Advice Regarding the Proposal Whether or Not to Change the Packaging of Company’s Freezers and Refrigerators

WAC Assignment - 2

Name: Atul Anand

Roll no: 17072

Section: B

Date: 29 July 2017

Memo

To: Paul Stevenson

From: Atul Anand,

Date: 29 July 2017

Subject: Advice regarding the proposal whether or not to change the packaging of company’s freezers and refrigerators

The enclosed report presents my analysis regarding the change to the packaging of company’s freezers and refrigerators. Based on the factors of fixed and variable costs, labor savings and material savings, I recommend you to proceed with the purchase of the MSK Covertech for all the five lines.

Please find the action plan for the implementation of the said approach included in

the report.

Executive Summary

W.C. Wood Company has a proposal to change the packaging for the company’s freezers and refrigerators, which involves replacing the current cardboard package to “clear pack”. Clear pack is a combination of polystyrene and clear plastic film.

Based on investment costs, variable costs, material savings, labor savings as well as engineer’s advice I recommend that our company accept the proposal of MSK Covertech to replace the current cardboard based packaging. Although, a costly option at present, it ensures larger savings over a longer period of time, thus proving more beneficial.

*Number of Words = 90

Table of Contents

1. Situational Analysis………………………………………………………………….4
2. Decision Statement…………………………………………………………………..5
3. Options Available……………………………………………………………………5
4. Criteria for Evaluation……………………………………………………………….5
5. Evaluation of Options………………………………………………………………..6
6. Recommendation…………………………………………………………………….7
7. Action Plan…………………………………………………………………………..7
8. Exhibits………………………………………………………………………………8-9

Situational Analysis

Appliance industry is very competitive, and older companies are facing new and stiffer competition from companies in China due to lower labor costs. To improve performance and profit, a company in the North American market will have to depend on cost-cutting and innovation.

At present in the packaging industry, some companies are changing to clear pack from cardboard based packaging. This trend has been bolstered by the fact that the price of cardboards is going up where as the price of clear pack design is going down. Along with this, clear pack protects the appliances better than cardboards, thus leading to lower damage warranty loss. Clear pack design also uses less labor and material, thus saving on both fronts. Whirlpool one of the biggest players in this sector has already shifted to clear pack.

At present, our company has a proposal to change our packaging methods and move to clear pack design. We have received quotes from two companies Lachenmeier and MSK Convertech. Each company has offered us a discount of 10% if we change all our five lines at the same time. There is also the possibility of changing a few lines as MSK Convertech has suggested for the original plant in Guelph. There are additional costs involved with each machine such as tooling costs, electricity costs, conversion costs, natural gas (some of the machines) and for Lachenmeier machines we have dig a pit for our small and large chest freezer lines. Along with these costs we will also have to include the conversion costs for the change to clamping system which the clear pack design requires. The engineers have suggested that the clear pack method can reduce damage warranty claims by 50%, but on a conservative estimate I have assumed 25% reduction if we use clear pack method.

So the current scenario requires us to decide whether or not to use clear pack and how to use it if we move ahead.

Decision Statement

We have to decide

1. whether or not to change to clear pack design
2. if yes,

1. which company to buy from
2. what type of machines to buy (heat shrink or not)

Options

1. Purchase all the five machines from MSK Covertech
2. Purchase all the five machines from Lachenmeier
3. Purchase a single heat shrink machine for the two lines in the original Guelph plant and three machines for the rest of the lines from MSK Covertech

Criteria for Evaluation

Above stated options have been evaluated based on the following criteria:

1. Investment cost
2. Total Cost in a year including investment
3. Variable cost associated with the machine

Assumptions:

1. I have separately included 35% fringe benefits in labor savings a
2. I have assumed a 25% reduction in damage warranty claim when we move to clear pack design
3. I have assumed that frost-free upright freezers and refrigerators are produced in equal numbers i.e. 45000 each per year.
4. For all the above three options I have assumed that all machines are ordered at the same time and we get a discount of 10% from the suppliers
5. I have assumed that the production of each line will remain same after the introduction of clear pack design.

Evaluation of Options:

1. Purchase of all five equipment from MSK Covertech

1. Investment cost: This option requires the highest upfront investment cost of $711000 as shown in Exhibit 1. Also, engineers prefer this machine and I have made the assumption that it requires lower maintenance cost than motors based machine, as this is based on hydraulics.
2. Total Cost in a year including investment: The total costs for this plan in a year will be $1162500 as shown in Exhibit 1.
3. Variable cost associated with the machine: This machines consume $8500 worth of electricity per machine per year. So for a given year, this comes out to be $4250.

1. Purchase all the five machines from Lachenmeier

1. Investment cost: This option requires an upfront investment cost of $1030900 as shown in Exhibit 2. This machine uses electrical motors; thus I have assumed that it will require higher maintenance costs in the long run.
2. Total Cost in a year including investment: The total costs for this plan in a year will be $1073400 as shown in Exhibit 2.
3. Variable cost associated with the machine: This machines consume $8500 worth of electricity per machine per year. So for a given year, this comes out to be $4250, which is same as that of MSK Covertech.

1. Purchase a single heat shrink machine for the two lines in the original Guelph plant and three machines for the rest of the lines from MSK Covertech

1. Investment cost: This option requires the lowest upfront investment cost of $1027075 as shown in Exhibit 3.
2. Savings due to clear pack method: The total costs for this plan in a year will be $1075075 as shown in Exhibit 3.
3. Variable cost associated with the machine: This machines consume $8500 worth of electricity per machine per year, which comes out to be $3400 per year. Along with this it uses $14000 worth of natural gas. Its variable cost is high and in the long run it will prove very costly.

Recommendation:

I recommend that our company should purchase all the five machines from MSK Covertech at same time even though it requires highest upfront investment because it has the lowest variable cost as well as I have assumed that it will require the lowest maintenance among the three options.