CASE 6.11: WHITEWATER WEST INDUSTRIES LIMITED

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Executive Summary

Whitewater West Industries Limited is involved in molding fiberglass and currently they are experiencing problems with their expansion plans. The reasons for their impediments arise from serious complaints from the general public about the emissions released from the plant and that their production capacity is currently full hence a need to expand. Mr. Chutter is considering relocating the company and hence Mr. Winford has been requested to conduct a research in order to find a favorable piece of land for their project. In making such a decision the company has to evaluate a variety of available options to find which option can meet its short term and long term venture.

Option one is the Hiram Walker plant which seems appropriate in all aspects but the main hindering factor is the fact that the owners are not willing to part with it. Option two is about setting up a building for $ 1,326,000, after buying a piece of land for $ 1,500,000 but the main setback is that it is not easy to get such space needed by the company. The third option involves buying two buildings along the highway in Abbotsford. The recommendations are that the firm to take either option 2 as long term investment or option or option 3 as a short term investment which may involve leasing the said piece of land as other alternatives and negotiations are sought. In so doing the firm should also have a look into their financial statements reported to ascertain that the decision being taken conform to their overall objectives.

 

 

Problem Statement

The Whitewater West industries limited management is to make a decision concerning the location of the plant for its fiberglass molding. The firm has so many factors to consider such as location away from the people. Their intentions are to locate the facility in Kelowna 400 km East of Richmond. The impeding factor is the growing concern or fear of air pollution. The project is to be completed by May 1996 and the management has three other three options to make to meet the capacity already achieved earlier before the issue arose. In taking the decisions the management has to consider all the factors necessary for plant location without contravening the available policies and regulation or the ethics required of them (Fletcher and Haywood, 1995).

Problems/Issues

The Kelowna plant had originally been erected on a prime productive agricultural land in a semi rural area. With time the city had built up residential houses in such a way that they surrounded the area. In addition, other plants had been set up within vicinity. The main impediment in the whole issue concerns the gases that are released from the factory which have a pungent smell during the process of polymerization. The chemical styrene released which is highly volatile and causes irritation to the eyes and mucous membrane. Despite the residents launching complaints to the city concerning the odor, the city could not find any evidence from the facility.

In addition, the plant had reached its full production capacity attributed to the success of Mr. Winford in pulling the strings in the company’s core business. The current estimates of the plant need for space is between 6,040 and 6,970 square meters to mange the current volume. The supplier of the company GWIL industries has the liberty to ship the materials anywhere. Mr. Chutter believes and proposes that production, design, administration and engineering can placed in one location to minimize on costs and enhance communication. Some employees are opposed to the relocation, even though the management feels that they can be replaced however the costs of replacement are very high.

The list of relocation has been narrowed to three. One of the locations is Hiram Walker plant that manufactured alcohol and currently closing down. The main constraint of the option is that the owners are unwilling to sell the plant and that the building will require a lot of expenses and costs in renovation. The second option the company can build a factory, but the main problem is how to acquire the site or land to build the plant. The last option is the Abbotsford site located along the highway which has two buildings fitted with sprinklers and hydrants though the site has no room for expansion. Considering the costs involved the stakeholders must decide which option to take bearing in mind that there is an estimated possible growth in sales through the expansion despite the costs involved.

Analysis

Location of facilities is normally a long term capacity choice which calls for long term obligation concerning factors relating to geography which may affect a business operation. Through location choice quite a large investment is needed in erecting the plant and machinery. The theory of industrial location rests upon various components which may include; communal groupings, migration pattern, geographical factors, economic factors, industrial dispersion degree, industry centers growth and other elements that might influence the industry. The factors may fluctuate from one plant to another in the different industries. Nevertheless, there must be focus on economic analyses framework.

The company has had quite a recommendable background as to evaluate and align their needs with what options are available. From a humble beginning the firm came to grow into an international firm which made water slides, fiber glass slides and the well organized site. The firm later specialized in the design and manufacturing process and installation of water slides. Due to the space available the company had decided on reducing on the operation segment of the plant. With the growing sales volume however, the company has been forced to expand the facility and hence space and location is now a challenge. The market share has grown substantially to fully utilize the full capacity of production hence from the three options by Mr. Chutter; the firm intends to acquire a building or land to set up their full production without interfering with the current production and sales.

Alternative Analysis

From the above issues, the company has to consider the following information from their financial statements: from the period reported 1991 to 1995 the net income from the business operation has been growing steadily from a loss of $ 215,350 recorded in 1991 to highest income of $160 853 recorded in 1995. It has an implication that the company has many costs to meet which influence their returns meaning that future income might be lower due to high costs of expansion. The firm equity has been fluctuating but picked up in 1994 from $ 360,397 to $ 521,250 in 1995. This has an indication that the value of the firm is at present period steady to support expansion.

The company’s working capital in 1991 was $ 216,863 while that of 1995 was $ 1,069,182 implying that the company can meet its current obligation attributed to the growing working capital from the available short term investments hence a possible ability to manage the future cash flows from the expansion. Currently the firm has no viable long term obligations showing that it will not be difficult to acquire funding for expansion in respect to the non-current assets it posses. The company’s sales has showed a slight drop from 1991 with a figure of $ 4,634,941 which dropped in 1993 to $ 4,496,048 but showed a remarkable improvement in 1995 to $ 5,152,512 which are projected by Mr. Chutter to rise to $ 6million as a result of any expansion.

Basing on the available options and considering the financial information given, option 1 will be very expensive in the sense that cost of labor will cost $250,320, land preparation, $1,321,555, cost of land $ 422,500 and warehousing $1,653,500. This might not be the case considering that the owners have decided that they can not part with the land. This is an implication that the land can be put at any price to scare the company away. In option 2 the costs allocated for land and building are over $3million yet the location has not been identified. Since the suppliers have the ability to distribute to any location the firm has the obligation or liberty to relocate the facility at any other place to avoid constraints of space for expansion and litigations from the community. For option 3 though there is no room for expansion, the facility can be relocated to this location. It will now wholly depend on the ability of the management and engineers’ ability to plan and design it properly though the costs of obtaining the land and building are way above $ 2million.

Decision/Recommendation

The firm might consider taking any of the three identified option in their initiatives to expand. I may recommend the firm to take option 2 basing on the following arguments. The company with their budgeted $ 2,964,425 on building and an estimated $ 1,500,000 on purchasing of land can acquire a piece of land to build the factory that will meet its needs. A perfect plant will be achieved not withstanding the difficulty in obtaining the land. Though it is not easy in obtaining the required size of land, such a firm can easily get an alternative land which nearly fits their specification. This is a long term decision that the company can have as it will take the company into their bigger future prospects.

Besides, as an alternative, the firm can opt for option 3 which is the Abbotsford site 65 kilometers east of Vancouver. The estimated cost for land almost meets their requirements though there is no room for expansion. In this respect they will meet the cost of $ 750,000 for the land and another $ 1,326,000 for the two buildings; though the land can leased as other locations are considered. They will have saved a total of $ 750,000 for the land and $ 1,638,425 for the building acquisitions instead of constructing another building. Moreover, the company will be in a position to efficiently use the available space just the same way it was applied in the previous set up. This may seem to be the most probable short term decisions which the company can take as other avenues are sought to negotiate with parties in option 1 into selling them the land. This will improve the production capacity enhancing the initials full production potential which will see their sales going up to $ 6 million.

 

 

 

 

 

 

Reference

Andrew Fletcher and John Haywood, (1995) Case 6.11: Whitewater west industries Limited,

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