Harper Chemical Company

HARPER CHEMICAL COMPANY

The Harper Chemical Company (HCC) was a medium sized producer of industrial

chemicals, which sold its products primarily to customers in the paper industries and the paint industries. In 1980, HCC diversified into the production of a mineral called Dominite. By acquiring the Dominite activities, HCC hoped it would yield at least 15% return on investment after taxes. In early 1980, the HCC board of directors authorised the construction of a processing plant having a 40 000 tons capacity at a cost of $4.5 million. As of the end of 1985, the Dominite operation had accumulated a $75 million before-tax loss and the general management of HCC is confronted with the decision to re-launch or to sell the Dominite operation.

The product benefits of Dominite

Dominite can be used as raw material as a replacement for talc in two major

industries: the ceramic (55%) and the paint (35%) industries. Dominite can also be used in a wide variety of products (10%) such as cement, insulating materials, plastic floor tiles and certain types of glass.

The ceramic industry

Dominite has a potentially large use as a replacement for talc in making ceramic

wall tiles. It could be used in proportion from 2% to 70% of the tile body weight depending on the other materials used, the process employed and the type of tile desired. The strength of the tile could be increased and manufacturing breakage reduced by using Dominite instead of talc.

In addition, a Dominite tile had minimal moisture expansion, which lessened the

tendency for the glaze to crack in use. Tiles containing 20% or more of Dominite had a low coefficient of thermal expansion, which allowed rapid heating and cooling without cracking. Therefore, tiles made with Dominite could be fired in the kiln in less time than talc tiles (1/2-15 hours for Dominite tiles compared to 18-40 hours for talc tiles). Tiles made with Dominite could also be fired at lower kiln operating temperatures than talc tiles (1800Ð'oF versus 2100Ð'oF). For these reasons tile manufacturers using Dominite could effect fuel economies and could increase the firing capacity of their kiln. Kiln capacity usually determined total capacity in a tile plant, and the cost of the kiln represent up to 25% of the total capital cost of the plant. Firing costs, including fuel, labour and depreciation typically amounted to 25% of the cost of goods sold. The cost of firing a Dominite tile at 1800Ð'oF for 15 hours was about one third of the cost of firing a talc tile at 2100Ð'oF for 40 hours. In 1986, one medium sized tile company, using about four tons of Dominite per day, reported savings of $300 per day in fuel costs alone after shifting from talc to Dominite.

To convert from using talc to Dominite however, tile manufacturers had to replace

their dies at a substantial cost to allow for the differences in shrinkage factors for talc and Dominite tiles. In some instances they also had to develop new set of glazes. One large tile manufacturer, using 40 000 tons of Dominite per year, reported that a new set of dies would cost $1,500,000. Smaller tile producers would incur proportionally lower die investment costs.

The paint industry.

Dominite could also be used as an extender pigment or a filler in making paints.

The cost of the extender pigment accounted for up to 5% of the total manufacturing cost of the paint. In this application, Dominite competed against talc and calcium carbonate (whiting), a lower-cost material than talc. Dominite could be used as an extender for house paints and as white prime pigment; it has high brightness, and it produce a paint with superior durability. Dominite had lower oil absorption characteristics than talc, which meant that less of the expensive vehicle was needed. For this reason, it was possible to reduce manufacturing costs by 12-18 cents per gallon by using Dominite. Dominite was harder than talc and more abrasive; in some cases it made scratches in mixing equipments, thereby shortening their technical life.

The market potential

Robert Moore, a chemical sales engineer, and John Moe, a production engineer,

received from General Management the assignment to appraise the market potential for Dominite and to investigate production and capital requirements.

In March 1980, Moore and Moe reviewed the information collected by the market

research and, using their best judgement, concluded that Dominite sales could be 55,000 tons a year by 1983. Talc and whiting sales for 1983 to both the paint and ceramic industries were forecast at 1.1 million tons. They further estimated that 55% of Dominite sales could be for ceramic applications, with 70-85% of that amount being sold to wall tile manufacturers. The paint industry was expected to account for 35% of Dominite sales and the remaining 10% of sales was to come from the use of Dominite in a wide variety of other products.

The ceramic industry was rapidly expanding with wall tile manufacturers leading

the trend: 4 large tile companies had 33% of the market, 12 medium-sized companies had another 33% and the remaining portion was divided among 30 small companies. The paint industry was dominated by 10 large companies, which had 25% of industry sales. 1,500 smaller companies accounted for the remaining