Applichem Management is faced with a difficult problem of allocating to its customers the capacity

of manufacturing plants that are located around the world. Management has long recognized that the

manufacturing plants differ greatly in efficiency but has had little success in improving the operations

of the inefficient plants. At this time, management has decided to focus on how best to use the

capacity of its plants given the differences in manufacturing costs that currently exist. They recognize

that this study may result in a significant reduction of output or possibly by shutting down of one or

more of the existing plants.

Applichem makes a product called Release$-$ease. Plastics molding manufacturers use this chemical

product. Plastic parts are made by injecting hot plastic into a mold made in the shape of the part.

After the plastic has sufficiently cooled, the fresh part is removed from the mold and the mold is then

reused to make subsequent parts. Release$-$ease is a dry powder applied as part of the manufacturing

process, that makes it easy to remove the part from the mold.

Applichem has made the product since the early $1950$s$,$ the demand has been consistent over time. A

recent study by Applichem$$s market research team has indicated that the 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. Release$-$ease sells at an

average price of $$1\mathrm{.}00$ per pound.

The company owns 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. Although the plants are focused on meeting demand for the immediate surrounding

regions, there is a considerable exporting and importing of product for various reasons. The

following table contains data on how demand has been met during the past year:

Table $1.$ Product Made and Shipped during Past Year $($x $100,000$ pounds$)$

From$/$To Mexico Canada Venezuela Europe United States Japan

Mexico City $3\mathrm{.}06\mathrm{.}37\mathrm{.}9$

Windsor, Ontario $2\mathrm{.}6$

Caracas $4\mathrm{.}1$

Frankfurt $5\mathrm{.}620\mathrm{.}012\mathrm{.}4$

Gary $14\mathrm{.}0$

Osaka $4\mathrm{.}0$

Differences in technologies used in the plants and in local raw material and labor cost created

significant differences in the cost to produce Release$-$ease in the various locations. These costs may

change dramatically due to currency valuation and labor law changes in some of the countries. This

is especially true in Mexico and Venezuela. The capacity of each plan also differs at each location,

and management has no interest in increasing capacity anywhere at this time.

The following table gives details on the cost to produce and capacity of each plant:

Table $2.$ Plant Production Cost and Capacity

Plant Production Cost

$($per $1,000$ lbs$)$

Plant Capacity

$($x $100,000$ lbs$)$

Mexico City $95\mathrm{.}0122\mathrm{.}0$

Windsor, Ontario $97\mathrm{.}353\mathrm{.}7$

Caracas $116\mathrm{.}344\mathrm{.}5$

Frankfurt $76\mathrm{.}6947\mathrm{.}0$

Gary $102\mathrm{.}9318\mathrm{.}5$

Osaka $153\mathrm{.}805\mathrm{.}0$

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

products in bulk around the world, but it is expensive. The costs involved are not only the

transportation costs but also import duties that are assessed by customs in some countries. Applichem

is committed to meeting demand, though, and sometimes it is done even though profit might not be

made on all orders.

The following table details the demand in each country, the cost to transport product from each plant

to each country, and the current import duty rate levied by each country. $($These percentages do not

reflect current duties$).$ Import duty is calculated on the approximate production plus transportation

cost of product brought into the country. $($For example, if the production and shipping cost for $1,000$

pounds of Release$-$ease shipped into Venezuela were $$100,$ the import duty will be $$100$ x $0\mathrm{.}5=$ $$50).$

Table $3.$ Transportation Cost $($$ per $1,000$ lbs$),$ Import Duties, and Demand for Release$-$ease

From$/$To Mexico Canada Venezuela Europe United States Japan

Mexico City $011\mathrm{.}407\mathrm{.}0011\mathrm{.}0011\mathrm{.}0014\mathrm{.}00$

Windsor, Ontario $11\mathrm{.}0009\mathrm{.}0011\mathrm{.}506\mathrm{.}0013\mathrm{.}00$

Caracas $7\mathrm{.}0010\mathrm{.}00013\mathrm{.}0010\mathrm{.}4014\mathrm{.}30$

Frankfurt $10\mathrm{.}0011\mathrm{.}5012\mathrm{.}5011\mathrm{.}2013\mathrm{.}30$

Gary $10\mathrm{.}006\mathrm{.}0011\mathrm{.}0010\mathrm{.}00012\mathrm{.}50$

Osaka $14\mathrm{.}0013\mathrm{.}0012\mathrm{.}5014\mathrm{.}203\mathrm{.}000$

Total Demand

$($x $100,000$ lbs$)$

$3\mathrm{.}02\mathrm{.}616\mathrm{.}0020\mathrm{.}0026\mathrm{.}411\mathrm{.}9$

Import Duty $0\mathrm{.}0\%0\mathrm{.}0\%50\mathrm{.}00\%9\mathrm{.}5\%4\mathrm{.}5\%6\%$

Questions:

You are a supply chain expert hired by Applichem to help its managers:

$3)$ Analyze and discuss any other factors Applichem needs to cons