Wriston Manufacturing Corporation

Memorandum

To: Wriston Manufacturing Corporation

From: Richard Sullivan (Gabriel Lim Be-­‐Vern 76032135) Subject: What to do with the Detroit Plant

Date: March, 1992

Word Count: 999

Overview

The future of the HED’s1 flagship Detroit plant (Detroit) has been called into question. With declining sales for it’s parent company the WMC2, there has been increasing focus on HED to perform.

This memo will outline the root causes for the failure of the Detroit and will look to provide recommendations for management.

Issues

Operational Inefficiency

Based on Exhibit A, we can see that Detroit has the highest number of product lines (3), product families (20) and product models (120). The high degree of variability has led to a poor return on assets (ROA) and poor sales.

From Exhibit B, we can see that there is a product and process mismatch for Detroit3. Machinery is laid out by function, commitment to flexibility and

[pic 1]

1 Heavy equipment division

2 Wriston Manufacturing Corporation

prototyping shows Detroit is a job shop. Rather a batch process should be used, this has led to operational inefficiencies exhibited by poor sales per employee and a high burden rate (Exhibit A).

Lack of Investment

At WMC plants are measured in silos for profitability, this has led to the downfall of Detroit. Once products at Detroit have reached high volumes they have been transferred to other plants. This has created a vicious circle whereby Detroit has poor operational efficiency due to high variance and of developing prototypes.

Once products reach high volume and efficiency it is passed on to other factories increasing the profitability of other factories’ operations. This method of accountability is flawed as other plants are benefitting from Detroit’s expense.

Within WMC plants fight for resources with the allocation of capital prioritized for profitable plants. Detroit has not been able to compete for investments as it has performed poorly and it manufacturers low volume and dying products. This has led to a lack of new machine tools essential for production, with the average age of machines in Detroit at 33.1 years old versus HED’s average of 15.9 years old.

Human Resource

[pic 2]

3 Being further from the diagonal line implies a mismatch and operational inefficiency

With the expectation of Detroit’s closure looming and the lack of investment funds pumped into the plant its workers have suffered. This has led to high absenteeism, high turnover, lack of motivation and low output per employee. Furthermore, the stigma attached with being a worker at Detroit would be hard to shake off and the culture of lack of accountability has seeped into every worker.

Options

The options that management can take over a five-­‐year horizon:

1. Close Detroit down

This would involve selling off the Detroit plant and firing the employees. Based on the capacity of other plants, Lancaster has been identified to absorb Group 1 products, Lima will absorb Group 2 products and Group 3 products will be discontinued. This option yields the highest NPV (Exhibit 3).

However, the NPV value fails to identify how the transfer of products will impact Lancaster’s and Lima’s overheads. Detroit’s products are low volume and more varied which would not suit these plants’ processes resulting in operational inefficiencies. Furthermore, there would be a loss of customers from the discontinuation of products.

1. Invest in Detroit

By reinvesting in Detroit, there is a negative NPV (Exhibit 3). Detroit would be able to sustain itself for another 5 to 10 years, and it would cost $2 million per year to re-­‐tool. However, the profitability of Detroit would remain the same in spite of the investment.

1. Build a new plant

Building a new plant also has a negative NPV (Exhibit 3), even though cashflows would increase by $3 million a year it is not sufficient to off-­‐set the investment incurred. Even in year 10, there would still be a negative NPV or negative $2 million.

Recommendations

The best course of action would be a delayed version of Option 1: Close Detroit Down. Rather than close it down immediately, the plant should be closed down over a period of 3 to 5 years to allow for time to tie up the following loose ends:

Impact On Other Plants