The Detroit plant is facing several issues, poor financial, decline sales, increasing operational cost, low output per employee, High burden rate and many others. Detroit plant is the only plant manufacturing all three product lines: brakes, off-highway and on-highway axles. All other plants produce only a single product line, Detroit is significantly more complex than other plant. Richard Sullivan the new vice president in the Heavy Equipment Division (HED) he has three options for Detroit plant:
1. Close the plant and transfer products to other locations.
2. Invest in Detroit plant (tooling) to continue the operations for (5 to 10 years).
3. Build new plant.
Issues
Issue #1 – Operation Inefficiency:
Throughout the plants history it …show more content…
This has caused an outflow of investment dollars from the Detroit plant, to others, as Wriston sees a better return on investment at other locations. Due to this, Detroit has not been able to secure resources as it performance had decreased and its production is focused around low volume output. As a result, machines and tools that are essential for production have become costly to operate and maintain with the average age of machines in Detroit being 33.1 years old, compared to 15.9 years for all other facilities …show more content…
(Table 2: NPV Calculations) However, this option will result in the highest NPV for the company. In this option the Detroit products are segmented into three groups and redistributed to other factories. Group number one products will be sent to Lancaster factory, and group number two products are sent to Lima factory, while group number three products are terminated because it the only group with loss $-3,462,000. (Table 4: income statement for each group)
Option NO. 2 Invest in Detroit plant (tooling) to continue the operations for (5 to 10 years)
This option is initially appealing because it does not involve an initial investment. However, it does have a $2 M investment per year for the factory retooling and maintenance. Even with the annual investment, the plant will have a loss of about $-3 M per year. The NPV for this option is $ -$1,862,763 for 5 years projection. (Table 2: NPV Calculations)
Option NO. 3 Build a New Plant
This option will result in a $36 million outflow for initial costs, as well as a $4 million inflow from the sale of the old plant. It will have a NPV of $445,930.88 from $3 million annual cash inflows. (Table 2: NPV
1. Close the plant and transfer products to other locations.
2. Invest in Detroit plant (tooling) to continue the operations for (5 to 10 years).
3. Build new plant.
Issues
Issue #1 – Operation Inefficiency:
Throughout the plants history it …show more content…
This has caused an outflow of investment dollars from the Detroit plant, to others, as Wriston sees a better return on investment at other locations. Due to this, Detroit has not been able to secure resources as it performance had decreased and its production is focused around low volume output. As a result, machines and tools that are essential for production have become costly to operate and maintain with the average age of machines in Detroit being 33.1 years old, compared to 15.9 years for all other facilities …show more content…
(Table 2: NPV Calculations) However, this option will result in the highest NPV for the company. In this option the Detroit products are segmented into three groups and redistributed to other factories. Group number one products will be sent to Lancaster factory, and group number two products are sent to Lima factory, while group number three products are terminated because it the only group with loss $-3,462,000. (Table 4: income statement for each group)
Option NO. 2 Invest in Detroit plant (tooling) to continue the operations for (5 to 10 years)
This option is initially appealing because it does not involve an initial investment. However, it does have a $2 M investment per year for the factory retooling and maintenance. Even with the annual investment, the plant will have a loss of about $-3 M per year. The NPV for this option is $ -$1,862,763 for 5 years projection. (Table 2: NPV Calculations)
Option NO. 3 Build a New Plant
This option will result in a $36 million outflow for initial costs, as well as a $4 million inflow from the sale of the old plant. It will have a NPV of $445,930.88 from $3 million annual cash inflows. (Table 2: NPV