Michigan Manufacturing Corp.

OPER 56105/17/1999

Executive Summary

The Pontiac plant had not been profitable for several years and had difficult labor force problems. It was decided to close the plant and distribute the current and new product (prototype) manufacturing to other plants that were under-utilized. Senior workers would be transferred to the new designated plants.

[NOTE: This executive summary is a little too brief. Another line or two presenting the issue/setting up the problem and a couple of lines addressing the recommendation are in order. –Greg]

Organizational Profile/Overview

Michigan Manufacturing Corporation's Heavy Equipment Division (HED) was a large axle and brake manufacturer. The division was under corporate pressure to perform well since the shipping business division sales had declined. It was headquartered in Pontiac. In 1987 the division had 9 plants operating, and 1 under construction. Each plant had different product missions' complexity, and each plant manager was evaluated on return on assets employed. The product complexity could be measured in 3 categories: product line (on-highway axles, off-highway axles, brakes), product families, and product model.

The Pontiac plant had two product lines unlike the other plants that specialized in one product line. It manufactured low volume product families, including prototypes for new products and replacement for all old products. Over the years, as market demand for a new product manufactured at Pontiac grew, the production would be transferred to a new plant specifically built or acquired for it. Several key factors that contributed to the poor performance of the Pontiac plant:

  • Investment: capital in the corporation tended to flow to those products and facilities with the highest demonstrated rates of return, whereas Pontiac had negative return, thus it was unlikely for it to receive new investment for low volume dying products.
  • Machine tools: many of the tools were antique and set up times could easily ran 10 times the run-time for a batch of parts due to the low volume. The machines were grouped on the plant floor by type of machine to lower training cost of operators who could specialize in one type of machine.
  • The plant: the facilities had degenerated with major improvements mandatory in a few years.
  • Labor: machine operators were skilled operators who specialized in one type of machine. Workers were protected by union. The plant had a history of long service employment. More than half of the workers aged 50 years and above. Due to little plant investment or attention, Pontiac workers believed corporate expectation for them were low and had begun to perform accordingly. Absenteeism and turnover were frequent problem at Pontiac plant.
  • Overhead: maintenance costs associated with old facilities and machines had gone up. Pension system systematized that plant gave pension to retired workers who used to work on the plant no matter if the product they had worked on had been transferred to a different plant. Past service pension funding expense in 1987 alone was $648,000. So far they were not obligated by the union to offer job security benefits to younger employees. However, the unions had begun to raise the issue recently.
  • Product costs: all plants in the division used a uniform product costing system, which calculated a standard cost for each model produced. With higher cost of unproductive-direct-labor, lower-volume-purchasing material costs, machine-set-up labor and higher fixed overhead, but with the same product sale price, Pontiac plant would end up with lower profit than other plants.

Critical Issues

  • HED's order winning criteria was in the new product innovation and existing product improvement. The division would need an efficient way to manufacture diverse prototype products in low-volume with limited investment dollar with current Michigan Manufacturing cash flow condition.
  • With Pontiac plant being the designated plant to experiment with these new prototypes, it had not been profitable for a couple of years and with current operation practices and tools was not expected to make any profit in the near future either. To be able to operate for the next couple of years, some machine and plant upgrade were mandatory. However, corporate capital allocated for it was unlikely to come with Pontiac current performance.
  • With lacking support from corporate and having outmoded machinery, Pontiac plant lost its importance as the portal for new product introduction. Instead, its other role of supporting discontinued products services dominated its popular image as producer of dying products. This was the source of difficult labor force in Pontiac.

Alternatives

  1. Close the plant as soon as possible and transfer product group 1 and 2 to other plants

(+) / Saving $5 million per year (see appendix I).
(+) / Lima plant was under-utilized and prime candidate for group 2 product transfer. Group 1 product manufacturing and assembly could be divided and transferred to Tiffin, Fremont, Lancaster, or Maysville.
(+) / Pontiac was still not obligated to guarantee job securities for younger employees, which means lower cost of employee termination.
(-) / Incurred $17 million for closing the plant and transferring products to other plant in year 1 (see appendix 1), while Michigan's profit and cash flow were pretty tight.
(-) / Variable overhead for other plants where the products were transferred would be higher.
(-) / Adding complexity to other plants where the products were transferred: need to redesign processes and train workers of the product transferred if current Pontiac workers were not willing to transfer to the other plant.
(-) / Pontiac plant was located near division headquarters where presumably all the engineers and marketing people came up with new products. Having these people distant from the plant where new product experimentation occurred would widen the gap between theory and practice. Would need to implement some kind of information sharing between headquarters and these plants.
(-) / Customers' complain of why we dropped product 3 group.
(-) / Bad publicity for Michigan manufacturing in the city of Pontiac
  1. Invest in plant tooling in an attempt to develop a viable operation for at least the next 5-10 year period

(+) / Did not require a lot of capital investment.
(+) / Good reputation with local public, with workers being valued first instead of profit.
(-) / $1-2 million investment for plant maintenance and new tools were difficult to get with current performance.
It was only short-term solution. As new products were getting introduced every year, Pontiac plant was not equipped to support more complexity.
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.
(-) / 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.
  1. Build a new plant

(+) / Save $1.5 million per year.
(+) / Start from scratch and build the plant that could handle complexity.
(-) / Lancaster plant was also brand new, and still needed management attention. Additional new plant might make things more difficult.
(-) / Needed investment of $18.5 million in the plant and tooling and another $3 million for start-up costs, while Michigan's profit and cash flow were pretty tight.

Recommendation

Noelle Allen should close the Pontiac plant as soon as possible and transferred its products to other plants that were still under-utilized. This option #1 generated the highest saving for HED ($5 million/year). It required a major investment up front ($17 million) but it was still lower than investment needed to build new plant ($21.5 million). Human resource management is pretty tricky, and after several years of rock bottom morale of workers at Pontiac it would be difficult to inject new processes.

Operating plants with high complexity (low-volume, diverse product model) requires multi-skilled workers and line personnel. The Pontiac plant workers were specialized on one type of machine only, and training was not justifiable since loyalty level was low. Other plants, such as Lima, Tiffin, Fremont, Lancaster and Maysville had better worker turnover rate, and cross-training program could be planned.

With the new product manufacturing dispersed over several plants, Allen needed to schedule plant visit by marketing/engineer personnel from headquarters. This step is necessary to narrow the gap between theory and practice by means of joint worker-engineer problem solving and systematic experimentation. It is also important to rotate engineers and production supervisors across different process area. Workers at local plants needed to be empowered and given incentives for problem solving skills, so engineers did not have to be present all the time at the plant.

With almost all plants having new product manufacturing (except Sandusky, Lebanon, Saginaw, Essex) Allen needed to institute organizational routines that were common to these plants for new product introduction.

Action Items

  • Find prospective buyer of Pontiac plant.
  • Arrange senior workers transfer to plants where the products they were working on would be transferred; arrange termination of employment with union for senior workers who refuse to transfer and younger workers.
  • Recalculate sales price for these transferred products by allocating plant overhead to products, on a percent-of-sales basis, as overhead would be higher with introduction of new product line.
  • Sell existing inventories while production is not up yet on the new designated plant, and transfer excess inventories to the new designated plants.
  • Purchase new machine for new designated plants.
  • Cross-train workers at new plants with transferred workers from Pontiac on processes of the products transferred.
  • Develop training program at new plants to empower workers with more problem-solving skills.
  • Schedule visits from marketing/engineering department to discuss implementation of new products.
  • Establish division-wide routines for introducing new product.
  • Implement division-wide database for problems encountered during implementation for new product.

Appendix I

Cost comparison between keeping Pontiac plant and

closing the plant and transferring product 1 and 2 group to other plants

for year 1

Keep the plant / Close the plant
Minimum maintenance of the plant per year. / - $1-2 million / Sale of property. / + $2 million
Direct labor, material, and fixed overhead costs difference than in using other plant per year for product 1 group. / - $1,143,200 / Employee termination costs about $3 million. / - $3 million
Direct labor, material, and fixed overhead costs difference than in using other plant per year for product 2 group. / - $1,036,100 / Pension expense still incurring after plant closing per year. / - $648,000
Pension expense per year. / - $648,000 / Additional tooling for other plant for product 1 group. / - $8.5 million
Additional tooling for other plant for product 2 group. / - $5.5. million
Total: / - $5 million / Total: / - $17 million