Case Exercise - 01 Rochem Limited Dr. Rhodes was losing his temper. "It should be simple Quality 28% 10.7% purity 135% 20.2% purity enough decision. There are only two alternatives. I just Manual Testingi Auto Testing can't understand why it's all blown up into such a big Adequate but needs Not know - probably issue. You are only being asked to choose a machine". The After sales service Very good Not know - unlikely to Management Committee looked abashed. be good Delivery 3 months Immediate The problem had been brewing for several weeks now, and although John Rhodes had seen it coming, his anger The body considering the problem was the newly formed was real enough. For the last thirteen years, since he had Management Committee. John Rhodes had recently founded the company as a young research chemist, the decided that the company was now of a size where the company seemed to have avoided major arguments over rather autocratic (albeit friendly) decision process he had policy. That it should happen over such a trivial issue adopted should be formalized. The committee consisted puzzled and upset him, especially now that the company of the four senior managers in the firm. The Chief Chemist was so well established. and the Marketing Manager, who had been with firm since the beginning, together with the Production Rochem Limited were one of the largest independent Manager and Accountant, both of whom had joined the companies supplying the food processing industry. Their company only six months ago. This was only the second initial success had come in the late 60s with a food meeting of the committee, and Rhodes was already preservative, used mainly for meat-based products, and starting to regret its formation. marketing under the name of "Lerentyl". Other products THE MARKETING MANAGER were subsequently developed in the food coloring and food container coating fields, so that now Lerentyl This year the market for this type of preservative had accounted for only 25% of total company sales. reached a size of some 20 million, of which Rochem Limited supplied approximately 48%. There had, of late, THE DECISION been significant changes in the market - in particular many of the users of preservatives were now able to buy The problem over which there was such controversy, related to the replacement of one of the process units products similar to Lerentyl. The result had been the used to manufacture Lerentyl. Only two such units were evolution of a much more price sensitive market. used, both of the same make, "chemex", a local company. Future market projections were somewhat uncertain. It It was the older of the two Chemex units which was giving was clear that the total market would not shrink (in trouble. High breakdown figures, with erratic quality volume terms), and best estimates suggested a market of levels, mean that output level requirements were only perhaps 24 million in four years' time (at current prices). just being reached. The problem was, should the company However, there were some people in the industry who replace the ageing Chemex with a new Chemex, or should believed that the present market only represented the tip t buy the only other plant on the market which was of the iceberg as far as the real potential in food capable of the required process, the German "AFU" unit. preservation was concerned, especially in the export The Chief Chemist's staff had drawn up a comparison of market which was hardly exploited at all. the two units, shown below. Lerentyl was sold in ether solid, powder or liquid form, AFU depending on the particular needs of the customer. Chema Caphal cost 590.000 840.000 However, despite this complication, prices tended to be Unit cost of 185 143 related to the weight of chemical used. Thus, for example, processing of capacity this year the average market price was approximately 200 Design capacity 2200 ky/month 2800 /monthper kg. There were, of course, wide variations depending technicians were needed to operate the plant. The four on order size, etc. had been with firm from its beginning "At the moment I am mainly interested in getting the It's all right for the Marketing Manager and Chief right quantity and quality of Leventyl each month, and although Chemist to talk about a big expansion of Lerentyl sales, they production have never let me down yet I'm worried that unless don't have to cope with all the problems if it doesn't happen. The we get a reliable new unit quickly, they soon will. The German catalyst (fixed) costs of the German unit are nearly three times machine can be on line in a few weeks, giving better quality, too. those of the Chamex. Just think what that will do to my budget at Furthermore, if demand does increase, but I'm not saying it will, low volumes of output. As I understand it, there is absolutely no the AFU will give us the extra capacity. I will admit that we are avidance to show a large upswing in Lerentyl. No, the whole idea not trying to increase our share of the preservative market as of the AFU plant is just too risky- yet. We see our priority as establishing our other products first. Not only is there the risk, I don't think it is generally When that's achieved, we will go back to concentrating on the understood what the consequences of the AFU would mean. We preservative side of things." would need twice the variety of spares for start. But what really worries me is the staff's reaction. As fully qualified technicians The CHIEF CHEMIST they regard themselves as the elite of the form. If we get the AFU An old friend of John Rhodes, and together they had been plant, all their most interesting work, like the testing and the responsible for every product innovation. At the moment, maintenance, will disappear or be greatly reduced. They will the major part of budget was devoted to modifying basic finish up as highly paid process workers." Lerentyl so that it could be used for more acidic food products such as fruit. This was not proving easy, and as THE ACCOUNTANT vet nothing had come of the research, although the Chief The company had financed nearly all its recent capital Chemist remained optimistic. investment from its own retained profits, but would be If we succeed in modifying Lerentyl, the market taking out short-term loans this year for the first time for opportunities will be doubled overnight, and we will need the several years. extra capacity. I know we would be taking a risk by going for the "At the moment, I don't think it wise to invest extra German machine, but our company has grown by gambling on capital we can't afford, in on attempt to give us extro capacity our research findings, and we must continue to show faith." we don't need of the moment. This year will be an expansive one for the company. We are already committed to considerably THE PRODUCTION MANAGER increased expenditure on promotion of our other products and The Lerentyl Department is virtually self-contained as a capital investment in other parts of the firm, and Dr. Rhodes is production unit. In fact, it is physically separate, being in a not in favor of excessive funding from outside the firm. I accept building a few yards detached from the rest of the plant. that there might eventually be and an upsurge in Lerantyl The department has its own raw material store and its demand but if it does come, it probably wouldn't be this year and own packing section, although finished goods are stored it will be far bigger than the AFU can cope with anyway, so we in the main store in the main building. Production might as well have three Chamex plants at that time." requirements for Lerentyl were currently at a steady rate John Rhodes intervened in the discussion: of 4150 kg per month. The four technicians, who staff the Look I know that to some extent we are arguing in the machines, are the only technicians in Rochem who do all dark. But this isn't a perfect world and we never will have all the their own minor repairs and full quality control. The information we want. Furthermore, I think that at this stage any reason for this is largely historical, since when the firm decision is better than just letting things drift." started the product was experimental and qualified QUESTIONS (Total Marks = 10) 1. What form do the: Decision body (01 Mark) Decision options (01 Mark] C. d Uncontrollable factors and (01 Mark) Consequences of the decision options take in this particular case? (01 Mark) 2. Classify the decision and the context of the decision, using the framework discussed in chapter 04. (03 Mark) 3. Which machine should the company buy, and why? (03 Mark]