1. How should CHEMEX have used its production network in 2009? 2. Should any of the plants have been idled? 3. What is the annual cost of your proposal? TABLE A (Sales by Region and Production/Capacity by Plant of Helex and Relex in Millions of Kilograms) Capacity Relex 2009 Production 7.0 Region Latin America Europe Asia wlo Japan Japan Mexico U.S. Plant Brazil Germany India Japan Mexico U.S. 2009 Sales 7.0 15.0 5.0 7.0 3.0 18.0 18.0 45.0 18.0 10.0 30.0 22.0 0.0 Helex 2009 Production 11.0 15.0 10.0 2.0 12.0 5.0 2009 Sales 7.0 12.0 3.0 8.0 3.0 17.0 8.0 0.0 18.0 17.0 TABLE B (Fixed and Variable Production Costs at Each CHEMEX Plant in 2009 in US$) Plant Location Plant Fixed Cost (M$) Helex Fixed Cost (M$) Relex Fixed Cost (M$) Brazil Germany India Japan Mexico U.S 20.0 45.0 18.0 17.0 30.0 21.0 5.0 13.0 4.0 6.0 6.0 5.0 5.0 14.0 4.0 6.0 6.0 5.0 Helex Raw Production Material Cost ($/kg) ($/kg) 3.6 5.1 3.9 7.0 3.6 4.5 3.9 7.5 3.6 5.0 3.6 5.0 Relex Raw Production Material Cost ($/kg) ($/kg) 4.6 6.6 5.0 8.5 4.5 6.0 5.1 9.0 4.6 6.5 O mmm NU 4.5 in 6.5 TABLE C (Transportation Costs from Plants to Markets in US$/kg) Asia w/o Japan 0.50 0.35 From/To Brazil Germany India Japan Mexico U.S Latin America 0.20 0.45 0.50 0.50 0.40 0.45 Europe 0.45 0.20 0.35 0.40 0.30 0.30 0.20 0.30 0.50 0.45 Japan 0.50 0.40 0.30 0.10 0.45 0.45 Mexico 0.40 0.30 0.50 0.45 0.20 0.25 US 0.45 0.30 0.45 0.45 0.25 0.20 CHEMEX Case In 2009, Ed Meyer faced several glaring problems in the financial performance of his company, CHEMEX. The firm had experienced a steep decline in profits and very high costs at its plants in Germany and Japan Meyer, the company's president for worldwide operations, knew that demand for the company's products was stable across the globe. As a result, the surplus capacity in his global production network looked like a luxury he could no longer afford. Any improvement in financial performance was dependent on having the most efficient network in place, because revenues were unlikely to grow. Cutting costs was thus a top priority for the coming year. BACKGROUND CHEMEX, is a global manufacturer of bulk chemicals used in the pharmaceutical industry. The company holds patents on two chemicals that are called Helex and Relex internally. These bulk chemicals are used internally by the company's chemical division, and are also sold to other chemical manufacturers. There are distinctions in the precise chemical specifications to be met in different parts of the world. All plants, however, are currently set up to be able to produce both chemicals for any part of the world. For 2009, sales of each product by region and the production and capacity at each plant are shown in Table A. The plant capacity, measured in millions of kilograms of production, can be assigned to either chemical as long as the plant is capable of producing both. CHEMEX has forecasted that its sales for the two chemicals are likely to be stable for all parts of the world, except for Asia without Japan, where sales are expected to grow by 10 percent annually for each of the next five years before stabilizing. The Japanese plant is a technology leader within the CHEMEX network in terms of its ability to handle regulatory and environmental issues. Some developments in the Japanese plant had been transferred to other plants in the network. The German plant is a leader in terms of its production ability. The plant has routinely had the highest yields within the global network. The Brazilian, Indian, and Mexican plants have somewhat outdated technology and are in need of an update. CURRENT PLANT COSTS AT CHEMEX After considerable debate, the task force identified the cost structure at each plant in 2009 as shown in Table B. Each plant incurs an annual fixed cost that is independent of the level of production in the plant. The fixed cost includes depreciation, utilities, and the salaries and fringe benefits of employees involved in general management, scheduling, expediting, accounting, maintenance, and so forth. Each plant that is capable of producing either Helex or Relex also incurs a product-related fixed cost that is independent of the quantity of each chemical produced. The product-related fixed cost includes depreciation of equipment specific to a chemical and other fixed costs mentioned that are specific to a chemical. If a plant maintains the capability to produce a particular chemical, it incurs the corresponding product-related fixed cost even if the chemical is not produced at the plant. The variable production cost of each chemical consists of two components: raw materials and production costs. The variable production cost is incurred in proportion to the quantity of chemical produced and includes direct labor and scrap. The plants themselves can handle varying levels of production. In fact, they can also be idled for the year, in which case they incur only the fixed cost, none of the variable cost. CHEMEX transports the chemicals in specialized containers by sea and in specialized trucks over land. The transportation costs between plants and markets are as shown in Table C. 1. How should CHEMEX have used its production network in 2009? 2. Should any of the plants have been idled? 3. What is the annual cost of your proposal? TABLE A (Sales by Region and Production/Capacity by Plant of Helex and Relex in Millions of Kilograms) Capacity Relex 2009 Production 7.0 Region Latin America Europe Asia wlo Japan Japan Mexico U.S. Plant Brazil Germany India Japan Mexico U.S. 2009 Sales 7.0 15.0 5.0 7.0 3.0 18.0 18.0 45.0 18.0 10.0 30.0 22.0 0.0 Helex 2009 Production 11.0 15.0 10.0 2.0 12.0 5.0 2009 Sales 7.0 12.0 3.0 8.0 3.0 17.0 8.0 0.0 18.0 17.0 TABLE B (Fixed and Variable Production Costs at Each CHEMEX Plant in 2009 in US$) Plant Location Plant Fixed Cost (M$) Helex Fixed Cost (M$) Relex Fixed Cost (M$) Brazil Germany India Japan Mexico U.S 20.0 45.0 18.0 17.0 30.0 21.0 5.0 13.0 4.0 6.0 6.0 5.0 5.0 14.0 4.0 6.0 6.0 5.0 Helex Raw Production Material Cost ($/kg) ($/kg) 3.6 5.1 3.9 7.0 3.6 4.5 3.9 7.5 3.6 5.0 3.6 5.0 Relex Raw Production Material Cost ($/kg) ($/kg) 4.6 6.6 5.0 8.5 4.5 6.0 5.1 9.0 4.6 6.5 O mmm NU 4.5 in 6.5 TABLE C (Transportation Costs from Plants to Markets in US$/kg) Asia w/o Japan 0.50 0.35 From/To Brazil Germany India Japan Mexico U.S Latin America 0.20 0.45 0.50 0.50 0.40 0.45 Europe 0.45 0.20 0.35 0.40 0.30 0.30 0.20 0.30 0.50 0.45 Japan 0.50 0.40 0.30 0.10 0.45 0.45 Mexico 0.40 0.30 0.50 0.45 0.20 0.25 US 0.45 0.30 0.45 0.45 0.25 0.20 CHEMEX Case In 2009, Ed Meyer faced several glaring problems in the financial performance of his company, CHEMEX. The firm had experienced a steep decline in profits and very high costs at its plants in Germany and Japan Meyer, the company's president for worldwide operations, knew that demand for the company's products was stable across the globe. As a result, the surplus capacity in his global production network looked like a luxury he could no longer afford. Any improvement in financial performance was dependent on having the most efficient network in place, because revenues were unlikely to grow. Cutting costs was thus a top priority for the coming year. BACKGROUND CHEMEX, is a global manufacturer of bulk chemicals used in the pharmaceutical industry. The company holds patents on two chemicals that are called Helex and Relex internally. These bulk chemicals are used internally by the company's chemical division, and are also sold to other chemical manufacturers. There are distinctions in the precise chemical specifications to be met in different parts of the world. All plants, however, are currently set up to be able to produce both chemicals for any part of the world. For 2009, sales of each product by region and the production and capacity at each plant are shown in Table A. The plant capacity, measured in millions of kilograms of production, can be assigned to either chemical as long as the plant is capable of producing both. CHEMEX has forecasted that its sales for the two chemicals are likely to be stable for all parts of the world, except for Asia without Japan, where sales are expected to grow by 10 percent annually for each of the next five years before stabilizing. The Japanese plant is a technology leader within the CHEMEX network in terms of its ability to handle regulatory and environmental issues. Some developments in the Japanese plant had been transferred to other plants in the network. The German plant is a leader in terms of its production ability. The plant has routinely had the highest yields within the global network. The Brazilian, Indian, and Mexican plants have somewhat outdated technology and are in need of an update. CURRENT PLANT COSTS AT CHEMEX After considerable debate, the task force identified the cost structure at each plant in 2009 as shown in Table B. Each plant incurs an annual fixed cost that is independent of the level of production in the plant. The fixed cost includes depreciation, utilities, and the salaries and fringe benefits of employees involved in general management, scheduling, expediting, accounting, maintenance, and so forth. Each plant that is capable of producing either Helex or Relex also incurs a product-related fixed cost that is independent of the quantity of each chemical produced. The product-related fixed cost includes depreciation of equipment specific to a chemical and other fixed costs mentioned that are specific to a chemical. If a plant maintains the capability to produce a particular chemical, it incurs the corresponding product-related fixed cost even if the chemical is not produced at the plant. The variable production cost of each chemical consists of two components: raw materials and production costs. The variable production cost is incurred in proportion to the quantity of chemical produced and includes direct labor and scrap. The plants themselves can handle varying levels of production. In fact, they can also be idled for the year, in which case they incur only the fixed cost, none of the variable cost. CHEMEX transports the chemicals in specialized containers by sea and in specialized trucks over land. The transportation costs between plants and markets are as shown in Table C