Wriston’s Detroit plant is no longer a viable operation due to long-term capital underinvestment and product-process mismatch. It is recommended that the plant be phased out of operations over a five-year period with production and staff gradually shifted to a new plant to be built in the Detroit area. Further, it is also recommended that division accounting procedures and evaluation mechanisms be modified to allocate revenues/costs allowing for the synergistic benefits of Detroit’s products, and to recognize inherent manufacturing complexities, respectively.
Issues Detroit’s production is unique when compared to other Wriston plants. Runs are typically lowvolume, involve significant set-up time, and vary significantly due to the sheer volume of different products lines, families and models. It is notable that the Detroit plant is the only plant manufacturing all three product lines: brakes, off-highway and on-highway axles; all other plants produce only a single product line. As seen by its area in Figure 1, manufacturing in Detroit is significantly more complex than other plant.
Also notable in this figure are Detroit’s low return and relatively low sales figures. Capital investment has lagged in Detroit and the equipment is out-dated and inefficient. The general work environment is poor, with leaking pipes and old fixtures. Built in an ad-hoc manner, the layout of the Detroit plant is piecemeal; production typically requires complex flows 1 through dedicated machining areas scattered about various buildings. Both the environment, and other factors seem to contribute to a poorly motivated workforce.
Analysis If used prescriptively, Figure 1 would suggest Detroit and its products be divested, though Wriston’s study group report suggests some products may be profitable if transferred to alternate plants. Shown in Table 2 though, the burden rate for each of these potentially ‘profitable’ groups is well above normal, apparently reflecting the complexity and variability inherent in Detroit’s assigned products. Variability, coupled with low volume, suggests the need for a flexible manufacturing system (FMS); the Detroit shop is instead closer to a flow shop configuration.
This represents a productprocess mismatch. As the majority of the division’s plants are also flow shops, it seems at best uncertain whether any of Detroit’s products could be better-produced at other plants; any product transfers would almost certainly inflate the receiving plant’s burden rates. The possible exception to this is the Fremont plant which has some experience and technology dealing with lower volume runs and product variety. Unfortunately, they are close to capacity. The true value of Detroit’s products (to the division) must also be considered.
Each plant is currently accounted for on a standalone basis, but Detroit’s many low-volume products are in large part supplementary (e. g. replacement parts) to other plant’s high-volume products. While these products are necessary to enable high-volume product sales, they are not necessarily sufficiently profitable to justify their standalone existence. So too, Wriston’s commitment to provide replacement parts seems indicative of the market’s valuation of such and their needed production, even if not directly profitable. Then internal performance measures and accounting systems should allocate a portion of other plant product revenues to Detroit in recognition of their synergistic contributions to those products sale. Aside from the depressing plant state, the demoralized workforce at Detroit can be explained by their long-term underperformer attribution. This negative feedback, coupled with a lack of situational control (inefficiencies relate to process primarily) destroys their intrinsic motivation. So too, the commitment of workers to a single machine minimizes flexibility and skill variations, both otherwise motivating factors.
Local workforce expectations are diminished when successful products are transferred away to other plants. The rewards for Detroit’s efforts are usurped by the receiving plants. Alternatives and recommendations Four alternatives have been considered for Detroit; a summary of the key characteristics for each is provided in Table 1. The fourth option presented involves creation of a new plant, but varies from the third option in that production would gradually rather than immediately shift from the current plant. Based upon the analysis provided above, any new plant should be built around flexible manufacturing processes.
This represents a radical departure from current processes and older members of the workforce may be challenged to adapt; retraining will likely be unpopular and ineffective for these workers. While running two plants in parallel certainly incurs some overhead, it would allow the older workforce to continue the successful manufacture of some Detroit products while naturally retiring from the organization over a five-year period, and younger workers to learn FMS processes and takeover products in a controlled, timely manner. 3
The net present value (NPV) of each option has been calculated and included in Table 1, based on figures from the study group report. Unfortunately, these figures are flawed in the same manner as Wriston’s current performance and accounting mechanisms in that they don’t properly allocate revenue, nor do they recognize inherent manufacturing complexities. The plant closure option’s expected operational gain seems particularly suspect. A better valuation of the new plant options is perhaps given by assuming an FMS-based Detroit plant could achieve burden rates similar to its nearest (process) counterpart, Fremont.
With proper processes and accounting in place, it is reasonable to conceivable they could match Fremont’s burden rate of 3. 65, which, as seen in Table 2, would result in a $6. 37M annual savings and a projected ROA of 20%; the NPV of the new plant and phased-in offerings would then be $31. 5M and $30M respectively. Then, plant closure option is to be rejected due to potential lost synergies and expected productivity losses. Re-tooling fails to address the underlying issues at Detroit and should only be considered if capital constraints preclude either new plant option.
It is recommended that a new plant be opened. While NPV calculations would seem to favour option three, they effectively ignore transitional costs. Given phased transition to a new plant is likely to provide productivity benefits in excess of the $1. 5M NPV differential, it is recommended that planning for the new plant at least carefully consider this option. Word count: 1000 4 Appendix (discussion with 692, 351) Table 1 – Detroit plant alternative assessment matrix
Factor Financial implications [NPV @ 10% discount rate] Marketing, sales and service Social responsibility Operational efficiencies Option 1: close the plant, transfer (some) production Net $2M one-time loss on closing costs/gains. Between $4. 9-5. 6M increase in annual cashflow (see table 2) [$47M] Insignificant direct sales loss; potential significant market disaffection due to lost product support/service Ethical obligation to workers; negative community and press response Transferred products require job shop efficiency – destination plants are primarily high-volume flow shop configurations
Option 2: Re-tool plant (5-10 year bridge) Additional $2M per year loss from tools maintenance, upgrading; on-going performance drag on company [$-7. 6M] Maintain sales and full product line, including support products Defer issues of closure and separation – many older workers will be retiring within 10 yrs Maintenance investments do not address underlying productprocess mismatch; no expected improvement
Option 3: Build new plant Capital intensive – need to consider Wriston cash/profit position; projected negative NPV [$-2M] Flexible manufacturing will allow more cost effective support of current and future low-volume service products Difficult to successfully transition older workers to new processes; likely requires buyout Introduction of flexible manufacturing should significantly improve performance; symbolism of new plant re-focuses and vitalises workforce Option 4: Phased transition to new plant As per option 3; delayed sale of old plant decreases NPV [$-3. 5M] As per option 3
Older workers can be retired out of old plant as younger workers are retrained in new plant As per option 3, with less disruption/lost productivity during transition Figure 1 – (modified) BCG performance matrix for Wriston HED Saginaw (10) Fremont (10) Table 2 – Key financial figures and projections for Wriston Detroit plant Burden by Detroit sub-group Group Group Group 1 2 3 Total 592 516 1630 2738 1260 2. 13 3829 5089 8. 60 2. 3 2. 7 1102 2. 14 3470 2. 13 5832 2. 13 10527 16359 5. 97 4. 9 5. 6 Projections Return on assets (attractiveness) Leba non (2) Tiffin (6) ? Essex (4) Star Sandus ky (5) Mays ville (2) Detroit (20) Lima (4) Notes: 1.
Area for each plant indicates the complexity of operations, where complexity is primarily driven by the number of product families and models. High 2. Market growth and share figures, standard axis for Low High Relative sales within HED (competitiveness) BCG matrices, were not available and have thus been replaced with ROA and relative sales respectively. Low Direct labour Variable mfg. overhead Variable burden rate Fixed mfg. overhead Total mfg. overhead Total burden rate Minimum gain ($M) Maximum gain ($M) Dog Cash cow 2582 4116 3684 7586 7. 14 4. 65 Returns 0. 7 1. 9 1 Potential O/H based on Fremont 9994 3. 65 ROA 20% Savings 6365 5
