Memorandum

To: Richard Sullivan

From: 610
Subject: Detroit plant recommendations
Date: 2008/11/22

Wriston’s Detroit plant is no longer a viable operation due to long-term capital underinvestment

and product-process mismatch. It is recommended that the plant be phased out of operations over

a five-year period with production and staff gradually shifted to a new plant to be built in the

Detroit area. Further, it is also recommended that division accounting procedures and evaluation

mechanisms be modified to allocate revenues/costs allowing for the synergistic benefits of

Detroit’s products, and to recognize inherent manufacturing complexities, respectively.

Issues

Detroit’s production is unique when compared to other Wriston plants. Runs are typically low-

volume, involve significant set-up time, and vary significantly due to the sheer volume of

different products lines, families and models. It is notable that the Detroit plant is the only plant

manufacturing all three product lines: brakes, off-highway and on-highway axles; all other plants

produce only a single product line. As seen by its area in Figure 1, manufacturing in Detroit is

significantly more complex than other plant. Also notable in this figure are Detroit’s low return

and relatively low sales figures.

Capital investment has lagged in Detroit and the equipment is out-dated and inefficient. The

general work environment is poor, with leaking pipes and old fixtures. Built in an ad-hoc

manner, the layout of the Detroit plant is piecemeal; production typically requires complex flows

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through dedicated machining areas scattered about various buildings. Both the environment, and

other factors seem to contribute to a poorly motivated workforce.

Analysis

If used prescriptively, Figure 1 would suggest Detroit and its products be divested, though

Wriston’s study group report suggests some products may be profitable if transferred to alternate

plants. Shown in Table 2 though, the burden rate for each of these potentially ‘profitable’ groups

is well above normal, apparently reflecting the complexity and variability inherent in Detroit’s

assigned products.

Variability, coupled with low volume, suggests the need for a flexible manufacturing system

(FMS); the Detroit shop is instead closer to a flow shop configuration. This represents a product-

process mismatch. As the majority of the division’s plants are also flow shops, it seems at best

uncertain whether any of Detroit’s products could be better-produced at other plants; any product

transfers would almost certainly inflate the receiving plant’s burden rates. The possible exception

to this is the Fremont plant which has some experience and technology dealing with lower

volume runs and product variety. Unfortunately, they are close to capacity.

The true value of Detroit’s products (to the division) must also be considered. Each plant is

currently accounted for on a standalone basis, but Detroit’s many low-volume products are in

large part supplementary (e.g. replacement parts) to other plant’s high-volume products. While

these products are necessary to enable high-volume product sales, they are not necessarily

sufficiently profitable to justify their standalone existence. So too, Wriston’s commitment to

provide replacement parts seems indicative of the market’s valuation of such and their needed

production, even if not directly profitable. Then internal performance measures and accounting

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systems should allocate a portion of other plant product revenues to Detroit in recognition of

their synergistic contributions to those products sale.

Aside from the depressing plant state, the demoralized workforce at Detroit can be explained by

their long-term underperformer attribution. This negative feedback, coupled with a lack of

situational control (inefficiencies relate to process primarily) destroys their intrinsic motivation.

So too, the commitment of workers to a single machine minimizes flexibility and skill variations,

both otherwise motivating factors. Local workforce expectations are diminished when successful

products are transferred away to other plants. The rewards for Detroit’s efforts are usurped by the

receiving plants.

Alternatives and recommendations

Four alternatives have been considered for Detroit; a summary of the key characteristics for each

is provided in Table 1. The fourth option presented involves creation of a new plant, but varies

from the third option in that production would gradually rather than immediately shift from the

current plant.

Based upon the analysis provided above, any new plant should be built around flexible

manufacturing processes. This represents a radical departure from current processes and older

members of the workforce may be challenged to adapt; retraining will likely be unpopular and

ineffective for these workers. While running two plants in parallel certainly incurs some

overhead, it would allow the older workforce to continue the successful manufacture of some

Detroit products while naturally retiring from the organization over a five-year period, and

younger workers to learn FMS processes and takeover products in a controlled, timely manner.

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The net present value (NPV) of each option has been calculated and included in Table 1, based

on figures from the study group report. Unfortunately, these figures are flawed in the same

manner as Wriston’s current performance and accounting mechanisms in that they don’t properly

allocate revenue, nor do they recognize inherent manufacturing complexities. The plant closure

option’s expected operational gain seems particularly suspect.

A better valuation of the new plant options is perhaps given by assuming an FMS-based Detroit

plant could achieve burden rates similar to its nearest (process) counterpart, Fremont. With

proper processes and accounting in place, it is reasonable to conceivable they could match

Fremont’s burden rate of 3.65, which, as seen in Table 2, would result in a $6.37M annual

savings and a projected ROA of 20%; the NPV of the new plant and phased-in offerings would

then be $31.5M and $30M respectively.

Then, plant closure option is to be rejected due to potential lost synergies and expected

productivity losses. Re-tooling fails to address the underlying issues at Detroit and should only

be considered if capital constraints preclude either new plant option. It is recommended that a

new plant be opened. While NPV calculations would seem to favour option three, they

effectively ignore transitional costs. Given phased transition to a new plant is likely to provide

productivity benefits in excess of the $1.5M NPV differential, it is recommended that planning

for the new plant at least carefully consider this option.

Word count: 1000

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 Appendix (discussion with 692, 351)

Table 1 - Detroit plant alternative assessment matrix

Factor Option 1: close the plant, transfer Option 2: Re-tool plant (5-10 Option 3: Build new plant Option 4: Phased transition to
(some) production year bridge) new plant
Financial Net $2M one-time loss on closing Additional $2M per year loss Capital intensive – need to consider As per option 3; delayed sale of
implications costs/gains. Between $4.9-5.6M increase from tools maintenance, Wriston cash/profit position; projected old plant decreases NPV
[NPV @ 10% in annual cashflow (see table 2) [$47M] upgrading; on-going performance negative NPV [$-2M] [$-3.5M]
discount rate] drag on company [$-7.6M]
Marketing, Insignificant direct sales loss; potential Maintain sales and full product Flexible manufacturing will allow more As per option 3
sales and significant market disaffection due to lost line, including support products cost effective support of current and
service product support/service future low-volume service products
Social Ethical obligation to workers; negative Defer issues of closure and Difficult to successfully transition older Older workers can be retired out
responsibility community and press response separation – many older workers workers to new processes; likely of old plant as younger workers
will be retiring within 10 yrs requires buyout are retrained in new plant
Operational Transferred products require job shop Maintenance investments do not Introduction of flexible manufacturing As per option 3, with less
efficiencies efficiency – destination plants are address underlying product- should significantly improve disruption/lost productivity
primarily high-volume flow shop process mismatch; no expected performance; symbolism of new plant during transition
configurations improvement re-focuses and vitalises workforce

Table 2 - Key financial figures and projections for Wriston Detroit plant
Figure 1 - (modified) BCG performance matrix for Wriston HED
Burden by Detroit sub-group Projections
Notes:
High

Saginaw Group Group Group

(10)
1. Area for each plant 1 2 3 Total
Return on assets (attractiveness)

Leba
Fremont indicates the complexity of Direct labour 592 516 1630 2738 ROA
non Tiffin (6) (10) Potential
(2)
operations, where Variable mfg.
O/H
? Star
Sandus complexity is primarily
overhead 1260 1102 3470 5832
based
20%
Essex ky (5)
Mays Variable burden rate 2.13 2.14 2.13 2.13 on
(4)
ville
(2) driven by the number of
Fixed mfg. overhead 3829 2582 4116 10527 Fremont Savings
Detroit product families and models.
(20) Total mfg. overhead 5089 3684 7586 16359 9994 6365
Lima (4) Total burden rate 8.60 7.14 4.65 5.97 3.65
2. Market growth and share
Dog Cash cow
Low

Returns
figures, standard axis for Minimum gain ($M) 2.3 0.7 4.9
Low Relative sales within HED High
(competitiveness) BCG matrices, were not 1.9
Maximum gain ($M) 2.7 1 5.6
available and have thus been replaced with ROA and relative sales
respectively.