Applichem Case. OM 888 Supply Chain Modeling and Analysis. Applichem. Produces Release-ease, a specialty chemical 6 plants that manufacture Release-ease Gary, Indiana Frankfurt, Germany Mexico Canada Venezuela Japan (Sunchem) Competitive Situation
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Applichem Case OM 888 Supply Chain Modeling and Analysis
Applichem • Produces Release-ease, a specialty chemical • 6 plants that manufacture Release-ease • Gary, Indiana • Frankfurt, Germany • Mexico • Canada • Venezuela • Japan (Sunchem) • Competitive Situation • Applichem = Market Leader, Revenues $ 75 Million (1982) • Main competitor has one large plant
What is the Objective? • Minimize cost? • What costs? • Transportation • Manufacturing • Fixed versus variable? • What are appropriate measures? • How to incorporate exchange rate changes? • What about different sizes and capabilities of plants?
What measurement should we use? • What is a fair comparison? (economies of scale, different technologies) • Cost per pound to manufacture? (different costs) • Total labor/volume? (labor costs, packaging issues) • Capital/volume? (capacity issues) • Cost before packaging per pound?
Frankfurt Sunchem Mexico Venezuela Gary Canada
Too Much Capacity? Total Demand = 79.9 M lbs; Total Capacity = 100.7 M lbs Should we close a plant? Which one? Might there be reasons for having excess capacity or keeping all plants open? Safety problems (chemical), transport costs/time, hedging
One Approach: LP Model Purpose Conduct “what-if” analysis to find better network supply chain structure Objective Minimize costs measured in some common form (1982 U.S. $) Decision Variables How much to make at each plant; how much to ship between regions Constraints Capacity constraints, demand limitations, non-negativity (import restrictions, etc.) Data Costs, import tariffs, exchange rates, capacity/demand info
How to Solve? • Basic “what if” analysis • Trial-and-error • Inefficient, not guaranteed to get optimal solution • Excel Solver Still, is this necessarily the best (or even a good) solution? Things change (exchange rates, inflation, etc.) http://www.oanda.com/convert/classic http://www.sunshinecable.com/~eisehan/V80-10en.htm International Monetary Fund: International Financial Statistics Yearbook.
What’s the Point? • Conclusion: Recourse actions from excess capacity can improve expected profit while reducing risk! Recourse actions – capacity decisions made before demand realized; production decisions made after demand realized.
Other Actions Spadaro Could Take? • Sharing technology and innovations across plants • Improve Gary’s yield • Reduce costs in Venezuela • Sunchem is high-cost, but also extremely efficient • What is impact of closure? • Changing management structure • Ensure technology and improvements transfer • If we close our most technologically advanced plant, what does this tell others about priorities?
Just Can’t Get Enough Applichem… • Check out: Lowe et al. “Screening Location Strategies to Reduce Exchange Rate Risk.” European Journal of Operations Research. 2002. Cohen and Huchzermeier. “Global Supply Chain Management: A Survey of Research and Applications.” Chapter 21 in Quantitative Models for Supply Chain Management. Eds. S. Tayur, R. Ganeshan, M. Magazine. 1999.