Chung Ngoc Hieu Mai Thanh Thao

CASE STUDY /P.429

PLASTECH, INC.

Summary
PLASTECH, INC.
Plastech was a producer of plastic pellets for use as raw material in molded plastic products. It
was primarily a service firm. Its niche was that it has the specialized equipment and expertise for
blending a variety of ingredients.
It operated six machine-paced blending lines which had feeding hopper, blending machine, water
bath, and pelletizer. Others two lines had additional specialized equipment to properly handle
hazardous chemicals.
The orders were in small quantities because customers did not want to keep high inventory. Thus,
that necessitated relatively small production batch sizes and a large number of setups. In 1992, the
average batch size was 13,000 pounds and there were 320 setup. The average setup time was 24
hours.
In 1992, it lost 2 significant customers which comprised 46% total pounds of the plastic. Plastic
then devised a new marketing strategy seeking additional work from all of its existing customers
and broadening its product line.
To meet the challenges arose in 1993, a third shift was added to meet the increase in production
and setup volume.
Although the firm had increased revenue 20%, the profit were down 83% from fiscal 1992.
Smith, operation manager, wanted to find out the reasons for this.
Question 1: Which factors contributed to the decline in profits?
Answer:
The factors contributed to the decline in profits:
1. The expense of direct labor increasing
The expense of direct labor increased from 14.8% to 18.5%. The direct labor was resposible for
all production and setup. And it aligned with the addition of the third shift.
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In fiscal year 1992, 1993 we can see the details of some figures as follow:
The expense of direct labor in fiscal year
E(DL)1992 = 528,000/3,564,288 = 14.8%
E(DL)1993 = 792,000/4,283,288 = 18.5%
Another way to see the increasing of expense of direct labor in fiscal year is computing it on each
unit by devived with production.
E(DL)1992 = 528,000/4,193,280 = 0.126
E(DL)1993 = 792,000/5,069,173 = 0.156
2. The selling expenses increasing
The selling expenses increased from 22.9% to 27.9%.
In fiscal year 1992, 1993 we can see the details of some figures as follow:
The selling expenses in fiscal year
E(S)1992 = 819,786/3,564,288 = 22.9%
E(S)1993 = 1,199,366/4,283,288 = 27.9%
Or we can see the change by devived the selling expenses with production.
E(S)1992 = 819,786/4,193,280 = 0.195
E(S)1993 = 1,199,366/5,069,173 = 0.237
3. Average sales price dropping
Average sales price droped a little from 0.850 to 0.845. As a result, the net profit after taxes felt
the amount of $25, 346 in 1993.
Conclution:
The increasing in direct labor and selling costs and the decreasing in sale price are the reasons
explain for the decline in profits.
Question 2: What did Lincoln Smith find when he computed the direct and indirect labor
productivity figures?
Answer:
In fiscal year 1992, 1993 we can see the details of some figures as follow:
Ratio of productive time to total time in fiscal year
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R1992 = 16,320/24,000 = 68%

R1993 = 18,360/36,000 = 51%
With the wage rates are not changed, the differential amount is = -3%
And,
The ratio between direct & indirect labor productivity as follow:
Direct labor productivity
1992 = 528,000/185,000 = 2.85
Indirect labor productivity
Direct labor productivity
1993 = 792,000/222,327 = 3.56
Indirect labor productivity
The differential amount is 0.71
Conclusion:
Linlcon Smith sees the increasing number of direct labor productivity from 528,000 to 792,000
( +33%). The indirect labor productivity increases 17%. With this increasing but the total set up
time is increasing too, ( nearly 56%) it proves that the time productivity is not efficiency.

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QUESTION 3: Identify and describe the root cause of the decline in operating profits.
Recommend a plan of action for plastech.
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Chung Ngoc Hieu Mai Thanh Thao

There are three problems which make operating profit is down:

1. Low gross profit margin
2. Poor expense control
3. Insufficient revenue volume
Details:
1. Low gross profit margin ( 1992 -1993)
In 1992, the annual gross profit is 1,709,428$, and in 1993, the gross profit is increasing than last
year 244,966 ( 13%). But, if we take a look in the total percentage, this value will be minus. We
can see in the charts as below:

The amount of -2.96% shows the reason why the decline in operating profits.
2. Poor expense control
In 1992, the annual gross profit is 1,709,428$, after tax, the net profit is 189,991$. But, in 1993,
the net profit after tax is 31,482$ while the gross profit is increasing than last year 244,966 ( 13%)
The new net profit after tax in 1993 in down to -86%, it is a big fail figure. This is affected by all
expenses are increasing continuously.
-

Production cost increases by direct/indirect labor productivity increase. This increasing will
good for enterprise in case the total productive time is efficiency. But, parallel with the
increasing of productivity, the setup time is increasing while the productive time increases
insignificantly.

Sales expenses: Sales expenses increase about 32% while sales revenue is up to 17% only.
With such a low revenue, it can not compensate for any other expenses or related expenses
like labor cost, other expenses.
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Setup time: With 33% increasing in direct labor productivity, but the productive time
increasing amount is inefficiently, this thing explains why the setup time becomes bigger
and bigger. This proves for the reason why Plastech poor in controlling the expenses.

General & administrative expense: The 33% amount of increasing direct labor, the
expenses give for administration is bigger. We can see the detail of Exhibit 5 and 6.

3. Insufficient revenue volume

In both 2 fiscal year, we can see the sales revenues are lower than production cost. We can
calculate the sales volume between 2 years and it shows that the differential amount is small,
nearly 875,893 products. Although Plastech has cut down the price for getting big volume in
selling, but the result is equally frustrated them.
Income statement of discal year 1992-1993
Unit: $
Figures

No

1992

1993

%Dif

%value

Explainations

Gross profit

1,709,428.000

1,954,394.000

244,966.00

13%

Increasing

819,786.000

1,199,366.000

379,580.00

32%

Increasing

Selling expenses
General and administrative
expense

643,228.000

678,459.000

35,231.00

5%

Increasing

Total expense

1,463,014.000

1,877,825.000

414,811.00

22%

Increasing

Operation profit

246,414.000

76,569.000

(169,845.00)

-69%

Decreasing

Less other expenses and taxes

56,423.000

45,087.000

(11,336.00)

-25%

Decreasing

Net profit after taxes

189,991.000

31,482.000

(158,509.00)

-83%

Decreasing

Sales($)

3,564,288.000

4,283,451.000

719,163.00

17%

Increasing

10

Productions(ibs)

4,193,280.000

5,069,173.000

875,893.00

17%

Increasing

11

Average sale price($/ib)

0.850

0.845

(0.01)

-1%

Decreasing

12

Average production cost($/ib)

0.442

0.459

0.02

4%

Increasing

13

Average profit($/lb)

0.045

0.006

(0.04)

14

Total productive time

16,320.000

18,360.000

2,040.00

11%

Increasing

15

Total setup time

7,680.000

17,640.000

9,960.00

56%

Increasing

16

Total time

24,000.000

36,000.000

12,000.00

33%

Increasing

17

Productive/total ration

(0.17)

-33%

Decreasing

Fiscal year summary statistics

9

0.680

0.510

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Recommend a plan of action for Plastech

We also know that

1. OPEX: A category of expenditure that a business incurs as a

result of performing its normal business operations.
2. REV:The amount of money that a company actually
receives during a specific period, including discounts and
deductions for returned merchandise
So, if Plastech needs to reconstruct the operating profit, they need to minimize the OPEX and
maximize the operating revenue. They also need a specific plan.
1. Minimizing the OPEX
a. Limit the setup time: Plastech loses time in setup time period, nearly 40%
productive time. They can combine the same order with the same material for same
order. Invest new technology in setup time ( longterm plan) or build warehouse for
stocking items with the longterm contract for traditional customer.
b. Limit the labor: The number of increasing direct labor is too high, HR should select
the skillful workers and fire unskillful workers. This step will cut down the cost for
both production & administration.
c. Variety the product but with reasonable volume: Select and kind deny for small kind
of new product. Keeping relationship with customers, diversifying the product
which has long life production.
d. Control expenditures: Keep the invested budget margin and flexible in solving cost.
2. Maximizing the REV
a. Blooming in sales revenue: from 1992 to 1993, the price is cut down for launching
volume, it makes sense. So, Plastech should keep this solving and goes ahead with
it. MKT team is doing very good in their strategies.
b. Sourcing new customers: This will help Plastech improves their customers and
revenue.
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c. Widen view for technology: In plastic market, investment on machinery and

technology is the best solution for surviving and developing. Plastech could invest
technology in setup time, replace using human being power by machinery power.

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