BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan

HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 0 of 5
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BA/E 296 Global Supply Chain Management

Case 4 Report

Global Plant Location - Applichem

(Harvard Case)

Qian Wang
Tsai-Lan Huang
Xiaoqing Ge

March 15, 2000

BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan
HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 1 of 5
__________________________________________________________________________________

1. How would you measure the productivity at a plant and perform a fair comparison of the
performance of Applichem's six plants?
We assume that the 'Number of People at Each Operation at Each Plant' means 'number of
people for each product type at each plant'. Therefore the product variety difference among
different plants should already be taken into consideration in Exhibit 3.
But the package variety is also an important factor for performing a fair comparison of the
performance, since the package variety difference is very big among all the 6 plants. For example,
Gary is carrying 80 package sizes while most of the others carrying only 1. Therefore we divide
the package labor (in Exhibit 3) by the number of package sizes the plant runs, and calculate the
subtotal of direct labor based on it. By this modified calculation, the plant productivity is as
shown in table 1.2.
Table 1.1

Direct labor

Original package labor in Exhibit 3

Modified package labor

Table 1.2

Mexico Canada Venezuela Frankfort

10.4
5
6.2
14.6
10.4
5
6.2
14.6

Gary
Sunchem
11.3
2.7
0.14125
1.35

Productivity

by direct labor
by direct labor-modified
by indirect labor
by total
by total-modified

Mexico Canda Venezuela Frankfort Gary Sunchem

0.882 0.215
0.318
0.828 0.591
0.278
0.882 0.215
0.315
0.828 1.116
0.304
0.691 0.167
0.373
0.945 0.405
0.241
0.387 0.094
0.172
0.441 0.240
0.129
0.387 0.094
0.171
0.441 0.297
0.134

average
0.518523
0.610116
0.47017
0.243886
0.254144

Similarly, for the manufacturing cost, it is unfair to measure using total manufacturing cost
which includes the packaging cost. The manufacturing cost before packaging is a more realistic
measurement.
2. Why do you think the plant have different productivity?
The productivity depends on the product make-up, equipment efficiency, employee loyalty,
improvements, operator technology, national labor rules, product quality etc. The following table
summarizes the differences in all aspects among the six plants:
Product Make-up
release-ease / other /
packages

Mexico
Canda
Venezuela
Frankfort

1-6-1
1-4-1
1-1-1
2-12-1

Equipment
Efficiency

Employee
Loyalty

Improve
-ment

Operator
Technology

68, dry-78
55
64
71-74, 1961

non-union
-

Bad
Good

ok
low
-

National
Labor
Rules
-

Product
Quality
high
-

BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan
HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 2 of 5
__________________________________________________________________________________
Gary
Sunchem

8-19-80
1-1-2

59-64
57, redesign-69

excellent
non- union

best

excellent

severe

3. A new cost measurement. Set up a linear program using the demand data, transportation and
manufacturing costs and capacities to find the optimal production for Applichem's global
network for 1982.
Because there is no technology break-through from 1977-1982, we assume that the
manufacturing cost is affected by exchange rate and inflation rate only. The exchange rates and
inflation rates vary greatly by country. For example, Mexico has the most dramatic change
between 1982 and 1981, while Japan has the lowest overall inflation rate change, and Venezuela
has no exchange rate change at all. Since all the plants' equipment setup date and manufacturing
starting date are before 1975, the plant's performance (manufacturing cost) should be based on the
modified cost eliminating the effect of outside influence out of control of plants (exchange rate
and inflation rate). For the 1982 manufacturing, if it was performed in 1977-81, the
corresponding cost should be:
year
1982 (check)
1981
1980
1979
1978
1977

Mexico
92.63
216.7922
198.4
162.1102
137.6809
118.8233

Canda
93.25
91.70873
82.52094
73.9437
63.54112
63.51462

Venezuela
112.31
103.9096
91.30894
76.06035
69.66872
64.82935

Frankfort
73.34
73.29401
78.05058
82.23734
74.14891
63.887

Gary
89.15
86.71935
78.40809
67.50937
59.82537
55.66974

Sunchem
149.24
156.7062
167.4084
120.3686
138.1361
114.9789

Frankfort
0.721472
0.603135
0.672756
0.847473
0.819323
0.795764

Gary
0.877
0.713612
0.675838
0.695698
0.661053
0.693412

Sunchem
1.468127
1.289533
1.442975
1.240424
1.526362
1.432156

And the ratio with average cost (among 6 plants) is:

1982
1981
1980
1979
1978
1977

Mexico
0.911234
1.78398
1.710107
1.670581
1.521333
1.48004

Canda
0.917333
0.75467
0.711288
0.762006
0.70211
0.791126

Venezuela
1.104833
0.85507
0.787036
0.783818
0.769819
0.807502

From the ratio comparison, we can see Mexico plant's manufacturing cost is reduced in 1982
dramatically mostly because of the exchange rate and inflation rate change. Overall, Gary did the
best (around 70% of the average, depends on which year we are looking at), while Mexico
manufacturing cost is between 78%-48% higher than average, depends on the year.

The linear programming is formulated as:

high

BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan
HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 3 of 5
__________________________________________________________________________________
6

Minimize:

Subject to:

ci Pi t ij Tij

i 1
j 1

T
j 1

ij

di

Pi k i
6

Pi Tij
j 1

Pi , Ti 0

i (1,6)

where, ci is the manufacturing cost vector, t ij is the transportation cost from site i to site j,
d i is the demand at site i,

k i is the capacity, Pi is the production, Tij is the quantity of

product transported from site i to site j.

We solved the LP using AMPL, and the code and solution is as attachment A. The final
optimal cost is $68,300,900. From the optimal solution, we observed that we will allocate the
manufacturing to the plant with lowest cost first (Frankfurt and Gary). For those with higher
manufacturing cost, then we need to consider the tradeoff between transportation cost and
manufacturing cost. Its cheaper to produce at Canada and Mexico than transfer form other
places, while its cheaper to transfer from other places than produce at Sunchem and Venezuela.
4. Find the optimal production for Applichem's global network of sites for 1982 taking into
account custom duties. What changes do you observe? How different is it from the current
production?
This problem is different from problem 3 only in the transportation cost. The linear
programming is as attachment B. The optimal production at each site and the optimal quantity
transported between each two sites turn out to be exactly the same as we obtained for Question 3.
But, of course, the total cost is increased to $69,693,700 due to the added duties.
5. Find the optimal production for Applichem's global network of sites for 1977 taking into
account custom duties assuming that the demand remains the same as in 1982. What do you
observe?
The only difference between this and the model in Q4 is the manufacturing cost, where the
1977 manufacturing cost should be what we obtained in Q3. The linear programming is as
attachment C. The calculation results shows that the optimal production and import amounts are

BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan
HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 4 of 5
__________________________________________________________________________________

quite different from the 1982 operations. And the total cost is the lowest if we produce at all
plants. Therefore we can conclude that international exchange rates and price volatility (inflation
rate) have tremendous influence on manufacturing planning.
6. Suppose it was known that to operate each site it costs $1 billion to set up and $100 for 1000
pounds of capacity. How will you formulate an integer program to set up a new production
network that determines which locations to setup and how much capacity to have and how
much to produce at each of these plants for 1982 data?
According to the new situation, the integral programming model could be set up as
follows:
6

Minimize:

(ci 100) Pi siU i t ij Tij

i 1
j 1

Subject to:

j 1

ij

di

Pi k i * U i
6

Pi Tij
j 1

Pi , Ti 0 ,

U i binary,

i (1,6)

s i is the setup cost =1,000,000,000, and U i is the binary variable to determine whether to

produce or not. The linear programming is as attachment D.

Consider to the setup cost and scale operation cost, the optimal solution suggests us to
produce only at Frankfurt, Gary and Mexico. We find these plants are again with the lowest
manufacturing cost. But if we remove the capacity constraint of each plant, we will end up with
solution that produce everything in Frankfurt and improve the objective value about 60%.
7. How useful is a model such as the one developed in (5) under (a) uncertainty in demand; (b)
uncertainty in currency fluctuations?
We build the model from Question 3~5 based on assumption of known manufacturing cost,
transportation cost and demand required at different regions. When each of the assumption is in
uncertainty, i.e (a) demand; (b) currency fluctuation, we can do the sensitivity analysis to find
out the point when solutions change and be prepared for it. For example, we may use this model

BA/E 296-1Global Supply Chain Management

Instructor: Jayashankar Swaminathan
HW 3 Atlanta Transportation System
Group Member: Xiaoqing Ge, Sally Huang, Qian Wang
Page 5 of 5
__________________________________________________________________________________

to analyze that when the demand at Venezuela is up to a certain level then we need to setup a
plant there instead of transport from other plants. We can also use this linear programming to
simulate different scenarios and have a whole view of possible results.
8. How could you advice Joe Spadaro to configure his worldwide manufacturing systems?
Due to the different cultural, geographical, political and demographical environment that the
subsidiaries of an international firm operate in, it is very important to set up a rational
performance measurement system taking the above factors into consideration for the management
to have a clear picture of the current operations.
Joe Spadaro should first understand that Applichems six plants have different product focus
and their operation (such as packaging) specifications are different. The market situation and
technology advancement level are also different. The foreign exchange rates as well as the tariff
policies also exert influence on the performance of a local factory. It is therefore not advisable to
use a rigid performance measurements to evaluate the performance of the six plants. Besides,
instead of vertical comparison, we suggest Joe to compare the plants performance with similar
local factories which might be more realistic benchmarks.
Apart from qualitative analyses, some quantitative tools can also be used in analyzing
complex problems that involve multiple variables. For example, computer simulations could be
used to analyze the behavior of an organization under the influence of uncertainties and provide
supporting information for shielding risks. An enterprise-wide productivity study involving all
the six plants has just been completed in Applichem, which has collected valuable data for
quantitative analyses. An enterprise-wide resource leveling and allocation model could be set up
based on the above information.

As indicated above, Linear Programming is especially

applicable to Applichems global network planning, which could solve some of the tactic
problems that Joe is facing.