Case Study For Operational Excellence

272 PART TWO DESIGNING THE OPERATION

Dr Rhodes was losing his temper. ‘ It should be a simple enough decision. There are only two alternatives. You are only being asked to choose a machine! ’

The Management Committee looked abashed. Rochem Ltd was one of the largest independent companies sup- plying the food-processing industry. Its initial success had come with a food preservative used mainly for meat-based products and marketed under the name of ‘Lerentyl’. Other products were subsequently developed in the food colour- ing and food container coating fields, so that now Lerentyl accounted for only 25 per cent of total company sales, which were now slightly over £10 million.

The decision The problem over which there was such controversy related to the replacement of one of the process units used to manufacture Lerentyl. Only two such units were used; both were ‘Chemling’ machines. It was the older of the two Chemling units which was giving trouble. High breakdown figures, with erratic quality levels, meant that output-level requirements were only just being reached. The problem was: should the company replace the ageing

Chemling with a new Chemling, or should it buy the only other plant on the market capable of the required process, the ‘AFU’ unit? The Chief Chemist’s staff had drawn up a comparison of the two units, shown in Table 8.4 .

The body considering the problem was the newly formed Management Committee. The committee consisted of the

CASE STUDY Rochem Ltd

● The resource and process ‘distance’ implied by the technology implementation will indicate the degree of diffi culty.

● Customer acceptability may be a barrier to implementation in customer-processing technologies.

● It is necessary to allow for the adjustment costs of implementation.

Chemling AFU

Capital cost £590,000 £880,000

Processing costs Fixed: £15,000/month Fixed: £40,000/month

Variable: £750/kg Variable: £600/kg

Design capacity 105 kg/month 140 kg/month

98 ± 0.7% purity 99.5 ± 0.2% purity

Quality Manual testing Automatic testing

Maintenance Adequate but needs servicing Not known – probably good

After-sales services Very good Not known – unlikely to be good

Delivery Three months Immediate

Table 8.4 A comparison of the two alternative machines So

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CHAPTER 8 PROCESS TECHNOLOGY 273

four senior managers in the firm: the Chief Chemist and the Marketing Manager, who had been with the firm since its beginning, together with the Production Manager and the Accountant, both of whom had joined the company only six months earlier.

What follows is a condensed version of the information presented by each manager to the committee, together with their attitudes to the decision.

The Marketing Manager The current market for this type of preservative had reached a size of some £5 million, of which Rochem Ltd supplied approximately 48 per cent. There had, of late, been significant changes in the market – in particular, many of the users of preservatives were now able to buy products similar to Lerentyl. The result had been the evo- lution of a much more price-sensitive market than had previously been the case. Further market projections were somewhat uncertain. It was clear that the total mar- ket would not shrink (in volume terms) and best estimates suggested a market of perhaps £6 million within the next three or four years (at current prices). However, there were some people in the industry who believed that the present market only represented the tip of the iceberg.

Although the food preservative market had advanced by a series of technical innovations, ‘real’ changes in the basic product were now few and far between. Lerentyl was sold in either solid powder or liquid form, depending on the par- ticular needs of the customer. Prices tended to be related to the weight of chemical used, however. Thus, for exam- ple, the current average market price was approximately £1,050 per kg. There were, of course, wide variations depending on order size etc.

‘At the moment I am mainly interested in getting the right quantity and quality of Lerentyl each month and although Production has never let me down yet, I’m worried that unless we get a reliable new unit quickly, it soon will. The AFU machine could be on line in a few weeks, giving better quality too. Furthermore, if demand does increase (but I’m not saying it will), the AFU will give us the extra capacity. I will admit that we are not trying to increase our share of the preservative market as yet. We see our priority as establishing our other products first. When that’s achieved, we will go back to con- centrating on the preservative side of things.’

The Chief Chemist The Chief Chemist was an old friend of Dr Rhodes and together they had been largely responsible for every prod- uct innovation. At the moment, the major part of his budget was devoted to modifying basic Lerentyl so that it could be used for more acidic food products such as fruit. This was not proving easy and as yet nothing had come of the research, although the Chief Chemist remained optimistic.

‘If we succeed in modifying Lerentyl the market opportu- nities will be doubled overnight and we will need the extra

capacity. I know we would be taking a risk by going for the AFU machine, but our company has grown by gambling on our research findings, and we must continue to show faith. Also the AFU technology is the way all similar technologies will be in the future. We have to start learning how to exploit it sooner or later.’

The Production Manager The Lerentyl Department was virtually self-contained as a production unit. In fact, it was physically separate, located in a building a few yards detached from the rest of the plant. Production requirements for Lerentyl were cur- rently at a steady rate of 190 kg per month. The six techni- cians who staffed the machines were the only technicians in Rochem who did all their own minor repairs and full quality control. The reason for this was largely historical since, when the firm started, the product was experimen- tal and qualified technicians were needed to operate the plant. Four of the six had been with the firm almost from its beginning.

‘It’s all right for Dave and Eric [Marketing Manager and Chief Chemist] to talk about a big expansion of Lerentyl sales; they don’t have to cope with all the problems if it doesn’t hap- pen. The fixed costs of the AFU unit are nearly three times those of the Chemling. Just think what that will do to my budget at low volumes of output. As I understand it, there is absolutely no evidence to show a large upswing in Lerentyl. No, the whole idea [of the AFU plant] is just too risky. Not only is there the risk. I don’t think it is generally understood what the consequences of the AFU would mean. We would need twice the variety of spares for a start. But what really worries me is the staff ’s reaction. As fully qualified technicians they regard themselves as the elite of the firm; so they should, they are paid practically the same as I am! If we get the AFU plant, all their most interesting work, like the testing and the maintenance, will disappear or be greatly reduced. They will finish up as highly paid process workers.’

The Accountant The company had financed nearly all its recent capital investment from its own retained profits, but would be taking out short-term loans the following year for the first time for several years.

‘At the moment, I don’t think it wise to invest extra cap- ital we can’t afford in an attempt to give us extra capac- ity we don’t need. This year will be an expensive one for the company. We are already committed to considerably increased expenditure on promotion of our other prod- ucts and capital investment in other parts of the firm, and Dr Rhodes is not in favour of excessive funding from outside the firm. I accept that there might eventually be an upsurge in Lerentyl demand but, if it does come, it probably won’t be this year and it will be far bigger than the AFU can cope with anyway, so we might as well have three Chemling plants at that time.’

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274 PART TWO DESIGNING THE OPERATION

QUESTIONS 1 How do the two alternative process technologies

(Chemling and AFU) differ in terms of their scale and automation? What are the implications of this for Rochem?

2 Remind yourself of the distinction between feasibility, acceptability and vulnerability discussed in Chapter 4 . Evaluate both technologies using these criteria.

3 What would you recommend the company should do?

PROBLEMS AND APPLICATIONS

1 In the early part of this chapter, three technologies are described: 3D printing, the Internet of Things, and Telemedicine. Try to describe the technologies by answering the ‘four key ques- tions’ that are also described.

2 A new machine requires an investment of €500,000 and will generate profits of €100,000 for 10 years. Will the investment have a positive net present value assuming that a realistic inter- est is 6 per cent?

3 A local government housing office is considering investing in a new computer system for managing the maintenance of its properties. The system is forecast to generate savings of around £100,000 per year and will cost £400,000. It is expected to have a life of seven years. The local authority expects its departments to use a discount rate of 0.3 to calculate the finan- cial return on its investments. Is this investment financially worthwhile?

4 In the problem above, the local government’s finance officers have realized that their dis- count rate has been historically too low. They now believe that the discount rate should be doubled. Is the investment in the new computer system still worthwhile?

5 A new optical reader for scanning documents is being considered by a retail bank. The new system has a fixed cost of €30,000 per year and a variable cost of €2.5 per batch. The cost of the new scanner is €100,000. The bank charges €10 per batch for scanning documents and it believes that the demand for its scanning services will be 2,000 batches in year 1, 5,000 batches in year 2, 10,000 batches in year 3, and then 12,000 batches per year from year 4 onwards. If the realistic discount rate for the bank is 6 per cent, calculate the net present value of the investment over a five-year period.

SELECTED FURTHER READING

Arthur, W.B. (2010) The Nature of Technology: What It Is and How It Evolves, Penguin, Harmondsworth.

Popular science in a way, but very interesting on how technologies evolve.

Brain, M. (2001) How Stuff Works , Wiley, New York.

Exactly what it says. A lot of the ‘stuff ’ is product technology, but the book also explains many pro- cess technologies in a clear and concise manner without sacrificing relevant detail.

Brynjolfsson, E. and McAfee, A. (2014) The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies , W. W. Norton, New York.

This is one of the most influential recent books on how technology will change our lives.

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