Plastech, Inc.

Chung Ngoc Hieu – Mai Thanh Thao

CASE STUDY /P.429        PLASTECH, INC.

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Summary

PLASTECH, INC.

Plastech was a producer of plastic pellets for use as raw material in molded plastic products. It was primarily a ser ice firm. Its niche was that it has the speciali!ed e"uipment and e#pertise for $lendin% a ariety of in%redients.

It operated si# machine&paced $lendin% lines which had feedin% hopper, $lendin% machine, water $ath, and pelleti!er. 'thers two lines had additional speciali!ed e"uipment to properly handle ha!ardous chemicals.

The orders were in small "uantities $ecause customers did not want to (eep hi%h in entory. Thus, that necessitated relati ely small production $atch si!es and a lar%e num$er of setups. In )**+, the a era%e $atch si!e was ) ,--- pounds and there were +- setup. The a era%e setup time was + hours.

In )**+, it lost + si%nificant customers which comprised /0 total pounds of the plastic. Plastic then de ised a new mar(etin% strate%y see(in% additional wor( from all of its e#istin% customers and $roadenin% its product line.

To meet the challen%es arose in )** , a third shift was added to meet the increase in production and setup olume.

Althou%h the firm had increased re enue +-0, the profit were down 1 0 from fiscal )**+.

Smith, operation mana%er, wanted to find out the reasons for this.

Question 1: Which factors contributed to the decline in profits?

Answer:

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The factors contri$uted to the decline in profits2

1. T e e!"ense #$ %&re'( )a*#r &n'reas&n+

The e#pense of direct la$or increased from ) .10 to )1.30. The direct la$or was resposi$le for all production and setup. And it ali%ned with the addition of the third shift.

Pa%e ) of 1

Chung Ngoc Hieu – Mai Thanh Thao

In fiscal year )**+, )**  we can see the details of some fi%ures as follow2

The e#pense of direct la$or in fiscal year

E45L6)**+ 7 3+1,---8 ,3/ ,+11 7 ) .10

E45L6)**  7 9*+,---8 ,+1 ,+11 7 )1.30

Another way to see the increasin% of e#pense of direct la$or in fiscal year is computin% it on each

unit $y de i ed with production.

E45L6)**+ 7 3+1,---8 ,)* ,+1- 7 -.)+/

E45L6)**  7 9*+,---83,-/*,)9  7 -.)3/

2. T e se))&n+ e!"enses &n'reas&n+

The sellin% e#penses increased from ++.*0 to +9.*0.

In fiscal year )**+, )**  we can see the details of some fi%ures as follow2

The sellin% e#penses in fiscal year

E4S6)**+ 7 1)*,91/8 ,3/ ,+11 7 ++.*0

E4S6)**  7 ),)**, //8 ,+1 ,+11 7 +9.*0

'r we can see the chan%e $y de i ed the sellin% e#penses with production.

E4S6)**+ 7 1)*,91/8 ,)* ,+1- 7 -.)*3

E4S6)**  7 ),)**, //83,-/*,)9  7 -.+ 9

. A-era+e sa)es "r&'e %r#""&n+

A era%e sales price droped a little from -.13- to -.1 3. As a result, the net profit after ta#es felt

the amount of :+3,        / in )** .

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Conclution2

The increasin% in direct la$or and sellin% costs and the decreasin% in sale price are the reasons e#plain for the decline in profits.

Question 2: What did Lincoln Smith find when he computed the direct and indirect labor

productivity figures?

Answer:

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In fiscal year )**+, )** we can see the details of some fi%ures as follow2 ;atio of producti e time to total time in fiscal year

Pa%e + of 1

Chung Ngoc Hieu – Mai Thanh Thao

;)**+ 7 )/, +-8+ ,--- 7 /10

;)**  7 )1, /-8 /,--- 7 3)0

The ratio $etween direct > indirect la$or producti ity as follow2 5irect la$or producti ity

)**+ 7 3+1,---8)13,--- 7 +.13

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Indirect la$or producti ity

5irect la$or producti ity

[pic 6] )**  7 9*+,---8+++, +9 7  .3/

Indirect la$or producti ity

The differential amount is -.9)

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Linlcon Smith sees the increasin% num$er of direct la$or producti ity from 3+1,--- to 9*+,---

• ? 06. The indirect la$or producti ity increases )90.

Pa%e        of 1

Chung Ngoc Hieu – Mai Thanh Thao

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QU  S!"#$ %: "dentify and describe the root cause of the decline in operating profits&

'ecommend a plan of action for plastech&

Pa%e        of 1

Chung Ngoc Hieu – Mai Thanh Thao

There are three pro$lems which ma(e operatin% profit is down2 ). Low %ross profit mar%in

+. Poor e#pense control

. Insufficient re enue olume 5etails2

1. L#w +r#ss "r#$&( mar+&n  1992 199 0

In )**+, the annual %ross profit is ),9-*, +1:, and in )** , the %ross profit is increasin% than last year + ,*// 4 ) 06. @ut, if we ta(e a loo( in the total percenta%e, this alue will $e minus.