy will change significantly from the way of business operations. The new plant is driven by the European markets in the area to tap the Alden Europe sales region. The French subsidiary currently contributes for 1/3rd of Alden Europe sales, followed by Italy i.e. half of France sales. French and Italian market in recent times showed negative feedback on two variables 1) market-responsiveness and 2) late delivery. The problem is because o devaluation of Italian Lira and the high transportation cost from Uniplant.

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WAC : Alden Products, Inc. – European Manufacturing

Italian market states that due to the above mentioned problems they are unable to continue to price competitively, and if no actions are taken the market share will fell drastically. This has led to an argument in Alden Europe that the location of the new factory should be new these markets to tackle the problems at hand and enable the region to maintain the market share. The benefit would result in cost reduction in labor and transportation as well as to enable Italy and France to Self-monitor their own markets. However the trade-off of capital investment can be noted evidently. On one hand through centralized unit of Uniplant, there is no new to purchase extra land for expansion and if required extra 10 hectares it would cost $ 250,000/ hectare. While the the price of equivalent land in Southern Europe would cost 4 times higher as $ 2 million/ hectare.

Risk The main risk is high level of initial capital investment in case of New Southern Europe plant. This decision will change the overall companywide operational strategy to decentralizing production. Van Zweiten is highly valued by Alden-Europe and has disagreements on this approach. Moreover substantial knowledge transfer would require developing the staff of the new capabilities through training and development investment. Also complexity might arise in the transfer of skills and knowledge to a new country due to differences in work ethics and cultural barrier of using a different language.

Option 2: Expansion of Uniplant 

Land: As per sales forecast a total 8 to 10 high-speed filling lines are required. Uniplant in Holland is located in industrial area where new filling lines can be added without buying new land. Further expansion of 10 hectares would cost minimum of $ 250 per hectare.

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Equipment Cost: A newly high-speed filling line have a capacity of 40-million-unit per year, and costs about $10 million. Resulting investment = 10 x 10 = $100 million

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Labor Cost: New automated production would reduce the labor requirement and can hire part-time labors from university.

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Outsourcing fillers on Contract: This can save direct Manufacturing cost from 5 to 30%

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WAC : Alden Products, Inc. – European Manufacturing

Pros 

Location near harbors: Easy access to petrochemicals and packing material, close to rail and highways from prompt logistical service.

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Combined demand of Europe: Increased bargaining power of raw material and reduced direct manufacturing cost.

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Using Contract Fillers in Italy would not be effected in exchange rate fluctuations, and can retain competitive price against the rest in Europe.

Cons 

The fast growth is risk in itself as in the beginning unit price decreases to lower level to production but results in management s problems such as capacity shortage, quality issues or poor customer service.

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Risk of outsourcing to contract fillers will decrease the quality and the standardization of product resulting in losing of core USP of API.

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In case of Contract Fillers most of technical know-how will be out in the market which the top management was reluctant.

Recommendation The Best decision of whether to expand or to make new plant should be aligned with API competitive guidelines such as lower investment cost including land, labor , equipment, raw material and components. A centralized Uniplant would be the most feasible option as it meets the company guideline of cost leadership, manufacturing flexibility and better customer service. Also automated production reduces the labor requirements and improves the product quality. Also option to increase contract fillers will reduce manufacturing ost by max 30% which will manage the rising overhead cost of Uniplant. Since API do not want to lose control on the product formulation, the high tech centralized Uniplant would be able to cater all the needs.

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