Ontario Packaging CASE PDF

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ONTARIO PACKAGING CASEInvestment valuation and trade-offsIn this case we will evaluate the impacts, in terms of operational performance, of the new investment introduction.Situation described:The management of the company took into account the investment proposal of replacing the current laminating ...

Description

ONTARIO PACKAGING CASE Investment valuation and trade-offs In this case we will evaluate the impacts, in terms of operational performance, of the new investment introduction. Situation described: The management of the company took into account the investment proposal of replacing the current laminating machine (purchased 12 years ago), with a new, more modern process, which would provide the same capacity. At a cost of 2.5 million €, the investment would ensure savings in labor costs, consumption of materials and other elements, such as to provide a payback of 6.5 years at current production volume. However, this solution does not respect the constraint imposed by the group leader (pay-back time of 4 years). The work team responsible for evaluating the investment has been exploring the possibility of increasing the sales volume by 40% in order to serve a new market segment. With the increased volume of production the company could increase saturation of the machine, and bring down the payback to 3.5 years. The team proposed this new hypothesis to the parent company, which - asked for confirmation that the pay-back did not exceed 4 years - gave the go ahead to invest. The new process would have had the same setup times, but a double lamination speed so a single machine could replace the current process, which was formed by two machines. Considering an increase in production volumes of 40%, the new process would be saturated at 80-85%. Apparently everything seems correct. But let's think in detail and evaluate the performance required by today's market and the current performance of the system. Conformance TIME Speed Punctuality PRICE

Current OW Q Q

QUALITY Specifications Compliance FLEXIBILITY

Q (L) Q

Variety Plan Product SERVICE

OW OW OW Q

Fundamental for MTO. It's important that it remains within a certain range.

Important: the company operates MTO  adapt to customer requirements.

In the case in which the customer explicitly asks for a quality requirement within a contract, then it comes to OW; otherwise it is a qualifier. In order to evaluate the investment choice of the OP it is needed to clarify the relationship between the configuration of the operations, performance required by the market and the benefits provided by the system. It is not enough only economic-financial aspects (pay-back time). Current technological-manufacturing, organizational and management features: Technological-plant (structural/hardware) levers

Organizational (infrastructural) levers

Management levers

Low saturation (60%, higher capacity than total demand)

Response mode MTO

2 machines in parallel

Small lot size

Low set-up time and small lot size

ONTARIO PACKAGING CASE Currently the company has a great coherence between the configuration of the technology choices and how to respond to the market. The levers implemented allow reaching a good flexibility of product (OW in the market), a good punctuality and speed.    

Low saturation: positively influences the ability to respond to peak demands, flexibility and punctuality. Fractioning of production capacity: if the production lot is greater than the minimum unit of time, the use of two machines allows increasing the variety and the ability to serve more customers simultaneously. Short setup and small lots: determines a disadvantage in terms of efficiency but allows you to respond more quickly to customers and increases the flexibility of the plan. Answer mode MTO: consistent with a market where speed and flexibility are the main OW.

We can summarize the levers-performance as follows:

According to the previous statement, we need to understand if the decision to buy the new machine turns out to be consistent with the characteristics of the market and the performance that OP wants to accomplish. The alternative to invest is not correct. The adoption of the new machinery and the entry on the "filler" market risks a severe performance penalty on the consolidated market because:   

It changes the division of production capacity: it will have one machine rather than two. It increases the saturation of the machinery. It increases the production lots as the orders of the new segment are large in size.

The decision has to be revised, starting with two key strategic points: 



With the expected development of the market in terms of competitiveness, the manufacturing process from here shortly will no longer be able to meet the needs of the market: a change is necessary because the inaction would lead to lose a large part of the success factor that has characterized the company to date. The decision to carry out the investment proposal is not consistent even if it is economically convenient, for the reasons mentioned above....