Wriston Report

Memo

To: John Carter

From: Richard Sullivan

 Subject: Detroit Plant Proposal

Dear John

I have been engrossed in the Wriston’s Detroit plant operations for quite some time and I would like to address your queries to the best of my capacity. I genuinely feel that Wriston’s Detroit plant is no longer a viable operation due to lack of capital investment in this plant over a long time and product-process gaps that have piled up over years. I conducted a feasibility study to see all possible options and to analyze our best way forward. I would like to highlight some of the issues we identified in this operation as well as the steps we took to decide my recommendation which is to close down the Detroit plant and to move the Group 1(two thirds of the on-highway axles) product line to Lancaster and move the Group 2 (two thirds of the off-highway axles) product line to Lima.

Key Issues

Operational Inefficiency: Based on Exhibit 2A and 2B, it is very evident that the Detroit plant has the highest number of product lines – 3(whereas all other plants only concentrate on a single product line), product models -120 and product families -20. This, along with the fact that most of their equipment is either outdated or inefficient, has led to the plant spreading itself too thin and not being able to achieve a good ROA. Their ROA is one of the lowest at about -7%. Also compared to other plants Detroit has the highest overhead but one of the lowest sales.

There also seems to be a process and product disconnect in our Detroit plant operation. The set up time for the different machines and processes involved in the manufacturing of the axles can run up to 10 times longer than the actual manufacturing of the batch parts. There should have been a more continuous line of manufacturing to make the operations efficient.

No investment in this plant for a long time: As the high/medium volume products have always been transferred from Detroit to other plant, the investment dollars were also diverted to the newer plants. Detroit got left behind. The machines are inefficient and outdated with average age of machine tools being around 33 years as opposed to the standard 16 years in HED industry. The buildings within the plant were also built in piecemeal unfashioned way that compromised the machine layouts and in turn contributed to inefficiency.

Demoralized workforce: The general work environment of our Detroit plant is depressing with leaking pipes, inadequate electric supply etc. That along with the above factors has contributed to an unmotivated workforce. The employee age groups are highly polarized with majority either under 30 or over 50. The under 30 employees has no attachment to the firm and frequently performs below standard thereby dragging down output of the older group as well. The employees themselves believe that the corporate expectations from them are low and perform accordingly. Absenteeism and attrition also are highly prevalent across the plant. The culture of lack of accountability has seeped into every employee.

Analysis

We analyzed three potential options available to us – Either we close the Detroit plant and transfer some of its product  lines to other plants, or we invest in retooling and refitting the Detroit plant to bring it up to perform to acceptable standards or we open a new plant at Detroit and close off this existing one.

Option 1 – Close the Detroit plant and move its product lines to newer plant

After performing a NPV analysis (see Exhibit 1), it was  clear that if the plant is closed and Group 1 products are moved to Lancaster and Group 2 products are moved to Saginaw and Group 3 products are closed down completely, we have a net present value of approximately 4.5 million dollars. However the case, does say that Saginaw is currently operating at close to 94% capacity so we also evaluated the NPV of moving the product line 2 to Lima which comes close to 2 million dollars This option, though less attractive than moving the Group 2 operations to Saginaw, may be a more viable one. Of course we have to bear the risk of losing some customer base to competition. However, if we give our customers enough notice and direct them to our other plants we may be able to save some of the relationships. There is also a high cost associated to terminating our employees. We should bear in mind however that with movement of Group 1 and 2 product lines to Lancaster and Lima, there will be additional jobs opening up in those places and we may be able to direct some of our more valuable and experienced employees to those locations.