Mr

Michigan Manufacturing Corporation's: The Pontiac Plant, 1992

Overhead costs of plants in the Michigan Manufacturing (MM) system vary greatly from plant to plant for several reasons, but the major one is that the varying complexity of the mission of each plant. Exhibits 2A and 2B show that different plants vary greatly in the number of product families they produce, and then also in the number of product models. We did not calculate the correlation between these numbers and the burden rates, but it is evident that the higher the number of products/product families, the higher the burden rates.

The role of the Pontiac plant in the current manufacturing system: Pontiac was the first plant of MM. When products became popular, MM built new plants, dedicated to those high volume, standardized products. With time, Pontiac lost this position of a feeder of new product into the MM - it was »left with a residue of low volume products« (1). Pontiac also retained responsibility for many replacement parts (even for discontinued products).

The recommendations of the task force are - in our opinion - short sighted, and based mostly on financial analysis, while neglecting other major factors such as complexity of operations and human resources issues. Even the financial analysis itself is not necessarily accurate. Let us consider the following points:

1. It is true that some of the products may be transferred to other plants, some of which are not operating at full capacity. However, under-utilization does not mean these plants would have no problem to handle low volume production. Transferring too many products would mean that the complexity level at those plants will increase, and they will not be as focused as they are at the present time and therefore not as profitable. We may end up moving overhead from Pontiac to those other plants.

2. Closing Pontiac would mean losing many experienced and versatile people with a proven track record of developing and engineering new products. The old-timers would not move to the other plants and these plants may not have this type of employees. The assumption of the task force and Noelle that those people are demoralized may be true, but they are wrong to assume this can not be corrected - revamping Pontiac and shaking down the product lines would give many of the old-timers the morale boost they need in order to flourish.

3. The figures don't tell the whole story - Pontiac is actually taking a much higher overhead burden than the other plants. This is a strategic mistake on part of the division CFO, as some of the Pontiac overhead should be allocated to the group and/or spread across the other plants. For instance, when Pontiac produces spare parts for a discontinued product which belongs to a product family owned by another plant, they are providing a service to that plant and to the group.

4. The task force ignored the advantage of innovation capability which Pontiac gave MM the leading position in the transportation industry. It is naпve to assume MM can break up this capability into its various plants.

Based on the above, we would suggest to Noelle to accept those recommendations of the task force referring to the transfer of some products to other plants (but with great care), but reject the recommendation to close the Pontiac plant. Pontiac plant should be kept as a development / engineering facility and as a low volume producer of spare parts (which should be charged to the relevant plant/product line - on a cost-plus basis, and using the fully loaded cost.

MM should also make changes to its overhead calculation as per (3) above - not only for