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- Case 8-1: General Appliance Company

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"What manufacturing strategy makes the most sense for this company?" mused Jerry Peshel, vice president of operations for General Appliance Company (GAC). GAC is a leading producer of major appliances with a moderately wide line of high-quality products. The major appliance industry, marked by several large competitors and relatively slim margins, was expecting strong unit shipments in the coming year. Rising consumer confldence and falling inter- est rates had stimulated demand for durable goods and new homes, promising increased sales in both the replacement and first purchase markets.

GAC was currently enjoying strong profitability, but there were clouds on the horizon. Process and product innovations by aggressive domestic competitors threatened to leave GAC with obsolete products and cost disadvan- tages. One rival had recently signaled a push into GAC's high-quality, high-price market segment by sharp increases in advertising and promotions that emphasized quality and reliability. The same company had recently purchased the industry's leading producer of top-quality dishwashers. Foreign concems were currently small players in the U.S. major appliance market, but many industry observers ex- pected Japanese and European companies to make bids for increased market share within the next five years.

Prepared by Professor Morris A. Cohen and Thomas F. Kendall, the Wharton School, University of Pennsylvania qnd Professor Ricardo Ernst, Georgetown Unfuersity with partial funding by the IBM MOIS Program. Copyright 1991 Morris A. Cohen, Ricardo Ernst, and Thomas F. Kendall.

Manufacturing performance plays an important role in maintaining viability in the major appliance business, due to the competitive requirement for responding to consumer demands for higher quality while addressing competitive cost pressures. Although GAC had continuously invested in maintaining and modemizing its manufacturing and distri- bution facilities over the last few years, many competitors had done likewise.

Peshel felt that there was a need to coordinate the company's piecemeal approach to reducing costs and plan- ning production in the context of an overall manufacturing and distribution strategy. An integrated approach would help him resolve the myriad of trade-offs that confronted him on a daily basis.

Recent discussions with the company's sales and manu- facturing managers had forcefully reminded him of many of these issues. Managers at some plants were urgently re- questing funds for expansion, while others were plagued with overcapacity. Some of the newer and more efflcient plants and distribution centers were underutilized, while

older facilities were approaching capacity limits. Several specific questions formed in Peshel's mind:

. Was the curent configuration of manufacturing and distribution facilities desirable? Should new facilities be purchased or built, should capacity be expanded or reduced at existing facilities, or should some facilities be shut down?

. Should each plant produce a wide range of flnished products or should they specialize in just a few product

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lines? Should some plants specialize in the fabrication of components and subassemblies while others are devoted to assembly?

. Is the existing network of distribution centers and warehouses appropriate? How should it respond to changes in the manufacturing system?

. How should distribution centers be sourced by manufacturing plants, and which customer market zones

should be assigned to each of the distribution centers? . How should overall market production requirements for

each product, component, and subassembly be assigned

to various plants? How should these production outputs be distributed to other plants, distribution centers, and

warehouses? How should these quantities be determined

on a regular basis? . Which production processes are appropriate for the

various components and assemblies used in the appliance industry? How should process choices be made, given estimated volumes, product mixes, and

costs for each of GAC's plants? . How will changes in demand pattems, competitor actions,

and extemal costs affect the answers to these questions?

Jerry Peshel gtew increasingly uncertain as he contem- plated the possible options and their ramifications. He knew

that the answer to any one question impacted the answers to

the others, and that choices of a manufacturing/distribution policy would have significant impact on GAC's future competitive position. He also knew, though, that his boss, GAC President Bill Clark, was counting on him to come up with a review of the operating function for the next board meeting, which was scheduled in four weeks.

The firm had recently hted a management consulting firm to evaluate GAC's competitive potential. In their report the consultants concluded that there was poor integration between

corporate objectives and the manufacturing side of the busi- ness. One of their recommendations was to consolidate manu-

facturing into few plants. They also documented several in- stances where delivery problems had led to lost sales in key markets. These service problems were traced to excessive production lead times which were brought about by compo- nent shortages. Their key finding, however, was that GAC must move to introduce new product designs and expand its

market penetration if it hopes to grow in the future.

Company History

General Appliance Company was founded as the Cleveland Washing Machine Company in 1939 by two brothers in Cleveland, Ohio. Fred and William Sherman built their first automatic clothes washer in an abandoned warehouse on Cleveland's south side. The Shermans rnade improvements on newly introduced automatic washer technology, and demand outstripped their ability to produce the machines almost immediately.

Chapter 8: Logistics Network Design for Global 0perations

By 1950 unit sales had reached 70,000 and ground was broken for the construction of an additional plant to handle skyrocketing postwar demand. Production of clothes dryers

was added in 1953 with the completion of the new manufacturing facitity. In 1958, the product line was broadened to include electric and gas ranges and ovens with the acquisition of the Newton Range Company of St. Joseph, Michigan. Two years later, the company off,cially

changed its name to the General Appliance Company and went public, with a listing on the New York Stock Exchange.

A small manufacturer of clothes washers and dryers, located in Fort Smith, Arkansas, was acquired in 1961. When a fult line of portable and builrin dishwashers was introduced in 1969, GAC manufactured them in Fort Smith as well as in Cleveland.

ln 1975 GAC built a production facility in Dalton, Geor- gia, to provide southem manufacturing capacity for ranges and a newly introduced food waste disposer line. By 1983 the plant had been expanded twice, and production lines for

washers, dryers, and dishwashers had been installec.

A manufacturing facility located near Los Angeles was purchased from another appliance producer in late 1978 and

converted to the manufacture of GAC washers, dryers, and dishwashers.

General Appliance consistently enjoyed the largest mar-

gins in the major appliance industry, mainly due to its emphasis on qualiry product reliability and excellent after- market service. The company had never experienced an unprofitable year and, by 1985, had achieved earnings of $74 million on sales of $685 million.

Product Une

GAC's product line consisted primarily of electric and gas ranges and ovens, clotles washers and dryers, and dish- washers. GAC also produced food waste disposers, but these supplied a relatively insignificant portion of revenue. GAC products enjoyed a high-quality image that was maintained by outstanding product and process engineer- ing, thorough testing, a motivated production work force, and by advertising that stressed reliability. The high prices that GAC products commanded allowed GAC to maintain a high level of R & D and capital spending.

GAC's products required components and assembly procedures that were basically similar. Each had a cabinet composed of a sheet metal exterior and several plastic or metal interior parts, an electrical or electronic control unit and a motor and drive mechanism (or in the case of the ranges and ovens, heating elements).r There were also

1 Smaller heating elements of various kinds were also required for dishwashers and dryers.

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various handles, knobs and trim pieces made of glass, metal, and plastic.

The major steps in manufacturing the products were:

1. Raw material and component purchasing 2. Cabinet manufacturing 3. Component manufacruring 4. Final assembly

GAC had developed methods and systems that, in manage- ment's view, accomplished these tasks efficiently and effec- tively. Each step is described below.

Purchasing

GAC purchased relatively few components, preferring in- stead to manufacture many of the parts that other appliance producers bought. For instance, GAC produced its own pumps, heating elements, transmissions (drive mecha- nisms), hoses, wire hamesses, and many molded plastic parts. This was done to maintain high quality levels, lower production costs and lower transportation costs (several GAC plants were not close to qualified parts suppliers). Continuous review of make-versus-buy decisions deter- mined if components currently manufactured in-house should be purchased. For many parts the answer in terms of both cost and quality continued to be to produce them in GAC plants.

Raw materials such as steel, plastic, porcelain ingredi- ents, and cement2 were purchased by the plants on an individual basis, although there were corporate guidelines for material and supplier selection. Critical purchased com- ponents like motors, timers, and assembled circuit boards were obtained only from a limited number of corporate- specified, qualified vendors.

The manufacturing plants currently purchased relatively few parts from each other, although such intemal interme- diate product sourcing was not prohibited by the corporate office. The Fort Smith and St. Joseph plants were required to buy the major components that they did not manufacture, including pumps, transmissions and heating elements, from one of the other plants.

The volume of plant-to-plant transfers was increasing, and disputes between the plants, mainly over transfer prices, were becoming more frequent. GAC used a "cost- plus" method to set transfer prices because they did not sell their intermediate products extemally and no objective market price could be set. Although the "cost-plus" method seemed straightforward, it resulted in disagreements about how costs were calculated and about what the mark-up should be. In particular, Fort Smith plant manager Mike Sloane felt that the prices he paid the Cleveland plant for

components were too high. An analysis performed by his Industrial Engineering department showed that, with the proper capital investment, the parts could be manufactured for a lower cost in Fort Smith. Jerry Peshel was well aware of the problems with the transfer pricing scheme, and was weighing the advantages and disadvantages of altematives that would promote equity among the plants.

Cabinet Manufacturing

The creation of cabinets from rolls of sheet metal required the following steps:

1. Slitting, sheeting, and stretching of the steel to form blanks

2. Drawtng and pressing to form tubs, top panels, and side panels

3. Welding of subassemblies 4. "Pickling" of subassemblies 5. Application of paint or porcelain 6. Assembly

Large presses, from 30 to 1250 tons of capacity, were used for the first two operations. Many of them were loaded and unloaded automatically, allowing one operator to mn sev- eral machines. All of the welding was done automatically, by robots or automatic welders.

"Pickling" is a process that prepares metal parts for the application of porcelain enamel. It involves removing for- eign materials and oil, etching the metal surface with an acid solution, and depositing a nickel film on the surface of the part to promote adherence of the enamel during the firing process.

Cabinet manufacturing consumed a large part of GAC's resources, in terms of people, equipment, and floor space, and accounted for a large part of the appliance manufactur- ing cost. It also represented a significant portion of GAC's in-process inventory investment. Enough cabinet parts for four hours of production were maintained in front of the paint and porcelain operation, while eight hours' worth were held in front of the assembly department.

For these reasons, GAC paid close attention to innova- tions in materials and processes that were used to produce appliance cabinets. For instance, Jerry Peshel knew that at least one of GAC's competitors molded clothes washer and dishwasher tubs out of plastic. GAC used porcelain-coated steel for both parts. (Stainless steel was also an altemative for these parts. Although it did not rust and did not require expensive coating processes, it was expensive and difficult to form.) Over the last few years developments in materials and molding technology had increased the viability of using plastic for these parts.

From a production standpoint, the replacement of steel- and-porcelain with plastic was attractive for several rea- sons. Although plastic cost more than steel on a per unit

273

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274 Chapter 8: Iogistics Network Design for Global Operations

Exhibit Ibasis, additional material cost was more than offset by labor and quality advantages. Also, molding processes generate

very little scraP. An injection molding and milling process reduces

labor costs by eliminating numerous stamping and assembly operations. Elimination of stamping dies and presses and abbreviation of the assembly line significantly

reduce the cost of design, engineering, and tooling for new models.

Models may be redesigned almost every year since the

costs of retooling decline. Also, the time and direct labor

required to setup production lines for each model mn are

reduced.

Tubs can be designed that reduce the number of parts

needed in assembly. The elimination of parts means that raw and in-process inventories are reduced and that manufacturing cycle times are speeded up as assembly is

simplif,ed. Problems encountered by consumers, including cracked

and chipped porcelain and the resulting rust, are eliminated'

Plastic also makes quieter parts, a characteristic demanded

by consumers, especially in dishwashers. For General Appliance, plastic had its drawbacks, too'

For one thing, GAC production personnel had no experi-

ence in the molding of such large parts. The major disad- vantage, though, was that plastic components required a

cure time after molding. While steel parts could be pro- duced in one or two seconds, plastic parts needed to cool for one or two minutes. Thus, if throughput was to be maintained, many expensive injection molders had to be purchased. Consequently, adoption of this innovation would

require substantial capital investment and floor space, and

could only be justified by a relatively high volume of production.

The industry's largest company, General Electric, had

taken advantage of plastic's favorable characteristics by spending four years and $38 million to redesign both its dishwasher product line and manufacturing facilities. Most

of the product's steel parts were replaced with a one-piece plastic tub. The well-publicized results included higher product quality, inventory tums, and market share, along

with lower production costs. transportation costs and num-

ber of parts and assemblies (reduced from 5600 to 850) (Purchasing, March 29, 1984, p. 113). An analysis of potential advantages for GAC in carrying out a similar dishwasher product and manufacturing system redesign for

the Cleveland plant had been prepared for Jerry Peshel and is shown in Exhibitl. Exhibit2 shows the cost/volume trade-offs of dishwasher process and product altematives, each of which is indicated by the material to be used for the

dishwasher tub. In addition to product and material changes, investment

in various production processes also offers reduced cabinet

manufacfuring costs. For example, some companies have

installed steel slitting systems that are used to reduce

Cost/Benefit Analysis of Redesigning Dishwasher Products

and Manufacturing Systems for Plastic (l4illions of Dollars)

Required Inuestment

Capital investment (4 molding machines) $17 60 Capital investment (other manufacturing equipment) 6'30 Manufacturing system redesign 1 50 Product redesign 1 10 Consolidation costs (Note 6) 0 90

$27.40

Annual Cost Sauings

Reduced direct labor in assemblY Reduced indirect Iabor

Savings from inventorY reduction

Scrap reduction

Reduced shipping costs (Note 7)

Increased material cost

Increased maintenance costs

Notes

1. GAC's cost of capital was estimated to be llVa'

2. Annual cost savings were based on an estimated volume of 250,000 units/Year'

3. The two-shift capacity of the injection molding machine being considered was 65.000 parts/year.

4. The molding machines and other manufacturing equipment proposed for the project had estimated lives of seven years, but were classified in the five-year recovery class under the ACRS. It was expected that the molding machines would have a salvage value of

approximately 10Vo of the original cost after seven years. Other equipment had no expected salvage value.

5. All of the proposed equipment was eligible for a 107o ITC (although legislation that would eliminate this credit has been proposed).

6. To obtain all of the cost savings indicated, dishwasher manufacturing operations would have to be

consolidated into one facility. This was the estimated

cost to physically relocate the affected equipment.

The effects on other factors, like inbound and outbound transportation costs, administrative costs,

customer service, and quality levels had not yet been

quantified. Plastic parts reduced the dishwasher

weight by 15 to 22 pounds, reducing some shipping costs.

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Exhibit 2

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Cost/Volume Relationship

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Total units produced per year

standard-width steel coils to the proper widths for cabinet parts. The altemative to performing this step in-house is to contract with a third party for the service or to pay extra for custom-width steel. Slitting systems require substantial floor space and installation costs (including the digging ofa 25-foot deep "looping pit" to maintain proper tension), but allow the appliance manufacturer to reduce steel costs and inventory through the purchase of standard-width coils. Most of these systems require a capital investment of between $0.4 and $2 million.

Some of GAC's competitors had invested heavily in factory automation and flexible manufacturing systems (FMS) to produce sheet metal parts for appliance cabinets. The FMS approach promised reduced direct labor, floor space, and inventory requirements, along with improved quality. The promised advantage of an FMS is its flexibility in producing a large number of part types, over a wide range of production volumes, at a competitive manufactur- ing cost. However, the fixed and investment costs of such systems were extremely high.

Magic Chef had recently spent $2.7 million for an FMS to produce sheet metal parts and re alned a 50Vo increase in direct

labor productivity. Panels for several different appliances were manufactured on the same line. The system required a coil of steel at the beginning of the line and only two operators-one to enter part numbers in the system computer and another to remove flnished panels. The FMS had been installed in conjunction with consolidations of their facilities and product lines so that high system utilization was assured. It was anticipated that panels produced at the FMS plant would be shipped to other Magic Chef facilities for assembly (Appliance Manufacturer, October 1985, p. 3l).

Peshel felt that GAC's product line was not varied enough, and its production runs were too long, to justify a laree investment in FMS. There were those in the Manu-

facturing Engineering department who strongly disagreed with Peshel on this point.

Component Manufacturing

Pumps, heating elements, and transmissions were produced

in only three of GAC's five plants (Cleveland, Dalton, and Los Angeles). Substantial investments had been made in machinery and automation to ensure low costs and consis- tently good parts. GAC used robots and employed dedi- cated automation in the fabrication of many parts and subassemblies. For example, the die casting operation used to make parts for washer transmissions had been automated (at an expense of $1.5 million) so that virtually no direct labor was required. An automatic ladle poured molten metal into the form, a computer controlled the pressure, and a robot removed the finished part.

Powdered (sintered) metal technology is an altemative process that can be employed for the production of some transmission and pump parts. Sintered metal parts are formed by introducing blended, powdered metals into a die under tremendous pressure and then heating to bond the particles. First used commercially ten years ago, the sin- tered metal process has several advantages. Resulting parts

are stronger, more uniform and require little added trim- ming or machining. Sintered metal forging is said to produce products of higher quality at lower manufacturing costs than other methods. Although an investment of $2.5 to $4 mitlion per plant is required, the potential payoffs are large. Exhibits 3 and 4 show the cost/volume relationship among the possible forging processes for both pump parts and drive unit parts.

Components were assembled in a variety of ways. Control panels for all of GAC's appliances were assembled at individual work stations. Direct labor costs were higher

276

Exhibit 3

Chapter 8: Iogistics Network Design for Global 0perations

Pump Parts Fabrication Cost Cost/Volume Relationship

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for this method than for an assembly line or automated assembly, but quality was high and it contributed to "job enrichment. "

Currently, top-of-the-line dishwashers were the only GAC products that contained electronic control panels (all others used electromechanical timers and conventional switches). GAC purchased fully assembled circuit boards, along with membrane switches and other components, for these control panels. Assembly time was reduced because wirhg and component mounting was greatly simplified, but the parts purchased for an elechonic panel cost almost $50 more than those for a standard panel. Also, 1007o testing of the incoming circuit boards offset assembly labor savings. GAC Marketing and Engineering personnel

were watching competitive products closely and contem- plating the introduction of electronic controls on other products. So far, though, consumer resistance to electron- ics on major appliances and engineering hurdles (includ- ing temperature problems during "self-cleaning" oven cycles and washer vibration difficulties) had to be overcome.

Other major components, including pumps and trans- missions, were built on machine-paced assembly lines in Cleveland and Los Angeles and on worker-paced (nonsyn-

chronous) lines in Dalton. The Dalton assembly lines produced pafis at a slower rate, but component quality was higher. Lower rework costs more than covered the higher direct labor assembly costs.

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Case 8-l: General Appliance Company

Final Assenbly

Most of GAC's plants used machine-paced final assembly lines, although many subassembly operations were per- formed individually or on worker-paced lines.

In the Cleveland plant, the Industrial Engineering de- partment had designed a high-speed machine-paced assem-

bly line. The decomposition of final assembly operations in multiple individual jobs, coupled with careful line balanc- ing and the judicious use of automation, allowed for a line cycle time that was several seconds faster than those in other plants. In contrast, the St. Joseph plant used worker- paced flnal assembly lines to produce ranges and ovens. Each worker completed a number of assembly operations before passing the unit to the next worker.

Machine-paced lines produced at a faster and more steady rate than the worker-paced lines but quality some- times suffered. Higher capital and maintenance require- ments for the machine-paced lines made them cost-effective only if they could be fully utilized for high volume production (generally considered to be at least two full shifts).

The investment required for a typical machine-paced line was $200,000 to $800,000, while the high-speed lines cost $650,000 to $1,200,000. Maintenance costs for the machine-paced lines often ran 2OVo to 5OVo higher than for worker-paced lines, due mainly to the complexity of the equipment and the need for skilled technicians to maintain them. The delays and costs associated with retooling such lines for model changes were also considerable.

Automated assembly, in the form of dedicated "pick- and-place" units or robots, could be utilized on the assem- bly lines to reduce errors and maintain a constant pace. If a suitable application was found, these units (costing between

$40,000 and $200,000) could be placed on a machine-paced

line to eliminate workers or improve quality.

Manufacturing Facilities

Exhibit 5 is an organizational chart of GAC's manufactur- ing and distribution operations and Exhibit 6 is a map showing the location of each facility. A description of each manufacturing plant follows.

Cleveland, Ohio

GAC's Cleveland manufacturing plant was the largest and oldest of its facilities. It consisted of the original GAC manufacturing plant and a large addition, which was built in the early 1950s. Several smaller expansions had been made during the past three decades and the entire facility now had floor space of almost 3 million square feet. General Appliance headquarters was located adjacent to the

277

plant, with the Research and Development building directly across the street.

The smaller, original GAC plant produced pumps, trans- missions, heating elements, hoses, wire hamesses, small plastic parts and other components. The main plant fabri- cated sheet metal cabinets and housed assembly lines for all of GAC products.

Building maintenance costs were extremely high. Inef- ficient material handing, due to the outdated factory design and lack of a modem conveyor system, pushed up unit costs. Labor costs were also higher in this region. Despite recent concessions, the union maintained many work rules that management considered to be inefficient. There was no more room to expand on the current Cleveland site, and facilities were currently utllized at more than 90Va of capacity.

Fort Smith, Arkansas

The Fort Smith plant was the sole manufacturing facility of a troubled laundry products manufacturer that GAC acquired in 1961. The plant was quickly converted to the production of General Appliance products and, mainly through the efforts of a GAC manufacturing team (of which Jerry Peshel had been the junior member), operating losses were stemmed within six months. In addition to washers and dryers, GAC manufactured podable and built-in dishwashers in Fort Smith. Fort Smith purchased several major components from Cleveland, including pumps and transmissions.

Although labor costs were low and the union was relatively cooperative, unit costs suffered because of out- dated equipment that required much maintenance and that resulted in frequent downtime. Fort Smith was a prime candidate for a large capital outlay to update its manufac- turing facilities. The plant manager, Mike Sloane, had submitted project requests in each of the last two years and had been tumed down both times. He was becoming increasingly vocal about the potential his plant had for low-cost production if corporate would approve his capital requests. Fort Smith was currently producing at less than full capacity.

St. Joseph, Michigan

The St. Joseph plant, formerly the Newton Range Company, manufactured only gas and electric ranges and ovens. GAC had not invested heavily in the St. Joseph plant

over the last few years because of the plant's limited size and product line.

Although St. Joseph was currently producing at capac-

ity, it was questionable whether the flxed cost of the small plant was worth the incremental capacity for ranges and ovens. Little automation had been installed in either the fabrication or assembly areas, but the plant was surprisingly

278

Exhibit 5

Chapter 8: Logistics Network Design for Global Operations

Manufacf uring Ot ganzation

President and CEO William Clark

Central - St. Louis Mgr: Brian Foulke

East - Mechanicsburg (Europe) Mgr: Ann Marie Martin

West - Los Angeles Mgr: Ed Bishop

VP of Finance

VP of Research & Development

VP of Human Resources

VP of Marketing

VP of Corporate Development Distribution

Facilities Manufacturing

Facilities

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efficient in terms of labor hours per unit produced. This was attributed mostly to an older, experienced work force that generated little scrap and worked well together. Assembly was performed on an operator-paced assembly line. Each worker performed several operations on the product before rolling it along the line to the next operator. St. Joseph employed only about 200 people. Heating elements were purchased from the Cleveland plant, but all other pafis were either manufachred in-house or purchased from approved vendors.

Dalton, Georgia

The Dalton plant was the newest and most efflcient of GAC's manufacturing facilities. Although it was almost ten years old, GAC had invested heavily over the last decade to expand and update the plant and its equipment. Several

miles of overhead conveyors provided efficient transport of material from sheet metal, paint, and porcelain deparhnents to the assembly lines. Robots had been installed in several locations, mainly to perform tedious or difficult punch press and painting operations. Machine-paced final assembly lines were used to obtain high-volume production of all of GAC's products, including food waste disposers. Dalton had the same capacity as the Cleveland plant with twenty percent less floor space. Facilities to manufacture all com- ponents including pumps, heating elements and fransmis- sions, had been installed.

Union relations were very good and employees were generally more hard-working and cooperative than in the other GAC plants. Wage rates were lower than at any other GAC location.

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Case 8-l: General Appliance Company 279

Exhibit 6

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One disturbing change Jerry Peshel had recently spotted,

though, was a significant increase in the unit cost of several products. The change had appeared fifteen months ago, shortly after production of dishwashers was initiated in Dalton (making Dalton the only production faciliry that manufactured all of GAC's products). These cost increases seemed to be exacerbated by changes in product mix and volume requirements. Dalton plant manager Brad McCal- lum had assured Peshel that Dalton would remain GAC's most efficient facility.

los Angeles, Ca]ifornia

The Los Angeles plant was a large facility that GAC had purchased in 1978 from another appliance manufacturer to provide West Coast capacity. The hansportation of bulky and heavy appliances to the West Coast was expensive and time-consuming. Before the Los Angeles plant purchase, at

any given time large amounts of inventory were on trains and trucks between GAC plants and the West Coast. The

Los Angeles plant had been converted to the manufacture of GAC washers, dryers and dishwashers.

Since 1979, however, results had been disappointing. Labor costs were high and quality was the lowest of any GAC plant. Rapid employee tumover was attributed to both problems. Pumps and transmissions were currently pro- duced in the Los Angeles plant, but the rework and scrap rates were high. Attempts by GAC engineering and produc- tion people to improve component quality had resulted in little improvement after two years of effort. Jerry Peshel knew that the Dalton and Cleveland plants had sufficient capacity to ship pumps and transmissions to the West Coast

if the Los Angeles plant did not get its act together soon. Many large and expensive presses, automatic cabinet lines

and automatic coating lines had been installed to provide high

volume capability, but the capacity was underutilized. Like- wise, machine-paced assembly lines were used at less than their two-shift capacity because of slack demand. Although it had been unthinkable just two years before, one option being

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280 Chapter 8: Logistics Network Design for Global Operations

considered was the closing of the Los Angeles plant' The fixed

cost savings and lower unit costs at Fort Smith, St. Joseph and

Dalton would possibly outweigh the higher transportatlon and

inventory costs. It was anticipated that higher utilization of these other plants would generate cost savings due to scale

economies, but this was unceftain.

Exhibit 7 summarizes refixed and variable cost for the

different manufacturing Plants.

Distribution

General Appliance maintained four distribution centers (DCs) to serve twelve customer market zones. East, Central

and West DC's supplied ten domestic customer zones' The

East DC served the foreign (mainly European) markets and

Canada was served by a DC located in Downsview, which

is a suburb of Toronto. Exhibit 8 presents the cost and capacities for the different distribution centers.

The Eastem DC, located outside of Philadelphia in Mechanicsburg, was the newest and most efficient distribu-

tion facility; it was also the smallest. It was currently operating at capacity and Manager Ann Marie Martin was

already requesting funds for expansion. The Central DC, located in St. Louis, was the largest distribution facility'

Exhibit 7

The Westem DC, in Los Angeles, had the highest handling

and fixed costs due to high labor rates and building maintenance expenses. All goods shipped to Europe went through the Mechanicsburg DC, while Canadian shipments

went through the Downsview facility.

All products were shipped from the manufacturing plants to the distribution centers where they were invento-

ried with varying degtees of automation and efficiency' Customer zone orders were generally filled by the nearest DC, but sometimes it was necessary to ship products from other DCs. All DCs maintained a9OVo fill rate service target'

The customer zones comprised many wholesale appli-

ance distributors who in tum sold to a total of approxi- mately 10,000 retait outlets. Distribution exclusively through retail stores had allowed GAC to avoid the sales

declines associated with housing industry downturns and the price-cutting of mass merchandisers. Most of GAC's appliances went to the relatively stable replacement market'

Peshel was contemplating opening a Southem DC. Fixed

and operating costs for a proposed Atlanta facility had been

estimated by a team that Peshel had appointed (see Ex- hibit 8), but the impact of such a facility on overall costs was

not yet clear. Transportation costs from existing DCs to many rapidly growing Southem markets were high' but it

wa off

agi

cor

tm stc

fa<

AI Pe si,

te1

Manufacturing Costs

Variable Production Costs ($ per units)

Plant Fixed Cost

Driue Unrt

Heating Control Element PunxP Unit

'Wasber

Cabinet AssemblY Dryer Disbwasher Ouen/Range

Assembly AssemblY Assernbljt

Cleveland St. Joseph los Angeles Dalton Fort Smith

$30,397,500 24.96 $ 6,037,200 0 $19,392,300 26.24 $24,420,600 24.00 914,289,300 0

16.00 12.16 0 11.52

18.05 12.80 15.68 1.0.24

0 1.1.65

10.88

12.L6

10.88

84.48

6r.4 /

84.48

79.74

85.50

42.24

43.7r

40.06

41.60

14.O8

15.42

L2.42

12.80

21.76

21..70

21..50

21.12

86.40

82.56

83.20

; sr

Exhibit 8

Distribution Center Costs and Capacities

Handling Costs ( $/Unit)

L L

Fixed Cost

Ma.x 7hrupt Dryer Disbwasber Range

Mecbanicsburg

I.A. St. Louis

Dounsuielo Atlanta*

$r,256,450

3,279,951

2,531,394

615,500

1,250,000

590,000

770,000

1,600,000

92,OOO

6oo,ooo

2, 1)

6.87

4.42

4.50

3.29

6.87

4.42

4.50

3.29

44) o.t' /

4.42

4.)V 12c,

41) 6.87

4.42

4.50 12q

*proposed

Case 8-1: General Appliance Company

was difficult to determine if reduced shipping charges would offset the costs associated with operating another DC.

The manager of the St. Louis DC, Brian Foulke, was against such an addition, arguing that his facility could cost-effectively serve the South if GAC would invest in the improved inventory control systems and the state-of-the-art storage and retrieval system that he proposed. The St. Louis facility was not currently operating at maximum capacity.

Manufacturing Strategy Options

Although GAC had its share of manufacturing problems, Peshel knew that his costs were currently competitive, given GAC's quality and service per{ormance. Even though GAC's products commanded high prices, the company could not have enjoyed margins almost double the industry average without a competitive cost stmcture. He was concemed, though, that changing market demands, foreign and domestic competitors and new product and process technologies could erode those margins quiclly.

To maintain a competitive cost position, he wanted to ensure that the configuration of GAC processes, plants and

Exhibit 9

distribution centers was rational and consistent with the company's overall corporate strategy of market segmenta- tion and differentiation. However, the trade-offs to be evaluated were complex. If GAC continued manufacturing the same products at several different locations, scale economies that could be realized by centralizing produc- tion would be sacrificed. Also, consistency and quality are enhanced by marufacturing each product at only one location. Recent experience with the Dalton plant sug- gested that there may be costs associated with overloading a plant with a production mission that is too complex. On the other hand, transportation charges for major appliances were significant and some economies of scope were obtained by manufacturing several similar products at the same location.

Peshel had instructed his new assistant, recent MBA graduate Skip Clark, to pull together relevant distribution and manufacturing cost information as the first step in a comprehensive analysis (see exhibits 9 to 15). With this information and Mr. Clark's assistance, Jerry Peshel hoped to draw some conclusions about the most effective manu- facturing strategy for GAC.

281

lo_6

nt ts

r. st

m ,t

;

v )S

d n t-

o it

Transportation Costs ($ per 100 units)

Dnrrns, Rc,Ncss

Distrtbuilon Centers

Mecbanicsburg Los Angeles St. Louis Dounsuiew Atlanta*

Cleueland

St. Iosepb Ios Angeles

Dalton Fort Smitb

964 1288

+ul) 1,439

1984

3955

3991

440

4297

2626

7288

7179

z)Dy

1163

833

2924

3208

6324

4894

5096

1805

1926

3392

oo)

Distribution Centers

Customer Zone Mecbanicsbutg Los Angeles st. Louis Dounsuieu Atlafiar

Atlanta Cbicago

Dallas Denuer

Detrcit Los Angeles

New Orleans

Pbiladelpbia St. Louis

Seattle

Canada

Foreign

1.252

1298

1753

)O111

1018

3986

ro)) 3L1.

994 4444

I /UO

3808

3395

2033

1392

2801

41.L

2253

2965

2298

1277

940

889

11"29

7i55 1r33 2303

1.'J.28

1.O23

2389

431.4

3314

5060

)ro/ 2650

6072

5039

2916

3783

6278

127

316

tGzg

1237

2767

.l oJ-t

1+V /

7b6

1259

940

4|.j> /

*proposed

282

Exhibit 10

Chapter 8: Logistics Network Design for Global Operations

ry Inter-Plant and PlanfDC Transportation Cost ($ per 100 units)

To Plant -+ Cleueland St. Iosepb LA Dalton Ft. SmithFn:,m: Cleueland Drive units

Heating elements Pumps Control units Cabiners

0.00 0.00 0.00 0.00 0.00

7.59 0.98 1.05

6.90

3.89 2.99 3.70 8.90

22.70

2.L1.

2.00 2.2L

4. /U

9.37

2.44 2.40 2.50

5.05 i 1.07

To DC -) Mechburg L.A St. Louis Doutnw Atlanta

Ra;

)

rVashers

Dryers Dishwashers Ranges

10.60

9.64 10.60 e.64

45.> t

39.55 43.51 39.55

t4.t/ t2.88 1,4.17

1.2.88

32.16 29.24 32.76 29.24

19.86 18.05 79.86 18.05

Tb Plant -+ Cleueland St. Josepb L.A. Dalton Ft. SnxithFrom:

St. Iosepb Drive units Heating elements Pumps Control units Cabinets

2)< 6.90

0.00 0.00

,,+e 2t.o0

,r.t, OA<

L cr<

10.90

To DC -) Mecbburg L.A St. Iouis Dounu Atlanta g

!trashers Dryers Dishwashers Ranges 72.88 39.91 11 1q 47 nR 19.26

Tb Plant -+ Cleueland. St. Josepb L.A. Dalton Ft. StnilbFrom

L.A. Ddve units Heating elements Pumps Control units Cabinets

3.89 2.99 3.70 8.90

22.I0

3.50 2.60 3.61 8.46

21.00

0.00 0.00 0.00 0.00 0.00

3.75 2.72 3.90 9.00

24.20

1fo

4.23 ie 1n

; SK

Stl

To DC -) Mecbbutg L.A. St. Iouis Dounw Atlanta $Tashers Dryers Dishwashers Ranges

44.28 40.25 44.28

4.84 4.40 4.84

28.26 25.69 28.26

69.55 63.24 69,56

37.31 ?a o?

t:t

From:

Dalton

To Plant -+ Cleueland Dalton Ft. SnxitbSt. Iosepb I.A, Drive units Heating elements Pumps Control units Cabinets

2.71.

2.00 2.21"

+. /u 9.37

2.t1. 2.05 2.22 4.84 y.o)

3.75 2.72 3.90 9.00

24.20

0.00 0.00 0.00 0.00 0.00

1.23 1.25 1.30 2.77 6.06

To DC -) Mecbbutg L.A St. Louis Dou.mzu Atlanta rwashers

Dryers Dishwashers Ranges

1.5.83

1.4.39

1.5.83

14.39

47.27 4Z.r) / 47.27 +2..) /

12.79 1,1,,63

12.79 11-.63

53.83 48.94

o.o)

o.o) From:

Ft. Smitb

7b Plant --+ Cleueland St. Joseph L.A Dalton Ft. Sm.itb Drive units Heating elements Pumps Control units Cabinets

5.05 11..07

4.95 1n on

4)4 1? ln

2.77 6.06

*o 0.00

To DC -) Mecbburg I,A St. Iouis Downw Atlanta 'Washers

Dryers Dishwashers Ranges

21..82

79.84 2L.82

28.89 26.25 28.89

9.16 8.33 9.16

)o.uo 50.96 ty,

13.48 12.25 73.48

........-z-

Case 8-l: General Appliance Company 283

Exhibir 11

Raw Material and Intermediate Product Usase

Wasber Dryer Disbwasber Ouen/ Range

Rau Materiab Steel

Motor Components

Driue unit Heating elem,ent Purnp Control unit Cabinet

Exhibir 12

Raw Material Cost Average Production Costs-Raw Materials

($/unit)

Cleueland St. Josepb Los Angeles Dalton Fotl

Smitb

Steel V1

Steel. V2

Steel V3

Motor V4 Motor V5

))

51.

o/ 58

37 21

284

Exhibit 13

Chapter 8: Iogistics Network Design for Global 0perations

Customer Zone Demand Forecast (1988)

Cltstorner Zone Washer Dryer Disbuasber Ouen/Range DC Assigned

Atlanta

Chicago

Dallas

Denver

Detroit

L.A.

New Orleans Philadelphia

St. Louis

Seattle

Canada

Foreign Total

108,000

120,000

69,000

55,000

82,000

73,OOO

54,000

85,000

71,000

54,000

25,000

6,000

802,000

81,000

61,000

43,000

44,000

45,000

58,000

56,000

57,OO0

72,000

31,000

22,OO0

8,000

578,000

33,000

26,000

19,000

18,000

22,000

17,000

25,000

21,000

18,000

9,000

11,000

241,OO0

49,000

39,000

25,000

23,000

40,000

27,000

42,000

41,000

48,000

25,O00

15,000

12,000

385,000

27'1.,000

246,000

156,000

140,000

189,000

175,000

178,000

204,000

212,000

128,000

71,000

37,000

2,007,000

St. Louis

St. louis St. Louis

St. Louis

t.A. st. Louis

Mechanicsbg

St. Louis

Downsview Mechanicsbg

c S

: L

I (

I I

Estimated Demand Growth Rates

Region

Producl U.S. West U.S. Central U.S. East Canada Foreign

3o/o

5o/o

3o/o

60/o

2o/o

4o/o

2o/o

3o/o

4o/o

5o/o

3o/o

W'asher

Dryer Dishwasher

Oven/Range

Current Selling Price

Ptoduct Prices ($/Unit)

Vasher Dryer Dishwasher

Range

$440

360

320

480

Case 8-1: General Appliance Company 285

Exhibit 14

Current Configuration Decisions

ID 1T Open? Open?DCs

Cleveland St. Joseph L,A.

Dalton Fort Smith

Yes

Mechncsbg

L.A.

St. Louis

Downsview Atlanta

I 2

Yes

Customer Zone Distribution Center Customer Zone Distribution Center Customer Zone Distribution Center

Atlanta

Chicago

Dallas

Denver

(St. Louis) (St. Louis) (Sr. Louis) (St. Louis)

Detroit IA

New Orl Phila.

(St. Louis) (r.A.) (St. Louis) (Mechbrg)

St. Louis

Seaftle

Canada

Foreign

(St. Louis) 3 (St. Louis) 3 (Downsview) 4 (Mechbrg) 1

Final Product Plant Mix (Actual/Max)

Cap.Utl. V/eight Cleueland St. Josepb los Angeles Fort Snxitb Demand Reqmt. a/o Prod

Wasber

Dryer

Disbwasber

Range

230,000

750,000

272,000

750,000

84,000

750,000

145,000

520,000

150,000

175,000

128,000

450,000

103,000

450,000

35,000

420,o00

285,000

550,000

218,000

555,000

80,000

500,000

91,000

370,000

159,000

390,000 45,000

390,000

42,000

230,000

802,000

578,000

211,,O00

386,000

0.35

o.35

0.35

100%

IOOa/o

TOOo/o

100%o

Intermediate Product Plant Mix (Actual/Max)

Cap.Utl. Weight Cleueland St. Iosepb Los Angeles Dalton Fot't Smitb Demand Reqrnt. o/o Prod

Driue Unit

Heatg. Elem,

Pump

Control Unit

Cabinet

772,O00

900,000

295,O00

400,000

515,000

750,000

671,000

820,000

671.,000

900,000

150,000

190,000

150,000

200,000

265,OO0

730,000

345,o00

163,000

580,000

266,000

650,000

266,000

800,000

583,000

900,000

91,000

222,000

365,000

610,000

674,000

733,000

674,A00

850,000

246,000

470,o00

246,000

470,000

1,621,000

386,ooo

1,043,000

2,007,000

0.04

o.o4

0.1

0.45

100o/o

].O0o/o

100%

1,000/o

286

Exltibit 15

Chapter 8: Logistics Network Design for Global Operations

ToaI Cost Summary

Item Cost (in $1,000) o/a of Total Cost

Inbound Cost Raw Material Ty'anssbipment

Production Cost Plant Fixed Variable

Outbound Cost DC Fixed DC Hndlg. & Tiansp. Plant Hndlg. & Ttansp

TOTAL P&D COST:

1.27,578.0

1,,249.7

1.22,827.7

94,536.9

329,437.8

423,974.7

7,683.3

29,99r.O

26,358.7

64,033.0

5r0,835.4

19.90o/o

Q.200/o

20.1.1%

15.48a/o

53.93o/o

69.41o/o

t.260/o

4.910/o

4.32% 'J.0.480/o

100.00%

I r I

t t

I t I I I (

(

Profit & Losses (In $tr4illions)

Total Sales (Year 0) Cost of Material, Production, & Distrib. Cost of Marketing, R & D, & Other Overhead Income Before Taxes Sales Margin (Year 0)

$823.360

$610.835

$125.000

t 6/.)z> 10.630/0

Abstract

The furmel thking England and France is remarkable in its impact. As the global logistics network grows, the tunnel improves travel for people and goods moving between the UK and the continent. Although many speculated about the financial implications of the tunnel, no one had done a serious study regarding the logistics implications of this new rail infrastructure. This study was motivated by the French train company dedicated to freight (Fret SNCF) in their need to explore commercial opportunities through the tunnel. We started by performing a survey (in cooperation with Coopers & Lybrand) with European exporting and transportation companies as to expectations and strategic

evaluation for the channel tunnel as a logistics altemative. We then developed some analytical models to offer guide- lines for deflning the range of values that would make one transportation altemative superior. In the study we worked with data provided by Fret SNCfl as well as with consul- tation with many European companies to validate the models and present specific solutions from different areas in the continent to the tIK. In particular, we examined nine feasible scenarios for going to London from seven different areas in the European continent.

lntroduction

The channel tunnel (Chunnel) linking England and France, which opened n 1994, greatly improves travel for both people and goods moving between the UK and the conti- nent. The tunnel connects the rail systems of the UK and France and, indirectly, their road systems. It adds an