Mapleleaf Case

MAPLELEAF: DESIGNING OPTIMAL

MAPLELEAF: DESIGNING OPTIMAL

CAP

CAP

ACIT

ACIT

Y

Y PLANNI

PLANNING

NG STRA

STRA

TEGY 

TEGY 

Amrit

AmritanshanshAhuja (PGP/2Ahuja (PGP/20/130/131)1)

Ba

Bavirisvirisettettyy DurgDurgaa ChanChandra dra SekhSekharar(PGP(PGP/20/1/20/1441)1)

Karti

KartikekeyayaMehrMehraa (PG(PGP/2P/20/10/1551)1)

Nikhil Sikaria

Nikhil Sikaria (PGP/2(PGP/20/10/16161))

Raj

Raj SagarSagar(PGP/(PGP/20/120/1771)1)

Shas

Shashankhank ShekShekharhar(PG(PGP/2P/20/10/1881)1)

Viv

Vivekek MuraMuraleedleedharaharann Nair (PGP/Nair (PGP/20/1920/191)1) Group 1

■

■ MapleleafMapleleaf Corporation is a miCorporation is a midsized manufacturer and ddsized manufacturer and distributor of paper pristributor of paper productsoducts ■

■ Firm has four production facilities located throughout North AmericaFirm has four production facilities located throughout North America ■

■ Products are shipped to seven Products are shipped to seven distribution centersdistribution centers ■

■ Forecasts suggest that the demand for goods in the next 5 and 10 years, it has beenForecasts suggest that the demand for goods in the next 5 and 10 years, it has been

found that the demand would outstrip the current capacity of 10,000 cartons per

found that the demand would outstrip the current capacity of 10,000 cartons per

day

day ■

■ Hence, a new capacity expansion plan Hence, a new capacity expansion plan was designed.was designed.

Case Description

■

■ Plan is to develop a new production plant adjacent to the current distribution centre,Plan is to develop a new production plant adjacent to the current distribution centre,

Guadalajara, Mexico because demand has increased in Mexico Guadalajara, Mexico because demand has increased in Mexico



 Estimated initial investment = $30 millionEstimated initial investment = $30 million



 Production costs = $10 per cartonProduction costs = $10 per carton



 Proposed capacity = 4000 average daily cartonsProposed capacity = 4000 average daily cartons



 Construction Time = 2 yearsConstruction Time = 2 years ■

■ Depreciation Method: Straight line method with 10 year useful life and no salvage valueDepreciation Method: Straight line method with 10 year useful life and no salvage value ■

■ Operating Schedule: 300 day/year operating scheduleOperating Schedule: 300 day/year operating schedule ■

■ Discount rate = 10% for NPV calculationsDiscount rate = 10% for NPV calculations ■

■ Tax rate = 40% for Cash flow calculationsTax rate = 40% for Cash flow calculations

■

■ Selling price of one carton = $20Selling price of one carton = $20 ■

■ All the goods that are produced are also soldAll the goods that are produced are also sold ■

■ Production facility Denver is the same as K.C. in exhibitsProduction facility Denver is the same as K.C. in exhibits

Assumptions made:



 Demand forecasts are projectedDemand forecasts are projected ■

■ Linearly from year 1 to year 5 based on 5Linearly from year 1 to year 5 based on 5thth year forecastyear forecast ■

■ Linearly from year 6 to year 10 based on 5Linearly from year 6 to year 10 based on 5thth and 10and 10thth year forecastyear forecast

0 0 2000 2000 4000 4000 6000 6000 8000 8000 10000 10000 12000 12000 14000 14000 16000 16000 1 1 22 33 44 55 66 77 88 99 1100 Forecast Forecast D Deemmaanndd CCaappcciittyy Y Yeeaar r DDeemmaannd d CCaappcciittyy 1 1 8800000 0 1100000000 2 2 8855000 0 1100000000 3 3 9900000 0 1100000000 4 4 9955000 0 1100000000 5 5 110000000 0 1122000000 6 6 110066000 0 1144000000 7 7 111122000 0 1144000000 8 8 111188000 0 1144000000 9 9 112244000 0 1144000000 1 10 0 113300000 0 1144000000

Demand and C

■

■ Estimating the production quantity in each of the production centres from year 1 toEstimating the production quantity in each of the production centres from year 1 to

year 10 using Linear programming such

year 10 using Linear programming such that the production costs are that the production costs are minimizedminimized ■

■ Based on data obtained in Based on data obtained in Step 2, production costs are calculated for all Step 2, production costs are calculated for all the 10the 10

years

years ■

■ An assumption is made on the selling price per carAn assumption is made on the selling price per carton and revenues are forecastedton and revenues are forecasted

for the entire 10 years.

for the entire 10 years. ■

■ Discounted cash flows are estimated for all the 10 years and Discounted cash flows are estimated for all the 10 years and NPV and Break-evenNPV and Break-even

period are calculated.

period are calculated.

Steps to be

■

■ TTable of demand forecast and able of demand forecast and product distribution costs for 5 year and product distribution costs for 5 year and 10 year10 year

0 0..7755 22..55 44..55 44..7755 55..2255 11000000 11000000 2 2..55 11 22..55 22..7755 3..23255 775500 11000000 4 4..55 22..55 00..55 22..2255 1..71755 22550000 33000000 1 1..55 11..55 33..7755 22..55 3..73755 11550000 22000000 3 3 22..2255 33 33..55 3..535 775500 11000000 5 5..2255 33..2255 11..7755 33..7755 00..55 22000000 33000000 1 100000000 1133000000 Centre/Production Centre/Production facility facility 5-yr 5-yr Daily Daily cartons cartons 10-yr 10-yr Daily Daily cartons cartons Toronto Toronto K.C K.C L.A L.A Seattle Seattle 44..7755 22..7755 22..2255 00..7755 22..55 11550000 22000000 Chicago Chicago Atlanta Atlanta Guadalajara Guadalajara Total Total

■

■ Total Capacity during Year 1 to Year 4 is 10000 daily cartons and during Year 5 isTotal Capacity during Year 1 to Year 4 is 10000 daily cartons and during Year 5 is

12000 units and

12000 units and YYear 6 to 10 is ear 6 to 10 is 14000 units14000 units

Yearwise Projected Demand per Distribution Centre Yearwise Projected Demand per Distribution Centre

Year Year 11 22 33 44 55 66 77 88 99 1100 Toronto Toronto 1100000 0 1100000 0 1010000 0 1100000 0 1100000 0 1100000 0 1100000 0 1100000 0 1100000 0 11000000 K.C. K.C.    66000 0 66550 0 66775 5 77000 0 77550 0 88000 0 88550 0 99000 0 99550 0 11000000 L.A. L.A. 2211000 0 2222000 0 2323550 0 2244000 0 2255000 0 2266000 0 2277000 0 2288000 0 2299000 0 33000000 Seattle Seattle 1122000 0 1122775 5 1313550 0 1144550 0 1155000 0 1166000 0 1177000 0 1188000 0 1199000 0 22000000 Chicago Chicago 1122000 0 1122775 5 1313550 0 1144550 0 1155000 0 1166000 0 1177000 0 1188000 0 1199000 0 22000000 Atlanta Atlanta 66000 0 66550 0 67675 5 77000 0 77550 0 88000 0 88550 0 99000 0 99550 0 11000000 Guadalajara Guadalajara 1133000 0 1144550 0 1616000 0 1188000 0 2200000 0 2222000 0 2244000 0 2266000 0 2288000 0 33000000 Total Total Demand Demand 8800000 0 8855000 0 9900000 0 9955000 0 110000000 0 101066000 0 111122000 0 111188000 0 112244000 0 1133000000

Projected Demand Forecast from Year 1 to 10

■

■ Table in the next slide shows cost associatedTable in the next slide shows cost associated ■

■ Guadalajara comes in 5Guadalajara comes in 5thth year in the modelyear in the model ■

■ TTotal Cost in one otal Cost in one year = Production cost + year = Production cost + Distribution costsDistribution costs ■

■ Production Cost = No. of units produced * Cost per unit (in each Production Cost = No. of units produced * Cost per unit (in each production facility)production facility) ■

■ Distribution costs = No. of Distribution costs = No. of units to be distributed from one facility to one units to be distributed from one facility to one distributiondistribution

centre * Costs associated in that particular route

centre * Costs associated in that particular route

Cost Analysis

Production Cost Production Cost

P

Prroodduuccttiioon n CCoosstt//CCaarrttoon n 14 14 119 9 113 3 117 7 1100 U

Unnit it ccoosstt* * NNo o oof f UUnnitits s 335500000 0 228855000 0 445555000 0 424255000 0 3300000000 Total Production Total Production Cost Cost    181500181500 Distribution Cost Distribution Cost T

Toorroonntto o KK..CC. . LL..AA. . SeSeaattttlle e GGuuaaddaallaajjaarraa ttoorroonntto o 77550 0 0 0 0 0 0 0 00

K K..CC. . 0 0 1100000 0 0 0 0 0 00 LL..AA. . 0 0 0 0 1155000 0 0 0 00 S Seeaattttlle e 0 0 0 0 0 0 1155000 0 00 C Chhiiccaaggo o 2222550 0 0 0 0 0 1122550 0 00 A Attllaanntta a 0 0 1111225 5 1515000 0 0 0 00 G

Guuaaddaallaajjaarra a 0 0 0 0 0 0 0 0 11550000 Di

Diststriribbututioion n CoCost st 1123237755

Cal

■

■ Distribution costs is different for difDistribution costs is different for different years, depending on the forecast for thatferent years, depending on the forecast for that

year

year ■

■ TTotal distribution costs are calculated using otal distribution costs are calculated using the Linear programming model usingthe Linear programming model using

forecasts from different distribution centers

forecasts from different distribution centers ■

■ The following table gives the total cost per day incurred The following table gives the total cost per day incurred every year from year 1 every year from year 1 to 10to 10

Y Yeeaarr 11 22 33 44 55 66 77 88 99 1100 Daily Cost Daily Cost (In $/year) (In $/year)  12842  128425 5 1364136418.718.75 1456565 145656.25 1.25 1431343137.5 7.5 1503150312.12.5 5 1586158600 00 1668166887.5 87.5 1751175175 75 1843184312.12.5 5 193819387575

Cost Analysis

Cost Analysis

Refer the Excel File for Calculations

Refer the Excel File for Calculations

Microsoft

Microsoft EExcelxcel Worksheet Worksheet

1 100000000 1100000000 1100000000 1100000000 1122000000 1144000000 1144000000 1144000000 1144000000 1144000000 2 2000000 11550000 11000000 550000 22000000 34340000 22880000 22220000 11660000 11000000 80. 80.00% 8500% 85.00.00% % 90.90.00% 00% 95.95.00%83.3300%83.33%% 75.75.71%80.0071%80.00% % 84.84.29% 29% 88.88.57%92.8657%92.86%%

••

_{Before 5}

_{Before 5}

_{year new plant is not present}

_{year new plant is not present}

••

_{Utilization from 5}

_{Utilization from 5}

_{year shows new plant presence}

_{year shows new plant presence}

••

_{In the 5}

_{In the 5}

_year

_{year, the new plant runs at half}

_{, the new plant runs at half (2000 units) of its capacity}

_{(2000 units) of its capacity}

Utilization

Utilization

NPV Analysis NPV Analysis

Assuming Selling Price per Carton = $20 Assuming Selling Price per Carton = $20

Year Year 00 11 22 33 44 55 66 77 88 99 1100 Capital Expenditure Capital Expenditure   3,00,00,000  3,00,00,000 Revenue Revenue 11660000000 0 11770000000 0 11880000000 0 11990000000 0 22000000000 0 22112200000 0 22224400000 0 22336600000 0 22448800000 0 226600000000 Cost Cost 11228844225 5 131366441188. 7. 75 5 114455665566. 2. 25 5 114433113377..5 5 115500331122..5 5 11558866000 0 116666888877..5 5 11775511775 5 118844331122. 5 . 5 119933887755 Gross Margin Gross Margin 331155775 5 3333558811..225 5 3344334433..775 5 4466886622..5 5 4499668877..5 5 553344000 0 5577111122..5 5 660088225 5 6633668877..5 5 6666112255 Gross Margin yearly

Gross Margin yearly (300 days) (300 days) 949477252500 00 10100707434375 75 110303030312125 5 14140505878750 50 11449090626250 50 116060202000000 0 17171313373750 50 118282474750500 0 119191060625250 0 1198983737505000 Depreciation Depreciation 3300000000000 0 3030000000000 0 3300000000000 0 3300000000000 0 3300000000000 0 3300000000000 0 3300000000000 0 3300000000000 0 3300000000000 0 33000000000000 PBIT PBIT 646477252500 00 7070747437375 5 7373030312125 5 11110505878750 50 11119090626250 50 130130202000000 0 14141313373750 50 151524247750500 0 116161060625250 0 1168683737505000 PA PATT 3388883355000 0 4422444466225 5 4433881188775 5 6666335522550 0 7711443377550 0 7788112200000 0 8844880022550 0 9911448855000 0 9966663377550 0 1100110022550000 Discounted CFs Discounted CFs    3530454.543530454.54 5 5    3507954.5453507954.545   3292167.54   3292167.54 3 3    4531965.034531965.03   4435706.70   4435706.70 2 2 4409670.34 4409670.34 2 2 4351709.13 4351709.13 2 2 426784267842.7642.768 40983738 4098373.36 389495.36 3894951.0811.081 NPV NPV    1,03,20,7951,03,20,795 Break Even will occur between 7th and 8th Break Even will occur between 7th and 8th YearYear

NPV Analysis

■

■ Strategic Capacity Planning Strategic Capacity Planning  ■

■ Effective CapacityEffective Capacity ■

■ Facility UtilizationFacility Utilization ■

■ Capacity CushionCapacity Cushion

Conce

Conce

pts

pts

of Org

of Org

anis

anis

atio

atio

Mana

Mana

gemen

gemen

used in the case

■

■ The company should build the plant at the end of 2 years in order to use it The company should build the plant at the end of 2 years in order to use it from 5from 5thth

year

year ■

■ MapleleafMapleleaf Corporation should sCorporation should start with new plant ttart with new plant to meet the demo meet the demand forecastand forecast ■

■ Profit continues to increase even after Profit continues to increase even after new plant is builtnew plant is built ■

■ The breakeven is achieved between 7The breakeven is achieved between 7thth and 8and 8thth yearyear

Conclusions