Applichem Case Study Pt. 3

Operations Strategy

Applichem may benefit from altering their organization architecture to optimize their process strategy.  The Vice Presidents of Latin America, Europe, and Pacific regions are positioned in such a way that it appears they lack the necessary connection to other important functions (e.g., linking Japan’s technology intensive plant more closely to the Vice President of Research and Engineering).  By not having accommodated the newer plants more efficiently into their architecture, Applichem is not able to capture the full benefits of their plants’ intangible values.

Another opportunity appears to stem from their varying degrees of yield loss that each plant experience.  Investments in research and the newest technology may significantly improve their ability to reduce yield loss during the production process and realize an increase in profitability as a result.  Of equal importance is the opportunity to expand research and development with the product itself, thereby taking advantage of possible improvements and extending the lifecycle.

Comparison of Local Cost of Production at Applichem’s Plants

Accounting for exchange rate and inflation effects, we analyzed Applichem plants’ costs (using the 1982 study results) for the 1978 and 1981 fiscal years.   In relation to the Gary, IN plant, the highest total plant costs were reported by the Sunchem and Mexico plants.      Exhibits I and II present the U.S. dollar cost equivalents of the various Applichem plants for 1978 and 1981.

While in 1982, the Sunchem and Mexico plants produced 4 million and 17.2 million lbs. of Release-ease (compared to Gary’s 14 million lbs.), respectively, it should be noted that the Sunchem and Mexico plants have total plant costs that were almost twice that of the Gary, IN facility.  While the Canadian, Frankfurt and Venezuelan plant costs were not significantly higher than the U.S. plant.

By the nature of Applichem’s business, at least 90% of the company’s costs were in the form of variable costs (i.e., Total Variable Costs = Raw Materials + Direct Labor + Utilities + Maintenance + Quality Control + Supplies + Package, Load  & Ship).  Further analysis reveals that bulk of the variable costs incurred by Applichem were in the form of raw materials.

The tables below indicate that, as a percentage of total costs, the Sunchem and Gary plants have the lowest raw material costs when compared to the other plants.  On the other hand, the highest raw material costs relative to total costs were reported by Mexico, Venezuela, Canada and Frankfurt.  The high ratio of raw materials to total costs indicates that:

– the Mexico, Venezuela, Canada and Frankfurt plants’ excess capacity results in high operating costs (resulting in lower profitability)

– the Gary and Sunchem plants raw material costs are almost as high as their operating costs which also results in inefficient operations and a negative on profitability.

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