Victoria Chemicals

Victoria Chemicals, a major competitor in the chemical industry worldwide, was the leading producer of polypropylene. Polypropylene is a polymer that is commonly used in a variety of products ranging from carpet fibers to auto parts. To increase the supply to meet demand, Victoria Chemicals opened two plants in 1967 located in Merseyside, England and Rotterdam, Holland. The two plants were identical in scale and design. The production of polypropylene pellets begins at Merseyside, with a refined gas received in tank cars known as propylene. The production process consisted of two stages: In the first stage, the gas form of polypropylene was combined with a solvent in a pressurized vessel and then concentrated and collected in a centrifuge. Next, the polypropylene was mixed with stabilizers, modifiers, fillers, and pigments in order to create the final product, a plastic pellet, which is shipped to the customer. The company positioned itself as a supplier to customers in Europe and the Middle East.

In Victoria Chemicals market region, there were many competitors, including some small producers. Victoria Chemicals was one that operated at different cost levels, while some of the competing plants were able to produce more output at much lower costs. Exhibit 1 shows the different plants and their associated cost in Victoria's market region.

Location Built Annual Output

(Metric tons) Production Costs

CBTG A.G Searbrun 1981 350000 1.00

Victoria Chem. Liverpool 1967 250000 1.09

Victoria Chem Rotterdam 1967 250000 1.09

Horsche A.G Hamburg 1977 300000 1.02

Montescassino SpA Genoa 1961 120000 1.11

Saone-Poulet S.A Marseille 1972 220000 1.19

Vaysol S.A Antwerp 1976 450000 1.06

Next 10 largest 450000 1.19

Victoria Chemicals began to experience decreases in the financial performance from 2006 to 2007. Their earnings had dropped 38% from 250 pence per share to 180 pence per share, and they were under pressure from investors to improve their performance. The decline of the company's value was associated with the production process and the facilities. The productions methods were out of date and require more laborers in comparison to the methods that other plants were using. In addition to the lack of newer technology, the manager that was running Merseyside had increased output by cutting expenditures to only covered maintenance for the last five years.

Furthermore, the products produced at Victoria Chemicals were considered a commodity. Since they did not have differentiated products, the only way to remain competitive and gain market share was to maintain prices that the other plants could compete with. Both Merseyside and Rotterdam are outdated in technology and processes, which required more labor than there competition. Since they had a high dependency on the labor, they incurred high production costs.

With all the issues stated above, plant manager Lucy Morris, decided to seek funding to improve the company's financial health. Enacting a modernization program would not only help their financial state, but it would also allow them to maintain a competitive position in the industry. Lucy Morris and her controller Frank Greystock proposed a modernization project that would cost GBP of 12 million to revamp the polymerization line. The project would renovate and reduce the polypropylene production done at Merseyside, which would in turn make up for the delayed maintenance. As mentioned in the case, the project details were as follows:

* Relocating and modernizing tank-car unloading areas, which would enable the process flow to be streamlined

* Refurbishing the polymerization tank to achieve higher pressures and thus great output

* Renovating the compounding plant to increase extrusion throughput and obtain energy savings

However, there were concerns associated with the proposed project. Some of those concerns were that Merseyside