Case Exercise - 01

Rochem Limited

Dr. Rhodes was losing his temper. "It should be simple enough decision. There are only two alternatives. I just can't understand why it's all blown up into such a big issue. You are only being asked to choose a machine". The Management Committee looked abashed.

The problem had been brewing for several weeks now, and although John Rhodes had seen it coming, his anger was real enough. For the last thirteen years, since he had founded the company as a young research chemist, the company seemed to have avoided major arguments over policy. That it should happen over such a trivial issue puzzled and upset him, especially now that the company was so well established.

Rochem Limited were one of the largest independent companies supplying the food processing industry. Their initial success had come in the late 60s with a food preservative, used mainly for meat-based products, and marketing under the name of "Lerentyl". Other products were subsequently developed in the food coloring and food container coating fields, so that now Lerentyl accounted for only 25% of total company sales.

THE DECISION

The problem over which there was such controversy, related to the replacement of one of the process units used to manufacture Lerentyl. Only two such units were used, both of the same make, "Chemex", a local company. It was the older of the two Chemex units which was giving trouble. High breakdown figures, with erratic quality levels, mean that output level requirements were only just being reached. The problem was, should the company replace the ageing Chemex with a new Chemex, or should it buy the only other plant on the market which was capable of the required process, the German "AFU" unit. The Chief Chemist's staff had drawn up a comparison of the two

Chemex AFU

Capital cost 590,000 880,000

Unit cost of processing at capacity 1 85 183

Design capacity 2200 kg/month 2800 kg/month

units, shown below.

Quality 98% 0.7% purity 99.5% 0.2% purity

Maintenance Adequate but needs regular servicing Not know - probably good

After sales service Very good Not know - unlikely to be good

Delivery 3 months Immediate

The body considering the problem was the newly formed Management Committee. John Rhodes had recently decided that the company was now of a size where the rather autocratic (albeit friendly) decision process he had adopted should be formalized. The committee consisted of the four senior managers in the firm. The Chief Chemist and the Marketing Manager, who had been with firm since the beginning, together with the Production Manager and Accountant, both of whom had joined the company only six months ago. This was only the second meeting of the committee, and Rhodes was already starting to regret its formation.

THE MARKETING MANAGER

This year the market for this type of preservative had reached a size of some 20 million, of which Rochem Limited supplied approximately 48%. There had, of late, been significant changes in the market - in particular many of the users of preservatives were now able to buy products similar to Lerentyl. The result had been the evolution of a much more price sensitive market.Future market projections were somewhat uncertain. It was clear that the total market would not shrink (in volume terms), and best estimates suggested a market of perhaps 24 million in four years' time (at current prices). However, there were some people in the industry who believed that the present market only represented the tip of the iceberg as far as the real potential in food preservation was concerned, especially in the export market which was hardly exploited at all.

Lerentyl was sold in ether solid, powder or liquid form, depending on the particular needs of the customer. However, despite this complication, prices tended to be related to the weight of chemical used. Thus, for example, this year the average market price was approximately 200 per 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 Chemex. 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 evidence 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 firm. 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 finish up as highly paid process workers." the major part of budget was devoted to modifying basic

Lerentyl so that it could be used for more acidic food

THE ACCOUNTANT

products such as fruit. This was not proving easy, and as

The company had financed nearly all its recent capital

yet nothing had come of the research, although the Chief investment from its own retained profits, but would be Chemist remained optimistic.

"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 an attempt to give us extra capacity our research findings, and we must continue to show faith." we don't need at the moment. This year will be an expensive 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 not in favor of excessive funding from outside the firm. I accept production unit. In fact, it is physically separate, being in a that there might eventually be and an upsurge in Lerentyl building a few yards detached from the rest of the plant. demand but if it does come, it probably wouldn't be this year and The department has its own raw material store and its it will be far bigger than the AFU can cope with anyway, so we own packing section, although finished goods are stored might as well have three Chemex plants at that time." in the main store in the main building. Production 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 decision is better than just letting things drift." reason for this is largely historical, since when the firm started the product was experimental and qualified

QUESTIONS (Total Marks = 10)

1.What form do the:

a.Decision body (01 Mark)

b.Decision options (01 Mark)

c.Uncontrollable factors and (01 Mark)

d.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)

actually the lecturer is checking the perception of every students regarding the questions of the case study, and the case study is taken from book related to Making Management Decision written by By Steve Cooke & Nigel Slack & Richard L.Daft, so please tell me your perception about each question given at the end of the case.

please full details required for every question.