Mohan N - Alden Products Inc. - European Manufacturing 3a37p

Mohan N - 151202067

SCHOOL OF MANAGEMENT MANIPAL UNIVERSITY

Alden Products Inc. - European Manufacturing Date of Submission – 21st August 2016

Technology and Operation Strategy Submitted to: Prof. Ashish Viswanath Prakash

Alden Products Inc. - European Manufacturing Abstract The case speaks about a manufacturing company which undergoes expansion of plant to manufacture in order to meet the growing demand. The company comes across various phases where it has to take strategic decisions to centralize or distribute, localize or standardize, and integrate or separate to attain operational efficiency and build on its competitive strategies. Introduction Alden Products Inc. (API) a company headquartered in Illinois, United States majorly ventured in personal care products and traded worldwide. Having said that, the company sells over 1500 products in more than 50 countries. Skin creams, lotions, soaps and shampoos, toiletries and deodorants were a few products around which their business was concentrated. Majority of sales were done in Europe continent. API’s target segment were customers who preferred high end products which were unique, high quality and innovative. The company is known for its excellent marketing strategies through innovative ments and other promotions. Also, they priced their products about 15% more than their competitors. Initially there were two plants, one in Peoria located in United States and the other in Buxbridge in United Kingdom. In 1962, the company decided to build a new plant to consolidate the entire production into two plants. One was the existing plant in Buxbridge which would responsible for United Kingdom region and other was a new Uniplant in Holland which would meet the production demands of entire European region including its subsidiaries. Why did the company go for a new UNIPLANT? The decision to build a Uniplant was majorly influenced by the below listed two factors or trends observed in the European market.  Firstly, the sales in European market grew at a rate of over 40% and was expected to quadruple in next 3 years. The existing facility in Europe could not meet this demand as most of them were inefficient and operated at maximum capacity. However the option of expanding the existing facility was ruled out keeping the cost and investment factor

mind. Another problem with expansion was to identify and train managerial staff to supervise expansions.  Secondly, Europe approached towards free trade policy among the union countries which meant that all trade tariffs were to be abolished. The idea of having a centralized production to mitigate risk made more sense. Also Allyn and Bower ed this decision with a few additional reasons to have a new plant. 

Consolidating production for several countries would help in smoothing the total load of production.

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API could certainly save on cost in of economies of scaled linked with buying and handling equipments, automated filling lines. Also construction cost of new plant would be less than congesting the existing site.

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It would reduce reliance on outside suppliers for processing and storage facility.

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The new plant would help in introducing new products, simplification of processes, and debugging.

Performance of the Uniplant Uniplant was built by mid-1964 in 30 hectares of land in Nijmegan, Holland with an investment of 200 million Dfl. Since its inception, the plant was expanded six times till 1982 due to increasing sales. On observing exhibit 3 which shows the data of production, cost, and sales figures of every year, we get to know that after the expansion of 1982, the production increased at 5%, increment of sales by 11%. Although the production is enhanced only 5% the overhead cost is found to be increased by 33%. A careful observation of this reveals that the cost has increased due to expansion which has brought drastic changes in work schedule affecting the work flow. However, with the increase in sales in the years post 1981 the overhead cost was reduced. Another factor that could affect the performance of Uniplant was Italian Lira and Dutch guilder currency deterioration which increased the transportation costs. API dint want to

reduce its mark- up price from 10% to 5% nor did it want to standardize the transportation cost to all its subsidiaries which would result in North European subsidies paying more and Italy less. With an intention of not losing the Italian market, the management allowed Italy to go for local contract filling. Also Recession hit Europe in 1970 to 1988. This resulted in cost of living in Holland went up to 70%. However the Uniplant was not much affected by this which is clarified by average cost per unit increased by 50% only. What saved API during this phase was their strategy to procure its materials majorly from outside countries and only 35% within Holland. This argument can be justified by exhibit 2 which states materials was budget for 62.6%.Uniplant’s high inventory turnover helped them in minimizing the overhead cost comparing the data in exhibit 3 from years 1987 to 1988 . CRUX of the Case Sales projections made by the company in 1990s revealed that a huge demand was expected in the next 10 years and there was a requirement for 8 to 10 high speed filling lines. The major problem of API here is take a strategic decision in locating the additional filling lines. Three alternatives were identified here: a) Expanding Uniplant to meet the requirements - Integration b) New plant in southern Europe - Separation c) Approach Contract Fillers - Offshoring Evaluation of Alternatives Expanding Uniplant to meet the requirements by Integration: 

Van Zweitan felt that integrating the additional facilities in Uniplant was best and economical choice for the below reasons:

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It would minimize the investment required avoiding the cost on purchasing additional land. If required Purchasing land adjacent to Uniplant was cheaper.

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He estimated that to get equipped a high speed filling line for a capacity of 40 million units would cost around 30 million Dfl and it requires an additional investment of 10 million Dfl if it was to be done in Uniplant.

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Also an expanded plant would them with blow-molding facility to produce its own plastic bottles which was an added cost advantage.

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Sourcing human resource would be a challenge in a new plant as there was no assurance of access to college students, also would lead to monotonous jobs due to lack of automation unlike Uniplant.

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However there was also a risk congestion and transportation problem encountered earlier.

New Plant in Southern Europe – Separation The very next option considered was to separate the function or set up a new plant in the southern parts of Europe may be in Italy or southern . This shift from the consolidated production system has its own pros and cons: 

This decision can be considered as feasible due to the proximity to the European market which is its major target market.

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The problem of late deliveries can be rectified by moving closer to the markets

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Currency deterioration which was a barrier to price the products competitively in Italy which was a majorly due to transportation costs can be overcome.

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However, the risk is here the level of investment that was to be made.

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It also indicated the change in operational strategies, management, training and development, knowledge transfer across countries etc.

Approach Contract Fillers – Offshoring Another alternative which was considered was to Offshoring the filling to contract fillers locally. By 1989, around 15% of Europe’s sale came from Offshoring while 30% of United Kingdom’s sale came from Offshoring. This approach was economical as cost varied from country to country.

Some fillers in charged 5% to 10% less than Uniplant while Italian fillers charged 20% to 30% lesser. The risks associated with this could be: 

The quality of products and customer service might reduce.

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Cost of inspecting the quality for fillers across would certainly increase

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Allowing a fillers to take over 100% production of any product would make API difficult to rebuild capabilities in future

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High chance of losing competitive advantage by revealing the hidden secrecy of formulations to fillers.

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Other risks might be in the form of logistics cost and lead times, currency risks, political risks.

Recommendations I would personally suggest the first alternative which is to Integrate within UNIPLANT for better operational strategy. Observing the competitive guidelines given in exhibit 4 it is implied that having without having control over its own processes it would lose its competitiveness. It can certainly cater to niche segments with creative marketing, new products development, meet market demand in a timely manner, maintain the superiority of its quality, provide exceptional customer service, build state of art capabilities, and also to exercise high degree of flexibility in responding to the market situations by implementing the integration strategy. References 1. Harvard

Business

School.

(n.d.).

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21,

2016,

from

http://www.hbs.edu/faculty/Pages/item.aspx?num=22780 2. Van Mieghem, J. A. (2008). Operations strategy: Principles and Practice. (1st Ed.). Belmont, MA: Dynamic Ideas.