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

2. 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

3. 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?

4. Compare Plants

5. 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?

6. Costs at different plants

7. Sunchem
Frankfurt
Mexico
Venezuela
Gary
Canada

8. Too Much Capacity? Should we close a plant? Which one?
Total Demand = 79.9 M lbs; Total Capacity = 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

9. 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

10. 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.)
International Monetary Fund: International Financial Statistics Yearbook.

11. Is there a better way to solve?

12. 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.

13. 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?

14. Just Can’t Get Enough Applichem…
Check out:
Lowe et al. “Screening Location Strategies to Reduce Exchange Rate Risk.” European Journal of Operations Research
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