WAC2D

Submission No. 2

W.C. WOOD COMPANY (A)

A report submitted to [Instructor]: Professor Rohini Patel [Academic Associate]: Ms. Pooja Thomas

 In partial fulfillment of the requirements of the course

Written Analysis and Communication I

On

23rd July 2011

By

Anushansa Singh (PGP ABM-I) Divya (PGP-I)

(Section D)

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MEMORANDUM

W.C. Wood Company, Guelph, Ontario. Date: 10th January, 2004 From: XYZ and PQR, Assistants To: Mr. Paul Stevenson, Vice-President (Manufacturing) Subject: Recommendation on the strategy for the ado ption of new packaging design of “clear   pack”

With reference to the proposal for changing the packaging design of the company’s product from cardboard to “clear pack” design, I have enclosed a detailed analysis of the possible alternatives  by which the shift can be brought about. An evaluation of the options concludes that the best option would be to install the new machines in all the five production lines at once. This option has the benefits of highest cost savings and reduction in damage claims while being lowest on the investment requirement.

EXECUTIVE SUMMARY  W.C. Wood Company has received a proposal to change the packaging design of the company’s  product. The new design, “clear pack”, although being capital intensive, brings down the costs, improves handling and packaging stability and is suitable for the clamp-truck operations. The company’s five production lines can be installed with machines from Lachenmeier or MSK  Covertech. The company can opt for the change in packaging design of one or two line at one time, an “all at once” change keeping the current design operational, or implementation at once. The options are weighed against the investment required, the reduction in warranty claims and the cost savings. In addition to scoring high on all three criteria, the recommended option of “all at once” conversion enables converting all warehouse equipment to clamp trucks. [Number of Words: 130]

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Table of Contents MEMORANDUM ........................................................................................................... 3 EXECUTIVE SUMMARY .................................................................................................4  Table of Contents.......................................................................................................5 SITUATIONAL ANALYSIS.............................................................................................. 6 PROBLEM STATEMENT ................................................................................................7 OPTIONS

.............................................................................................................7

CRITERIA .....................................................................................................................8 EVALUATION OF OPTIONS ........................................................................................... 8 RECOMMENDATION.................................................................................................. 10 ACTION PLAN............................................................................................................ 10 EXHIBIT 1. Analysis for option 1: Change the packaging design in all production lines at once..................................................................................................................... 12 EXHIBIT 2. Analysis for option 2: Change the packaging design in only one or two lines at a time........................................................................................................... 13 EXHIBIT 3. Analysis for option 3: Change all machines at once, keeping current cardboard packaging equipment and transition from old to new equipment carried out in phase..............................................................................................................14 EXHIBIT 4. Comparison of Strategy X, Strategy Y and Strategy Z............................15

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SITUATIONAL ANALYSIS The technology of “clear pack”, embraced by Europe and South America since many years, is now entering North American household appliance industry as an effective substitute for the current cardboard packaging. “Clear pack” technology, which uses a combination of polystyrene foam and clear plastic film as packaging material and employs an automated machine, cuts down   both the material and labor costs. This is highly beneficial since the cardboard prices are witnessing a rising trend while the costs of the clear pack design have been declining. In addition to this, the new design brings about an improvement in handling and packaging stability, thus  bringing down the damages caused to the product – which is a major concern to WC Wood, owing to the high damage warranty rates on the company’s products. Taking into account the increased competition from China and other low-labor-cost countries, WC Wood should go ahead with the “clear pack” technology to increase its profit margins. The new design will also lead to potential improvement in the customer experience. For implementation of the new packaging design, the five production lines in the four plants of  the company would need to be installed with new equipment. In regard to this, the company has the alternatives of electric servo motor-run Lachenmeier (Lch) machine, hydraulics-run MSK  Covertech (MSKI) machine and a large heat shrink film machine (MSKII) to handle two lines. Even though ordering all the machines from the same supplier has an added advantage of a 10  per cent discount, the capital investment may further be optimized by using machines from both the suppliers (Exhibit 1).

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Furthermore, presently the company products are handled by lift trucks fitted with either a clamp or a Basiloid. Though the Basiloids, latest of the two, reduce the size of aisles in workhouses and increase the storage space, these have not been uniformly adopted in the distribution system. Thus, there has been a need to revert back to clamp trucks for handling the products. The “clear   pack” technology has an added advantage that it is better suitable for clamp-truck operations and thus with this technology in place, the company can convert all warehouse equipment to clamp trucks at the same time, thus resulting in an optimized packaging design. The conversion from the present design to “clear pack” all at once, however, is highly capital intensive and may run into implementation problems. Such was the case with Whirlpool – one of  the players in home appliances faced some major conversion issues, regarding training of  warehouse operator and customers. Thus the new system may be implemented in different  phases, over years or run in parallel with the existing system. These strategies would provide a risk aversion to the company.

PROBLEM STATEMENT What strategy should be adopted for the transition from the current cardboard packaging design to the new clear pack design?

OPTIONS 1. Change the packaging design in only one or two lines at a time. Since each production

line differs in volume and variety of the product produced, many phasing strategies are  possible. Of these, strategy Y has been identified to yield maximum returns in the long run (Exhibit 2).

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2. Install the new packaging design in all production lines at once, keeping the current

cardboard packing equipment in place . The transition from the current equipment to

the new equipment may be carried out in phase-wise manner. Of the three such  possibilities considered, strategy Z gives the highest returns (Exhibit 3).

3. Change the packaging design in all production lines at once. Detailed analysis of this

option considering thirty-four combinations of machines from the two suppliers leads to strategy X. This involves employing the following machines: MSKII for Line 1 and Line 2; and Lch for Line 3, Line 4 and Line 5 (Exhibit 1).

CRITERIA Criteria on the basis of decreasing order of preference are as under:

1. Reduction in damage claims

2. Savings on cost

3. Capital investment required

Since the major area of concern for WC Wood Company is the high rates of damage-claims, even a 10% reduction in the number of such claims would lead to substantial savings for the company. Also, a major portion of the investment on the new machines is a one-time expense. Hence the criteria have been ordered as above.

EVALUATION OF OPTIONS Page 8 of 15

Option 1. Change the packaging design in only one or two lines at a time, Strategy Y.

1. Reduction in damage claims: Since all lines will not be shifted to clear pack design this

year, some lines will still produce cardboard packaged products, leading to less reduction in damage claims ($ 1,89,152.71).

2. Savings on labor and material costs: The lines not converted to clear pack design this

year will still incur higher material and labor costs. Savings on costs for strategy Y is $ 30,32,182.00.

3. Capital investment required: The costs on the new machines will be incurred as and when

they are installed. Overall a net present value of  $ 16,17,873.78 is required for the installation.

Option 2. Install the new packaging design in all production lines at once, keeping the current

cardboard packing equipment in place, Strategy Z.

1. Reduction in damage claims: The reduction in damage claims with strategy Z is higher 

than strategy X, specifically $ 2,12,439.34, since all the lines are producing clear   packaged goods, though partially.

2. Savings on labor and material costs: The savings for strategy Z comes out to be $ 29,

85,860.36. This amount is lower than that of strategy Y, since labor and cardboard

material will be used by the parallel-run current packaging process.

3. Capital investment required: This option requires highest capital investment ($

17,93,250.00 ) among the three options evaluated owing to requirement of additional

conveyors and traffic controllers for each line. Page 9 of 15

Option 3. Change the packaging design in all production lines at once, Strategy X.

1. Reduction in damage claims: Strategy X, i.e. all at once conversion from the cardboard to the clear pack provides the highest reduction in the damage claims ($ 2,37,268.79). This is because there is a complete shift from cardboard packaging to clear pack, and conversion from Basiloids to Clamp trucks (Exhibit 4).

2. Savings on labor and material costs: Strategy X provides the maximum cost savings of  $ 33, 34,841.28, since the cardboard is completely eliminated as an input, and the

machines are automated (Exhibit 4).

3. Capital investment required: The required capital is lowest among the three strategies ($14, 74,750.00) since there are no additional expenses of running the packaging designs in parallel and the cost of  $ 227,000 for simultaneous handling of the Basiloid and the clamp product will not be incurred (Exhibit 4).

RECOMMENDATION

WC Wood Company should proceed with conversion of the packaging design in all the five  production lines at once according to strategy X.

ACTION PLAN 1. Place an order for the machines (three electric servo motor-run Lachenmeier (Lch)

machines, and a large heat shrink film machine (MSKII) for the two lines in plant 1) with the suppliers at the earliest. Page 10 of 15

2. Plan the inventory purchase and consumption in a manner to consume the cardboard input by summer shutdown. 3. Initiate training sessions for the warehouse operators enable them to handle the new equipment and clear-packed products effectively. 4. On receipt of the machines, install them on the production lines. This would consume around one week. 5. Take feedback from the customers, distributors and warehouse operators regarding the new packaging design. In case of negative feedback, do the needful.

[Number of Words: 1247]

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EXHIBIT 1. Analysis for option 1: Change the packaging design in all production lines at once

Scenari o

L1

L2

L3

L4

L5

Total cost

3

MSKII

MSKII

Lch

Lch

Lch

1474750

1

Lch

Lch

Lch

Lch

Lch

1475000

4

MSKII

MSKII

MSKI

MSKI

MSKI

1543750

31

Lch

MSKI

Lch

Lch

Lch

1557500

2

MSKI

MSKI

MSKI

MSKI

MSKI

872500

-

Five cost effective scenarios selected from 32 scenarios considered during detailed analysis (Refer to Excel Sheet: , Table 5)

-

Compared on the basis of capital investment required, since savings are same in each scenario

-

Best Scenario on the basis of NPV (total cost): Scenario 3, designated as Strategy X

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EXHIBIT 2. Analysis for option 2: Change the packaging design in only one or two lines at a time

Case

Scenario

Phase 1

Phase 2

Phase 3

Phase 4

Phase 5

1

3 (2 lines @ once)

L3, L4

L2, L1

L5

-

-

NPV (Cash flow) $16,32,568 .74

2

1 (2 lines @ once)

L2, L4

L3, L5

L1

-

-

$16,03,460 .93

3

4 (2 lines @ once)

L3, L4

L2, L1

L5

-

-

$15,73,470 .32

4

3 (1 line @ once)

L4

L2, L1

L3

L5

-

$11,87,121 .71

5

1 (1 line @ once)

L4

L2

L3

L5

L1

$11,12,941 .02

6

4 (1 line @ once)

-

$10,94,359 .04

-

-

L4

L2, L1

L3

L5

Top three scenarios from option 1, on the basis of capital investment required chosen and implemented in phases with conversion of (i) two lines at a time, (ii) one line at a time Cases 1 to 6 compared on the basis of NPV (Cash flow) across five years Case 2 emerges as the best case, designated as Strategy Y  * NPV = ∑ (Cash flow)t/(1+i)t – C0 -

t: Number of years;

i: Discount rate (Assumed 10% p.a.)

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EXHIBIT 3. Analysis for option 3: Change all machines at once, keeping current cardboard packaging equipment and transition from old to new equipment carried out in phase

Percentage load on new equipment

Case

NPV (Cash flow)

Phase 1

Phase 2

Phase 3

1

50

75

100

$13,18,865 .51

2

33

66

100

$11,03,145 .78

3

70

85

100

$15,68,072 .42

-

The best scenario from option 1 implemented in different phases

-

Cases compared on the basis of NPV (Cash Flow)

-

Case 3 emerges out to be the best case, designated as Strategy Z

-

* NPV = ∑ (Cash flow)t/(1+i)t – C0 -

t: Number of years;

i: Discount rate (Assumed 10% p.a.)

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EXHIBIT 4. Comparison of Strategy X, Strategy Y and Strategy Z

-

Strategy

Capital Investment

Reduction on Damages

Cost Savings

X

$14,74,750. 00

$2,37,268.7 9

$33,34,841.28

 Y 

$16,17,873. 78

$1,89,152.7 1

$30,32,182.00

Z

$17,93,250. 00

$2,12,439.3 4

$29,85,860.36

For detailed analysis, refer to Excel Sheet:

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