Michigan Manufacturing Corp.

OPER 561 05/17/1999

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
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OPER 561 05/17/1999

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).

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OPER 561 05/17/1999

(+) 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

2. 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.

3. 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
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OPER 561 05/17/1999

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.
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OPER 561 05/17/1999

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 - $1-2 million Sale of property. + $2 million
plant per year.

Direct labor, material, and fixed - $1,143,200 Employee termination costs - $3 million
overhead costs difference than in about $3 million.
using other plant per year for
product 1 group.

Direct labor, material, and fixed - $1,036,100 Pension expense still - $648,000
overhead costs difference than in incurring after plant closing
using other plant per year for per year.
product 2 group.
Pension expense per year. - $648,000 Additional tooling for other - $8.5 million
plant for product 1 group.
Additional tooling for other - $5.5. million
plant for product 2 group.
Total: - $5 million Total: - $17 million