Wriston Manufacturing Corporation - Final 2
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Industrial Engineering
Date
Dec 6, 2023
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Uploaded by JudgeMagpie3656
Group Case Memo: Wriston Manufacturing Corporation
Introduction & Problem Identification
As the newly appointed Vice President of the Heavy Equipment Division (HED) of the Automotive Supplier Group
of the Wriston Manufacturing Corporation, Richard Sullivan had a difficult decision to make. For several years, the Detroit
plant has performed at a level well below division expectations. Between losing its high-growth potential products to other
plants and its employee morale, it appears that “at best a break-even operation is expected for at least five years if the
operation is left as is.” Sullivan did not believe that the existing plant was viable in the long run, however, he feels a sense of
responsibility towards the company and its employees and customers and wants to ensure that he moves forward with a
short-term plan that looks beyond the Detroit plant to the needs of all key stakeholders. Currently, he weights three potential
solutions: 1. Closing the Detroit plant as soon as possible and transferring its products to other plants, 2. investing in plant
tooling in an attempt to develop a viable operation for at least the next 5 to 10 year period, or 3. building a new plant.
Analysis of Alternatives
Alternative 1: Closing the Detroit plant as soon as possible and transferring its products to other plants
(For the purposes of simplicity, this alternative will be divided into two parts. Part 1 will weight the pros and cons of the
decision to close the plant “as soon as possible”. While Part 2 will analyze the logistics of transferring products from the
Detroit plant.)
Part 1 - Closing the plant as soon as possible
(Expected Cost: $2 million - Appendix 1)
The strongest argument supporting the closure of the Detroit plant (as soon as possible) can be found in Exhibit 2B
where the former’s total overhead burden rate is shown to be the highest across all plants within the Division despite it
bringing in the third-lowest amount in sales. Effectively, this suggests that it is not profitable for HED to continue
manufacturing in Detroit due to the high indirect costs associated with its current manufacturing operations. Sullivan believes
that the high plant overhead can be attributed to the increasing maintenance costs associated with running an old facility
with old machinery. However, based on the information provided in the case, it appears, even at current levels of spending
on maintenance, the plant is unsafe (e.g. inadequate electrical system, leaky water system, column spacing and ceiling
heights compromising storage and machine layout, etc.) and will require major, million-dollar repairs in the near future.
Closing the Detroit will allow HED to avoid this cost. But even if the Detroit plant were to remain open, it is unlikely that
Wriston—with its decreasing sales and tight budget—will approve of investing millions of dollars into renovating a plant that
underperforming and losing its importance within the greater organization. (We determined that the Detroit is becoming
unimportant because investment into the plant has decreased from ~$1.7 million to ~$200,000 between 1980 and 1990.)
Should the plant be closed, it is the its customers and 352 employees that will feel the brunt of the impact. While
Detroit customers’ orders can be supplied by surrounding HED plants (more on this in Part 2), Sullivan needs to decided
what kind of support he will offer his employees. At the very minimum, the company will incure termination costs of around
$6 million. However, as a large majority of the plant’s employees over the age of 50 (Exhibit 5) who have been with Wriston
for decades, Sullivan needs to consider whether to reward their loyalty or not (through providing them with the opportunity to
transfer to another plant or to elect an early retirement). He should also factor in that these workers are approaching
retirement age and thus may have a difficult time finding employment elsewhere. But is it fair for HED to only provide this
level of support to their senior employees? On one hand, the younger employees have not shown Wriston the same level of
dedication as the older generation nor will they experience ageism while job hunting, on the other, does the company have a
moral obligation towards their future?
Part 2 - Transferring products from Detroit to other plants
(Expected Cost: $25 million - Appendix 4)
Transferring products from Detroit to other plants will ensure that HED continues to meet customer demands while
cutting down on costs. Detroit would transfer its product to plants that are more modern and specialized than itself,
generating direct labour savings (due to better machines and more productive work forces), saving on material’s cost (due to
lower scrap rates and higher-volume purchasing) and overhead (as many of these other plants have significantly lower
burden rates than Detroit). As proposed in the case, two-thirds of on-highway axles can be transferred to one of Fremont,
Maysville, or Lancaster. Based on our analyses of the three options (Appendix 2), we believe it would be best for the
Lancaster plant to inherit the production of these products. Not only does it provides the best return on the initial $17 million
investment at $37 million, but because it is a new plant there is no need to consider the operational and logistical impacts of
taking on new products. As for the off-highway axles, we have the option to transfer two-thirds of products to either Saginaw
or Lima. Having calculate the returns (Appendix 3), Saginaw is the best choice economically. Additionally, as Saginaw is a
lower burden plant (Exhibit 2B) than Limba, we believe it is better equipped, capacity wise, to absorb the additional products
from Detroit.
The biggest downside to this alternative is that it does not economically transfer of all of products from Detroit.
There
is still one-third of the on-highway axles and one-third of the off-highway axles left, not to mentioned the
service/replacement parts. If HED drops these products, cash flows would increase approximately $1.9 million. However,
this would mean that we will not meet customer demands. While is exact cost of lost sales cannot be quantified with the
given information, it is important to note that unfulfilled demand will damage our company’s reputation and burn bridges with
certain clients. As Wriston can afford to do neither, the business would have to look for other ways (such as outsourcing, or
building a new low-volume plant) to make up for the discrepancy.
Alternative 2: Investing in plant tooling in an attempt to develop a viable operation for at least the next 5 to 10 years
(Expected Cost: $10 - $20 million + the future cost of closing down/future cost of new plantn - Appendix 5)
As a viable alternative, Wriston Manufacturing Corporation could invest in Detroit plant's tooling and infrastructure
to revive operations as a short-term solution. This new influx of investments may help bridge the technology gap at the
Detroit plant and enable it to produce products at par with other plants without incurring higher costs. Additionally,
employees may also become more excited and energized if they realize that upper management cares about their work,
increasing morale and (hopefully) decreasing absenteeism and turnover. On the other hand, with declining sales and low
gross profit, investing in the plant may not be useful if Sullivan cannot attract more customers and reduce overhead costs.
Moreover, should the Detroit plant purchase new machinery, it may not live its full lifespan as machinery lasts, on average,
33.1 years (Exhibit 4) while the Detroit plant would only remain open for the next 10 years at most. It is also important to
note that because this alternative only provides a short-term solution, in 5-10 years Sullivan will still have to make a decision
as to close down Detroit or not.
Alternative 3: Building a new plant
(Expected Cost: $32 million - Appendix 6)
Wriston also has the option to invest $32 million into building a new low-volume plant for the division. Assuming
that this new plant increases cash flows by $3 million, it will take approximately 10.67 years before the company breaks
even on this investment (Appendix 7). While this option would help HED meet customer demand and drive the overhead
costs down significantly (as it is a new facility with new equipment) , there is a lot of uncertainty surrounding this alternative
which makes it hard to evaluate. For instance, how to we deal with the production of products during the time between the
closure of the Detroit plant and the completion of the this new plant? Do we drop these products? Do we outsource their
production? How much will these options cost? What’s the estimated lifespan for this new plant? It will take over a decade
before the company breakseven of this investment, will the plant last that long? Moreover, the Detroit plant was plagued with
a lot of morale-driven issues such as absenteeism and high turnover, what is the likelihood that HED will be able to avoid
this at the new plant? And assuming that the morale issue can be resolved by implementing a 4-day workweek as
suggested by the Union letter (Exhibit 6), what is the impact of this decision on the company? In essence, the challenge with
this alternative is that it is high investment and very risky.
Recommendation:
Based on our analysis of available alternatives, we recommend Wriston Manufacturing Corporation to close it
Detroit plant within the next year and transfer two-thirds of their on-highway axles to Lancaster and two-thirds of their
off-highway axles to Saginaw. The production of all other products should be outsourced. The business will pay all its
employees severance and provide them with an opportunity to transfer to another Wriston plant and integrate into teams
with much more positive cultures.
Implementation:
As soon as possible, Sullivan should annouce that the Detroit plant will close within the next year. This needs to be
made clear to employees as well as customers. Communications to employees should include details about conditions
surrounding their severance package as well as the offer to transfer to another plant. This ensures that employees will be
able to plan their finances accordingly and not feel as if their company has abandoned them. On the other hand, being
transparent, timely, and responsive with customers will ensure that Wriston retains their client’s trust (and money) during this
transitionary period. As the company’s decision to close Detroit may disrupt the client’s supply chains, Sullivan can also
consider offering incentives like discounts and special pricing to maintain strong relationships. In the long-run, Wriston will be
able to ensure that all demand is met through a combination of transferring products to different plants and outsourcing.
While this is costly, it is also necessary because Wriston cannot afford to lose any clients. Aside from all these benefits, this
solution balances cost and risk. For an initial investment of approximately ~$27 million (cost of closure + cost of transferring
products), we will be able to increase cash flows by, an almost guaranteed, ~$3.7 million ech year (earnings from Lancaster
+ earnings from Saginaw). This means we would break even in about 7.3 years, which is a better outcome than the other
alternatives.
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