Applichem runs six plants in different nations producing identical chemical products. The objective of this case study is to allow students to think about relevant costs in the given industry environment, compare costs and productivity across plants and to identify the reasons for cost differences when producing the same product. Lastly, students may begin to think about options to ensure that productivity improvements at one plant are translated to other plants as well.
Harvard Business School (685051-PDF-ENG)
Feb 22, 1985 (Revision: Jul 1, 1986)
Case questions answered:
- Compare the performance of Applichem’s 6 Release-ease plants. Why were some plants “better” performers than others?
- How would you advise Joe Spadaro to configure his worldwide manufacturing system?
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Case answers for Applichem (A)
This case solution includes an Excel file with calculations.
Compare the performance of Applichem’s 6 Release-ease plants. Why were some plants “better” performers than others?
Average Yield on Raw Material A: The key performance measure for the comparison of the different plants of Applichem is the average yield on raw material A that accounts for the physical or any other loss in the manufacturing process of the final product. Higher losses in the process indicate inefficiencies that eventually result in a low Average yield on raw material A.
As stated in the case, there are three categories of plants i.e. high, medium and low volume producers with an average yield on raw material A of 98-99%, 94-95%, and 91-92% respectively. For the average yield measure, Frankfurt was at the apex with 98.9% fulfilling the average yield specifications whereas Gary, a medium plant, is at a yield of 90.4 that does not lie under the medium plant bound of 64-95%. All other plants satisfy their corresponding ranges of an average yield of raw material A in the final product as shown in Exhibit 1.
Capacity Utilization: The comparison between plants can also be done by calculating the Capacity Utilization that has been calculated in Exhibit 2. Capacity Utilization shows the Plant’s efficiency by which the capacity is used for the production of finished goods. So, higher capacity utilization shows a higher efficiency of the plant. According to Table 2, Venezuela has the highest capacity utilization while the lowest is that of the Canadian plant, leaving others somewhere in between these two extremes.
Fixed and Variable Cost: The comparison of Applichem plants by total cost is not an appropriate measure for performance because of different raw material costs, labor costs and capacities of each plant. Therefore, the solution to this limitation is to compare the plant’s performance on the basis of fixed and variable costs (Exhibit Table 3). We included the raw material, ‘direct labor, salaries and fringes’ and ‘package, load, and ship’ in the variable cost. For a good comparison, packaging cost should be omitted from the variable cost comparison because Gary plant packages 80 different sizes and therefore, it has high packaging cost which is relatively justified. After elimination of packaging cost, the Gary plant seems…