As of 1987, the division has 9 plants operating on-stream, and 1 (Fremont) under construction. The complexity of the products manufactured could be measured based on 3 categories: I. Product line (on-highway axles, off-highway axles, and brakes), I’. Product families, and iii. Product model. The Pontiac plant operates two product lines. It manufactures the low volume product families that include parts for new products and replacement parts for all old products to support its past customers.
Based on the corporate strategy, it had been decided that as the demand for a new product being manufactured at Pontiac grows, the production shall be transferred to a new plant having requisite economies f scale and available capacity. As of 1987, the key factors that possibly have contributed to underperforming at the Pontiac plant are: ; Investment: Due to the existing corporate policy, the company tended reward plants showing the highest demonstrated rates of return by increasing the fund.
On the other hand, Pontiac producing low volume dying products had negative return, thus it was unlikely for it to receive new investment and funding. ; MIMIC tools: Most of the tools present in the Pontiac plant were out-dated and hence its corresponding setup times set up times was around 10 times the usual run-time for a normal batch f parts which was further aggravated by its usage for low volume production. The Plant: The facilities at Pontiac had not undergone any maintenance and upkeep activity during the last many years. It thus had degenerated and still lies under the improvements within the next few years. Labor Issue: The machine operators at the Pontiac plant are skilled and are specialized in operating a particular type of machine. Further the workers are even protected by union. The plant had been following the policy of long term employment for its employees. As per the age profiling of Pontiac employees, there are two groups of employees, The higher averaging 50 years and above) and the lower (averaging 25 years) But with the present state of the plant partly brought upon by the corporate policy of not releasing enough funds, the company has been underperforming and the employees had turned to absenteeism. Overhead: The overall maintenance costs have risen owing to the old plants. The pension policy of the plant entitled all the retired workers who have worked in the plant whether the same or transferred to a new plant. The service pension funding expense in 1987 alone stood at $648,000. It was not an obligation for the company however recently; the unions had started to expect t as an obligation on the company. ; Product costs: The plants in the division have been using a uniform product costing system, which calculated a standard cost for each model.
With higher cost of unproductive-direct-labor, lower-volume-purchase costs, set-up costs and higher fixed overhead, the Pontiac plant has ended up with lower profit as compared to other plants. Critical issues: ; The Heavy Engineering Division’s criterion for order winning was in the new product innovation and improvement of existing products. The division is required to devise a new way to manufacture prototypes in low-volume at limited investments n line with the current cash flow condition of company. With Pontiac plant having been designated to experiment with these new prototypes, it had been making losses since the last few years and Judging from the current operational practices and tools it was not expected to make any profit in the near future either. Lacking support from corporate and having outmoded machinery and its role of supporting discontinued product services has been a source of difficulty for Pontiac. Objectives: As part of the case analysis, 2 important questions arise which need to be answered: a.
Why overheads costs vary so greatly from plant to plant in Michigan Manufacturing system? B. Comment on the investments in Heavy Equipment Division in the Pontiac Plant – low or normal or high; why? C. Should Noel Allen close the Pontiac Plant? If so, what should she do with the products currently manufactured in Pontiac? Should she follow the recommendations of her task force? If not, what, if anything, should she do to transform it into a profitable operation?
Evaluation of Alternatives: a) Very high setup time (nearly 10 times the run time for batch of parts) b) Aged machine tools and inadequate electrical system ) Produced only Low volume products d) High volume product moved to new plants e) Old models never deleted from the production line f) Pension expenses (for employees who worked on products to other plants) remained at Pontiac Alternative 1: Close Plant and transfer its products to other plants Positives: a) Profit of $3. 6 million per year without investment. ) Group 2 products can be transferred to Saginaw and/or Lima & Group 1 products can be transferred to Massively. C) No obligation to guarantee Job security to younger employees will mean low termination costs. Negatives: a) Will incur $2. Million in expenses to close the plant & transfer products in 1st year. B) Variable overhead for other plants where the products were transferred would be higher. C) Variable overhead will rise for other plants where Pontiac products are transferred. D) Complexity will go up in other plants due to process redesign & training of workers. ) Loss of customers buying group 3 products & potential sales loss of $5. 7 million. Years a) Does not require a lot of capital investment. A) $1-2 million investment for plant maintenance and new tools were difficult to get with current performance. B) It was only a short-term solution. As new products were getting introduced every year, Pontiac plant was not equipped to support more complexity. C) With more than 50% workers aged 50 years above, there would be more workers retiring in the next 5-10 years, and pension funding would increase every year. ) Difficult to handle workers’ bad habit and low morale and to change the image of a “dying” plant. E) In the next 5-10 years there was more probability of the unions having Pontiac signed contractual agreement to provide all workers Job securities, which means higher termination cost when the plant was closed in the next 5-10 years. Alternative 3: Build a new Plant a) Save $1. 5 million per year. B) Start from scratch and build the plant that could handle complexity. A) Lancaster plant was also brand new, and still needed management attention.
Additional new plant might make things more difficult. B) Needed investment of $18. 5 million in the plant and tooling and another $3 million for start-up costs, while Machine’s profit and cash flow were pretty tight. Recommendations & Conclusions: regular (on-highway & off-highway) products. Group 1 products should be moved to Massively and Group 2 products should be moved Saginaw. We have arrived to this session considering break-even after transferring respective sales of Group 1 & Group 2. We also considered available capacity of existing plants before taking decision of moving production.
