OM 888 Supply Chain Modeling and Analysis Applichem Case OM 888 Supply Chain Modeling and Analysis

Applichem Competitive Situation 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?

Compare 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?

Costs at different plants

Sunchem Frankfurt Mexico Venezuela Gary Canada

Too Much Capacity? Should we close a plant? Which one? 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 Objective Decision Variables 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 Excel Solver 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.

Is there a better way to solve?

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.