INTRODUCTION

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Focus

MICHIGAN MANUFACTURING CORPORATION

Multi-billion dollar corporation

Consists of multiple independent divisions

Sales declining over the past three years.

Pressure on high performing divisions.

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HEAVY EQUIPMENT DIVISION

Manufactures Large Axles & Brakes Target market - N. American transportation

industry. Business driven by marketing of improved

products. Headquarters – Pontiac Ten* plants under the division Facing monetary issues at various plants at

various time frames. Maysville 1984-85, Lima, Saginaw, Pontiac - 1987

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PONTIAC PLANT

Division’s first plant (1914) All new projects start here, subsequently

moved out – In 1947, brakes transferred from Pontiac to

Sandusky. In 1952, highway rear axle from Pontiac to Tiffin.

Left with low volume products from both the product lines

On-highway – 60%, Off-highway axles – 40%

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VolumesHi Lo

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Pontiac Plant (-7%)

Complexity

Product Families/

Assemblies

two

Lebanon, PA (37%)

Fremont, OH (56%)

COMPLEXITY!

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Pontiac Plant(6.1)

Burden R

ates

Product Families/

Assemblies

two

Lebanon, PA(2.6)

Fremont, OH(3.7)

BURDEN RATES!

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VolumesHi Lo

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Pontiac Plant(6.1)

Burden R

ates

Product Families/

Assemblies

two

Lebanon, PA(2.6)

Fremont, OH(3.7)

BURDEN RATES!

OPERATIONS ROLE AT PONTIAC PLANT

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Externally

Neutral Supportive

BMN 201 10-11 HP Wk 2 HP Strat v0.3 8

Stage 1Objective is to minimizethe negative impact of

‘Operations’

Stage 3Objective is for ‘operations’to provide credible supportfor the business strategy.

Stage 2Objective is for ‘operations’

to help the business maintain parity with its

competitors.

Stage 3Objective is for ‘operations’

to provide a source of competitive advantage.

PONTIAC PLANT

FRAMEWORK ANALYSIS

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CORPORATE POLICY

Plant used as test grounds : New products were developed and once they have reached higher sales volume , they were transferred to other plants.

Plant used to support the finished/dying products, those which were the end of the lifecycle

Employees divided in groups under 30 and above 50 , middle age less significant .

Investment in machines and plant development low.

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FINANCIAL POLICY

Low Investments, depreciation high (D/I = 4 in 1987)

High Fixed burden Rate ,Overhead Costs of products , no longer produced in the plant also added to production cost

Investment decided on ROA, and sales volume .

Cost analysis done based on sales data , plant dynamics not considered into account when calculating for individual units.

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MANUFACTURING POLICY

High setup time . Average plant machine life is 33 years ,

across the company average life across division 15.9 years .

Process based layout with products moved from one department to other .

Production in low volumes and higher variety, some of the products are no longer sold actively mainly serving as replacements.

Primary Responsibility for “service”/replacement parts for all the division product lines

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PROBLEM FORMULATION

On the outset: Pontiac plant is making losses

Looks bad on the balance sheet (Should it be responsible for its own P/L given that it is

not independent in its decision making).

Why is it making losses? High burden costs

High overheads High setup times w.r.t run times, the ratio can be upto

10 times Accounting practices not aligned with realized

operations startegy

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WHY ARE THE BURDEN COSTS HIGH?

Small production volumes No “star” products manufactured in the plant. Manufacturing of service (replacement) parts

for product lines supported by other plants Supports product lines discontinued from

other sites, i.e. treated as a dumping ground Old equipment, scarce modernization /

upgrades Av age 33.1 years vs 15.9 for the division (and this

includes Pontiac!!!) Carries the burden of costs (like pension) for

development of star products but gets no benefit.

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WHY ARE NO “STAR” PRODUCTS PRODUCED HERE

Over the years the plant evolved a “Process Layout” unsuitable for mass production.

Mass production was moved out to plants custom built for the specific product lines.

Old equipment, less efficient than custom equipment available at other plants

A strong management thought process and “financial” justifications for manufacture of high volume products in “custom-built” plants.

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WHAT THE IMPACT ON/FROM LABOUR

The employee morale is low, rumors about imminent plant closure. Absenteeism is high. High turnover.

Middle age-group (likely middle-management) is under staffed.

Serves as a “training ground” for middle managers who then give their best to other plants and return in the retirement age.

Largely two groups, youngsters and oldies. Leads to friction at the workplace.

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THE VICIOUS CIRCLE OF LOW PRODUCTIVITY

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Low volumes

Low profits

Low budget for upgrades

Older Equipment

Low production capabilities

SUGGESTIONS AND RECOMMENDATION The realized strategy of treating Pontiac as a

R&D facility should take center stage as the intended strategy.

TRANSFER PRICING must be used while moving product lines across plants. Replacement parts and other low profit operations

should moved out, possibly outsourced. Till the plant returns to profitability, the top

management should distribute the losses over other facilities

Equipment must be upgraded Middle management must be strengthened by

bringing in people from other plants.

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QUESTIONS

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APPENDIX

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Y Axis : Profit X axis : Decrase in Fixed OH (Percentage

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RANDOM THOUGHTS

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IS THE CASE-WRITER BIASED?

From the tone the case writer takes, the problems are straightforward. It actually looks like a guided tour. It is either a very well written case that captures

the crux of the problem or is a retort aimed at the process that’s trying to kill the plant.

The problems give a feel of a federal structure where no one looks at the “bigger picture”.

Does not give much insight into the corporate thought process.

No light on the possibility of “licensing fees” for transfer of successful products to other facilities.

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