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. Manufacturing in Detroit is significantly more complex than other plant.
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. The layout of the Detroit plant is piecemeal; production typically requires complex flows through dedicated machining areas scattered about various buildings. Both the environment and other factors seem to contribute to a poorly motivated workforce.
Wriston accounts for the revenue of each plant on a standalone basis. This is not an accurate method of cost accounting since Detroit contributes to the other plants’ revenues.
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 3-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.
Several alternatives are presented to the division’s management:
Alternative 1 – Close the Plant and Distribute the Production of the Parts Amongst other Plants:
When considering shutting down the Detroit plant, the impact on the receiving plants must be considered. Detroit’s parts are noted as being mostly low volume, high-setup time parts, and include service parts. The plants identified for receiving the Detroit parts are not set up for this type of operation. Lima, Lancaster and Maysville are identified as high-volume parts plants, while Fremont is identified as a high tech plant specializing in gear machining. The study team’s suggestion to move the parts to these plants do not consider the manufacturing model consciously incorporated into the setup of those plants.
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.
Although this option yields the highest NPV(Table 1), it does not adequately recognize the negative impact on production resulting from the introduction of these parts.
Alternative 2 – Keep the Plant Open (5-10 years) and Invest in Tools and Maintenance
This alternative provides the worst NPV and would be a last resort solution. The company would continue to have a negative ROA.
Alternative 3 – Close the Plant, Invest in New Plant
While this alternative returns a negative NPV, given the discussion of Alternative 1 with regards to the other plants abilities to take on the parts from Detroit and the need to continue the plant’s products, this alternative needs to be considered. While it does not meet the hurdle rate for new product investment, it will continue to provide a measure of positive cash flow and profit to the company, while meeting the needs of Wriston’s customers, effectively maintaining good customer relations.
In regards to the new plant, the process and the work force should gradually transfer to the new plant in 3-year period instead of shifting immediately.
The 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 the new processes and takeover products in a controlled, timely manner.
In regards to the study group recommendation of dropping the Group 3 products, the financial analysis prepared by the study group for the three groups produced at Detroit incorrectly attributes fixed manufacturing overhead to the three groups in a proportional manner. Reviewing the financials, Group 3 is profitable based on its variable manufacturing costs only. Using the model presented by the study group, if Wriston were to drop group 3, the fixed manufacturing costs would have to be redistributed over the remaining two groups, resulting in an even greater net loss to the Detroit operation. Group 3 is marginally profitable and contributes to the plant’s bottom line.
In light of the above analysis, (Table 1 represent key features of each alternative) Wriston should invest in building a new plant to produce the three products lines around a flexible manufacturing system and shift the process and the staff to the new plant in a 3-year span. This phasing process allows training the new employees and gives the older ones the option to retire or continue in the new working environment. In addition, it will prevent any production stoppage and ensure satisfied customers.
Moreover, the current revenue accounting policy does not properly allocate revenues to Detroit, even though Detroit provides the initial investment and helps generate revenues to other plants. Further, Detroit bears the responsibility of providing maintenance and repairs and these costs are not allocated to other plants. Accounting should recognize these contributions, by allocating a portion of the revenues to the Detroit plant and by sharing their costs among the other plants.
Option 1: close the plant, transfer production
Option 2: Re-tool plant (5-10 year bridge)
Option 3: Build new plant
NPV (10% discount rate) 29 Million -13 Million -12 Million
Operational Aspects Destination plants are primarily high-volume flow shop configurations
Maintenance investments do not address underlying productprocess mismatch; no expected improvement
Introduction of flexible manufacturing should significantly improve performance.