AIMS 3770- Dr. Leon
Project 2: Applichem’s Capacity Planning Problem
Applichem management is faced with the difficult problem of allocating the capacity of its
manufacturing plants to its customers that are located around the world. Management recognizes that
the plants differ greatly in efficiency but has had little success in improving the operations of the
inefficient plants. At this time, management must decide how to best meet the demand forecasted for
existing markets next year using the capacity of its plants given the differences in manufacturing costs
that currently exist. They also want to develop a longer term strategy to identify how the plant facilities
should be modified to meet the emerging Chinese market. This longer strategy entails investigating the
possibilities of expanding an existing plant, building a new plant in China and shutting down one or more
of the existing plants.
Applichem makes a chemical product called Release-ease. Plastics molding manufacturers use this dry
powder product to make it easy to remove a plastic part from a mold. A recent study by Applichem’s
market research team indicates that existing customer demand for Release-ease should be fairly steady
for the next five years. Although Applichem does have some competition, particularly in the European
markets, management feels that as long as they can provide a quality product at a competitive price,
customers should stick with Applichem. The large growth in Chinese manufacturing during the 21st
century has also created a new market that Applichem wants to exploit. Marketing research estimates
that five years from now Applichem could easily sell three million pounds per year to China.
Applichem currently owns six plants capable of making Release-ease in the following cities: Gary,
Indiana; Windsor Ontario, Canada; Frankfurt, Germany; Mexico City, Mexico; Caracas, Venezuela; and
Osaka, Japan. These plants have traditionally focused on meeting demand for the immediate
surrounding regions, but a considerable amount of exporting and importing of the product has occurred
due to imbalances in the supply and demand for some of the regions. The following table shows the
production/distribution policy that Applichem used last year where the amounts shipped are in 1,000
lbs.
PRODUCT MADE AND SHIPPED LAST YEAR (x 1,000 POUNDS)
From/To
Mexico City
Windsor
Caracas
Frankfurt
Gary
Osaka
Mexico
300
Canada
Venezuela Europe
630
United States
Japan
790
260
410
560
2000
1240
1400
400
Differences in the technologies used and local raw material and labor costs create significant differences
in the cost to produce Release-ease in the various locations. The costs can change dramatically due to
currency valuation and labor law changes in some of the countries as well. This is especially true in
Mexico and Venezuela. The following table provides estimated costs to produce next year along with the
capacity of each plant:
Plant
Mexico City
Windsor
Caracas
Frankfurt
Gary
Osaka
Production
Cost (per
1,000 lbs)
$95.01
$97.35
$116.34
$76.69
$102.93
$153.80
Plant
Capacity (in
1,000 lbs)
2200
370
450
4700
1850
500
In considering how best to use the capacity of its plants, Applichem management needs to consider the
cost of shipping product from one customer region to another. Applichem now commonly ships product
in bulk around the world, but it is expensive. The costs involved are not only higher transportation costs
but also import duties that are assessed by customs in some countries. The following table describes
the cost to transport 1,000 pounds of product from each plant to each country:
TRANSPORTATION COST (per 1,000 lbs)
Plant
Mexico City
Windsor
Caracas
Frankfurt
Gary
Osaka
Mexico
0.0
$11.0
$7.0
$10.0
$10.0
$14.0
Canada
$11.4
0.0
$10.0
$11.5
$6.0
$13.0
Venezuela
Europe
$7.0
$11.0
$9.0
$11.5
0.0
$13.0
$12.5
0.0
$11.0
$10.0
$12.5
$14.2
United States
$11.0
$6.0
$10.4
$11.2
0.0
$18.0
Japan
$14.0
$13.0
$14.3
$13.3
$12.5
0.0
Import duty is calculated on the approximate production plus transportation cost of product brought
into the country. For example, assume that 1,000 pounds of Release-Ease are shipped into Venezuela
from other country and that the production and shipping cost of these 1,000 pounds are $100. The
import duty would then be calculated as $100 x .5 = $50 where the .5 is Venezuela’s 50% import duty
shown in the following table. The following table describes each country’s current import duty along
with the country’s estimated annual demand for Release-ease.
Country
Mexico
Canada
Venezuela
Europe
United States
Japan
Annual Demand
(in 1,000 lbs)
300
260
1600
2000
2640
1190
Import Duty
0.0%
0.0%
50.0%
9.5%
4.5%
6.0%
Your assignment is to perform the following analysis:
1. Use the following table to help organize the production/distribution cost for each route in the
problem:
From Plant: XXX
Production Cost ($/1000lbs)
Transportation Cost
($/1000lbs)
Import Cost ($/1000lbs)
Total Cost per 1,000 pounds
To Country: YYY
2. Develop a linear programming transportation spreadsheet model and use Solver to minimize the
total production, distribution and import duty cost for the existing six plants next year. What is
your optimal production distribution plan? How does it differ from Applichem’s current plan?
How much money can Applichem save with your plan? Which plants are underutilized?
3. Applichem would like you to use your model to figure out the best way to expand capacity in
order to capture the emerging Chinese market in a couple of years. They estimate that the
Chinese demand will eventually be three million pounds per year. China has a 20% import duty
rate. Transportation costs to China from each of the existing six plants are estimated to be (per
1,000 lbs): $14 from Mexico City, $12 from Windsor, $14.5 from Caracas, $13 from Frankfurt,
$13.5 from Gary and $5.0 from Osaka. As a first strategy, Applichem is thinking of expanding
the European plant’s capacity by one million pounds. Make a copy of your LP model to a new
worksheet and modify it as necessary to analyze this expansion and the addition of the Chinese
market. Do you have sufficient capacity with this plan?
4. Applichem is also considering the second alternative of building a new plant in Beijing to capture
the emerging Chinese market in a couple of years. This new plant would be built instead of the
European plant expansion. This new plant would have a capacity of two million pounds per year
and it would cost $90.10 to produce 1,000 pounds at this new location. Transportation costs
from the new Chinese plant to the different market regions would be the same as from the
Osaka plant with two exceptions: there is no transportation cost from the Chinese plant to
China and the transportation cost per 1,000 lbs from Beijing to Japan is $4.50. Make a copy of
your part 2 LP model to a new worksheet and modify it as necessary to analyze this new plant
with the addition of the Chinese market. Which alternative is cheaper, the European plant
expansion or the new Chinese plant?
5. Save each plant scenario that you optimized on a different worksheet in the same spreadsheet.
Deposit the spreadsheet into MyLMUConnect when you are done.
6. Write a memo to Mr. Apple, the Operations manager at Applichem, that communicates how you
think Applichem’s existing capacity should be allocated for the next couple of years. You should
also communicate the capacity alternative you recommend for the future to help Applichem
expand into the Chinese market. Defend your recommendation with the costs calculated in your
models plus at least one other location factor that you think is important to the decision. Turn
in a printed hardcopy of this memo in class. The following guidelines should be used to organize
your memo:
Paragraph
1
2
3
4
Content
Summary of Applichem’s problem and your
recommendations. This should briefly
describe the potential savings over the next
two years with the existing plants and your
recommendation for longer term expansions.
Description of production/distribution plan
details using current plants for next two
years. The capacity utilization for each plant
should be identified and interpreted. (Table
should be included to help communicate
numbers).
Recommended expansion and location plan
for Chinese market. (Reference to table or
graph for cost details may be needed).
Concluding Comments
PROJECT 2: LOCATION ANALYSIS RUBRIC
Points
Organization
3
Your memo is clearly
and efficiently
organized. After
reading the first
paragraph, the
audience knows your
general
recommendation and
the criteria on which
you based your
decision.
2
Your memo follows the
suggested
organizational
guideline. Portions of
the memo ramble
however and/or the
first paragraph does
not summarize the
decision criteria and
recommended plan for
the audience.
2 year Distribution
Plan Description
(Points x 2)
A complete
description of the
production
distribution plan
for the next two
years is provided.
The audience
knows exactly
what actions to
implement and
understands
which plants are
not operating
efficiently
Writing
Mechanics
Complete details
about either the
particular
quantities to ship
over each route or
the plant
utilizations are not
provided.
Your memo has a
few problems
with grammar,
word usage,
sentence
structure,
punctuation
and/or spelling,
but they do not
distract the
reader to a
significant
degree.
Your memo is
substantially free
from errors
associated with
grammar, word
usage, sentence
structure,
punctuation and
spelling.
Long Term Expansion
Recommendation
(Points x 4)
A persuasive argument
is made to convince the
audience of the supply
chain structure that
should be developed in
order to expand into
the Chinese market.
This argument includes
facility
recommendations and
references to key costs
plus at least one other
relevant factor that
was considered at a
non-superficial level.
A reasonable argument
is made to convince the
audience of the supply
chain structure that
should be developed in
order to expand into
the Chinese market.
This argument only
includes facility
recommendations and
key costs and does not
consider other
reasonably developed
factors.
Communication of
Numerical Results
(Points x 2)
Easy to read tables or
graphs display insightful cost
comparison of your
recommended production
strategies versus alternative
strategies along with
pertinent details of your
production/distribution
plan. These tables are
appropriately labeled and
help limit your memo to one
page.
Easy to read and
appropriately labeled tables
or graphs display a simple
cost comparison of your
recommended strategy
versus alternative strategies
or display pertinent details
of your production/
distribution plan.
Points
Organization
1
Your memo jumps
from idea to idea
without a clear
reason for moving in
that direction. It is
addressed to the
appropriate audience
however.
0
Your memo does not
summarize the
information for the
appropriate
audience.
The distribution
routes are not
discussed in the
memo at all or the
routes are
incorrectly
communicated.
3
6
Points
Earned:
Points
Possible:
2 year Distribution
Plan Description
(Points x 2)
An overview of
the distribution
routes is made
with insufficient
detail about the
quantities
shipped.
Writing
Mechanics
Your memo has
an accumulation
of errors
associated with
grammar, word
usage, sentence
structure,
punctuation and
spelling that
distracts the
reader from the
points you are
trying to make.
Your memo is
marred by many
serious errors of
grammar, word
usage, sentence
structure,
punctuation and
spelling
3
Long Term Expansion
Recommendation
(Points x 4)
The costs, expansion
plans and supply chain
structure are not
correctly
communicated or are
not defended with
sufficient support or
cost details.
Communication of
Numerical Results
(Points x 2)
Your tables or graphs are
not easy to read or
appropriately labeled
and/or do not communicate
pertinent information to the
audience and/or contain
serious miscommunication
of information.
The expansion plans
are not addressed in
this analysis.
Tables or graphs are not
included.
12
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