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Fonderia Di Torino S.P.

Cabreros | Dela Isla | Elefan | Eugenio | Siy | Villanueva | Tansiongco

EXECUTIVE SUMMARY Fonderia Di Torino is an organization that specializes in the production of precision metal casting for the original-equipment manufacturers in the industry of automotive, aerospace and construction. Presently, it is faced with a dilemma of purchasing a new automated molding machine or just retain their semi-automated machines in the plant. The latter is more labor intensive, needing 24 operators in a day. On the other hand, labor costs can be saved with the new automated machine which only needs two operators a day. However, although the company can benefit from the efficiency of the purchasing of the new machine, there are labor implications because there will be unnecessary labor force that needs to be wither laid off or transferred to a much lower-paying janitorial position. Fonderia Di Torino now has to measure whether the benefits can outweigh the costs of buying the new automated machine. In order to do this, the group took on the point of view of the managing director, answering the problem whether to push through with the investment or not. The case was analyzed using financial/economic frameworks (cost comparison, hurdle rate, net present value) and non-financial analysis as well. One major assumption of the group was the case happened in the Philippine setting, to have a better analysis and comprehensive recommendations especially in the sensitive issue regarding labor regulations.

I. CASE CONTEXT Founded in 1912 by Benito Cerini, Fonderia di Torino was created to produce castings for the armaments industry. But in the 1930s, the company expanded to the production of precision metal casting for the automotive industry. Since the expansion, the company has been a stand out due to the quality of its products. And because of this, Fonderia di Torino captured the market of the OEMs (original equipment manufacturers). The confidential market-demand information that Fonderia di Torino received from the OEMs helped increase the precision of production scheduling and the company received relatively long-term supply contracts from the OEMs. In November of 2000, the companys managing director, Francesca Cerini, was faced with the decision of purchasing an automated molding machine called the Vulcan MoldMaker to replace the existing the semi-automated molding machine. The old molding machines were more labor intensive and hazardous to the health of the workers, while the new molding machine has a higher productivity and efficiency rate. However, a major factor that may hinder the purchase of this new machine is the collective bargaining agreement between the company and its labor union. The company must now decide whether to push through with the purchase or not. II. POINT OF VIEW AND PROBLEM STATEMENT Employing the point of view of the managing director, the main problem that should be addressed is whether to approve the major investment of upgrading the current molding machine to the Vulcan Mold-maker machine. The following questions should be answered:

What are the economic benefits of acquiring the Vulcan Mold-maker machine? What are the non-financial benefits of acquitting the Vulcan Mold-maker machine?

III. FRAMEWORK OF ANALYSIS In order to answer the problem, the following were the methodologies used to analyze the case: A. Economic analysis 1. Cost comparison of the two molding machines 2. Hurdle Rate (WACC) 3. Net Present Value

B .Non-financial analysis 1. Advantages IV. ANALYSIS A. Economic Analysis 1. Cost comparison of the two molding machines Old molding machine: Number of machines Purchase price Depreciation Average depreciation Annual depreciation Useful life Sales offer Workers per shift Hours per shift Working days in a year Hourly rate Maintenance worker per shift Hour per shift Working days Hourly rate Maintenance supplies cost Electrical power 6 $ 415,807 $ 130,682 $ 47, 520 $ 69,301 6 years $ 130,000 12 8 210 days $ 7.33 3 8 210 days $ 7.85 $ 4,000 $ 12,300

Cost of workers

= workers x hour x shifts x working days x hourly rate = $ 295,546.60

Cost of maintenance workers = workers x hour x shifts x working days x hourly rate = $ 39,564 Total recurring cost = cost of workers + cost of maintenance workers+ maintenance supplies + electrical power = $ 351,409.60

New molding machine Number of machines Purchase price Depreciation Useful life Skilled operator Hours per shift Shifts Working days in a year Hourly rate Contract maintenance Electrical power Savings annually 1 $ 1,010,000 $ 126,250 8 years 1 8 2 210 days $ 11.36 $ 59,500 $ 26,850 $ 5,200

Cost of workers

= operators x hour x shifts x working days x hourly rate = $ 38,169.60

Total recurring cost = cost of workers + cost of maintenance workers+ maintenance supplies + electrical power - savings = $ 119,319.60 Based on the cost comparison between the two machines, the new molding machine will generate lesser annual recurring cost compared to the old molding machine. The improvement in the labor efficiency is the major contributor to the cost difference of the two molding machines. 2. Hurdle Rate WACC = (E/V x Re) + (D/V x Rd) x (1-Tc) Re = Rf + B(Rm-Rf) =5.3%+1.25*6% =12.8% Rd Tc E/V D/V = 6.8% = 43% = 67% = 33%

WACC = (67% x 12.8%) + (33% x 6.8%) x (1 - 0.43) = 0.08576 + (0.02244 x 0.57) = 9.86%

3. Net Present Value In order to calculate the initial outlay of a Vulcan Mold-maker machine we need to have the cost of buying a new machine but we also need to calculate the current after-tax market value of the six old machines and by subtracting the costs on the revenues we get the net outlay for the new machine which is the initial outlay. B. Non-financial analysis Advantages One of the notable advantages of buying the new machine is the improvement in quality and decrease in the rejection rate of the products. It can also increase the capacity to produce, making the company more efficient by increasing the level of production. Also, the new machine does not need too much space, hence the area saved can be used for other purposes. Purchasing the new molding machine will decrease medical claims. Employees experience back injuries due to lifting of heavy objects, which resulted to expenses for the company due to their medical claims. These claims doubled since 1998 due to the mix of casting products that shifted toward heavy items. If the new molding machine is purchased, the demand to lift heavy objects will decrease, which will result to the decrease in medical claims leading to savings in insurance costs. Currently, the company needs to regularly have their workers trained in order to attain the consistency in the mold quality of the old molding machine due to its semi-automated process. But for the new molding machine, which is fully automated, regular trainings will not be a requirement. This may result again, to savings for the company. Also, upgrading to a fully automated machine will lessen the possibility of human error during the process that will result to lower rejection rate, lower volume of scraps and wastes produced while maintaining and even improving product quality. Disadvantages The new molding machine is fully automated which means it is not as labor intensive as the old machine. If this type of machine is purchased, about 14 workers will be laid off, or if not re-assigned to a lower job classification. This may become a possible problem to the company especially that there is a collective bargaining agreement between the management and the employees union. Retrenchment of employees may result to labor cases against the company.

Termination of Employee The group also reviewed literature related to Labor and Employment. In the assumption that the Fonderia De Torino is a company based in the Philippines,it is imperative that all employment processes and guidelines must be in compliance with the Philippine Labor Code. Article 283 of the Philippine Labor Code states that Employee Termination must be done only if it is within the authorized causes. The employer may terminate the service of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year Redundancy - Where the services of an employee is in excess of what is reasonably demanded by the actual requirements of the enterprise. V. CONCLUSION Based on both the analysis, it seems that Fonderia di Torino will gain more if it replaces the old semi-automated molding machines with the fully automated Vulcan Mold-Maker. Thus, the company should push through with the purchasing of the new molding machine. There will also be qualitative or nonfinancial ups and downs. Since the new machine is more efficient, there will be employees that need to be laid off, which can scar the labor relations of the company. On the up side, there will be a safer environment for the workers resulting to less medical claims, and there will be savings on training personnel since the new machine does not heavily need manual operation. VI. RECOMMENDATION In order for the company to successfully upgrade from the semi-automated molding machine to the fully automated molding machine to be able to reap its benefits, the management must first come to an agreement with the employees

union to avoid labor problems which may result to even greater financial damage to the company. This installation will result to the lay-off of 24 Union employees. To operationalize this, the Fonderia De Torino should be able to have the following in place to ensure seamless execution 1. Communication Plan It is critical that the affected employees clearly understand why they are being separated from the company. Ideal talking points for this situation are: Changing and growing business/customer requirements Organization review was done with third party consultants Objective of becoming more efficient through the use of various systems, processes and technologies

2. Separation Package As required or mandated by law, employee separation due to Redundancy must be accompanied by severance package which is equivalent to 1 month salary for every year of service. As a profitable company, Fonderia De Torino should acknowledge the contribution of their employees by providing premium to the separation package. Understanding the employee needs and their families, the recommended package follows below: 2 Months Basic Pay for every year of service (tax free) Cash conversion of all vacation leave and sick leave credits (tax free) Pro-rated 13th month bonus and Year-end bonus based on basic monthly salary (tax free) 2 year Extension of the HMO coverage for the retiree only, up to January 31, 2014 2 year Extension of the Group Life Insurance coverage for the retiree

3. Union Management A clear discussion of the communication plan and talking points above is required to ensure no labor strikes or mishaps will follow the decision. To anticipate possible union action, the below table is a proposed action plans.

Potential Union Action

Mitigation Plans External Legal counsel to handle (DOLE to assume jurisdiction given nature of the business) Discuss with union/federation leaders and counsel Activate Business Continuity Plan

Union may file Notice of Strike with prayer for TRO. (Ground: ULP)

Show active resistance through concerted activities: Red Arm Bands Lunch time rallies Boycott Use of social media to air their issues Network with connections Other groups may take the cudgels for the non-union members (may file case, etc)

Apply counter mass actions guidelines and code of conduct Heightened security alert

Corp Communications to take the lead in managing all media related threats Discussion with union/federation leaders and counsel External legal Counsel to handle

4. Soft Landing Programs To cushion the impact of this event to the personal and financial lives of the affected employees, the group recommends that there should be soft landing plans in terms of livelihood programs. In the Philippine setting the following seminars and business opportunities can be considered: Magnegosyo Seminars Franchising Seminars Livelihood Courses o Commercial Bread making & Bakery Mgt. o Basic Meat Processing o Laundry Soap and Detergents o Operating a Laundry Business o Food Service Management o Starting up a Junk Shop Business