Indicators of problems in O-I
1) Product Quality Problems
The first observable symptom at Owens-Illinois that indicated some problems is the quality issues of some of its products between 2002 and 2003. O-I had supplied HVR bottles to Clorox Food Company. O-I has been accused of manufacturing low quality bottles different from those that had been ordered. The company was guilty of using a single step manufacturing process as opposed to the usual two-stage production process as a way to cut on costs. O-I was trying to minimize its production costs by manufacturing substandard bottles which caused Clorox a loss of over $725,000. Clorox filed a lawsuit against O-I seeking compensations for the losses it incurred from the usage of the low-quality bottles.
Owens-Illinois had been experiencing challenges in acquiring soda ash from its Wyoming mining site which resulted in the production of the low-quality bottles (Lehner et al.). The mining of soda ash has become a costly activity for the company due to the rising oil prices. Energy costs are estimated to account for 25% of the total manufacturing costs depending on the type of energy used as well as the factories location. The constant rise in the global oil prices has increased the energy costs which reduces the company’s profit levels. As a cut costing strategy, the company’s management opted to reduce some of the operations in the manufacturing process. This involved eliminating repetitive production measures that were not very significant to the products quality. This resulted to the elimination of 2nd stage of producing plastic bottles which unfortunately altered the quality of the bottles.
2) Broken Partnership Deals
Another indicator was when the Withdrawal from environment partnerships with Graham Packaging Company in June 2016. The two companies had been partners on a glass recycling project that was an environmental conservation partnership. However, after failing to honor its financial obligations in the partnership, O-I withdrew from the partnership. The CEO of O-I, Andres Alberto Lopez, admitted that the poor financial performance experienced in the previous year was partly due to its financial commitments to the Graham-Owens Recycling partnership. In the partnership, O-I had annual financial commitments of $500 million for a period of 5 years. The company pulled out of the partnership in its 2nd year of operations. From its financial statements, the profitability level of O-I fell by more than 15% which was attributed to inefficiency in its investment decisions. The company terminated a few other sponsorships deals it had with non-governmental charity organizations. The annual sponsorship and partnership costs stood at $1.9 million in 2015 and was reduced by more than 40% in the 2017 financial year. After conducting a root cause analysis, the reason the company has been experiencing a decrease in its profit margin was due managerial problems at the organisation.
3) Failed Business Acquisitions.
In 2014, Owens-Illinois tried to acquire a German glass manufacturing company but the deal failed during the final proceedings of the agreement. O-I was looking to acquire Indram Glass Company that would allow O-I to have a commanding market share in the German glass market. However, the debt of O-I was too much to enable the take over to be successful. The debt-to-equity ratio for Owens-Illinois Inc. is quite low which means that the company’s liquidity ratio is negative (Latino et al.).
Deeper Problems at Owens-Illinois Inc.
Managerial inefficiency
After Al Stroucken retired as the company’s chief executive officer December, 2015, the company has been faced by managerial inefficiencies which have resulted to reduced profitability margin. The lack of proper organisation in the departments has created a supply chain delays that increase the company’s operational costs. The lack of a proper supply chain especially in the acquisition of raw materials has led to the drop in the products quality. The lack of clear cut product distribution channel is another problem resulting from poor management of the company. The former CEO of O-I retired without having gloomed his successor in the company which caused a shift in the company’s overall running.
Huge Company Debt
Over the years, the financial structure of O-I is funded by more debt than equity which is a bad sign of the company that is sent to the investors. Owens-Illinois capital structure has more debt to equity ratio. The 68.56% debt financing of the company is regarded quite high compared to an overall benchmark of 25%. In the year ended on December 2017, O-I had a debt total of $5.28 billion which is a decrease of 1.6% from the previous year (Annual report, 2016). This huge debt was the main reason that the Indram acquisition deal was never finalized.
Asbestos Liabilities
Owens-Illinois company has been a defendant in numerous lawsuit cases that has been filed due to the harms caused by asbestos that it has been using to produce its products. Asbestos-related liabilities has been $110 million in 2017. These liabilities have been as a result of asbestos exposure of its employees which has led to physical injuries and health complications. The company has been trying to reduce the liabilities using claims-handling agreements.
Conclusively, it is evident that Owens-Illinois Inc. is facing some internal problems which can only be identified by having a closer look at the operations of the company. O-I is facing a managerial threat which started when the former CEO retired from his position in December 2015.
Work Cited
Latino, Robert J., Kenneth C. Latino, and Mark A. Latino. Root cause analysis: improving performance for bottom-line results. CRC press, 2016.
Lehner, Carmen. Evaluating a new plant startup in the rigid plastics packaging industry. Pepperdine University, 2016.
Owens-illinois, Inc. (2017). Form 10-K 2017. Retrieved from Mergent Online database
Owens-illinois, Inc. (2017) Annual Report, 2016. Mergent Online. Web. 20 April 2018
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