X automobiles limited have one of its car making plant in yyyyy location. It is the oldest and strategically one of the most important unit. A stop in its functioning can lead to low supply in the markets against the demand for it. Recently the plant is facing problem because of some labour issues. The biggest problem is that the Management is not ready to recognize the union and as a result the union cannot get itself affiliated to any political party at the national level.
The labourers were not happy and they have put their demands before as well and there have been talks between the labours and management two times in the previous 5 months but nothing concrete came out and as a result there is lot of resentment amongst the workers. The second problem is that the plant is very old and the layout is not changed since its inception and as a result still old technology is used for automobile manufacturing which is leading to slow production rate but the management is pressurizing the labour to increase the production efficiency and the output without having any change in plant layout and machinery.
The workers are not happy as slow production was result of obsolete machinery and not their way of working. The company really needs to redesign its production facility to meet the production targets. This problem is also leading to high cost of production as the maintenance cost is really high. One more problem which the company was facing was the wage difference between the contract workers and the permanent workers. Both of them were made to do same work but the contract worker was given almost half of what a permanent worker was given.
Contract workers are usually hired in order to fulfill the seasonal demand but this company had them for a long time and the company was saving money by keeping them rather than going for permanent workers. Due to this problem the contract workers along with some union activists got into some violent mood and they ransacked the company’s office as well as its machinery. They broke many machineries which were critical for the production process and as a result whole production has come to a halt.
The company has shut down its plant temporarily and this has led to huge financial loss to the company as it needs plant redesign plus new machineries are needed to start the production process again. The company is also losing its market share because the supply is not able to meet up the demand for the product and as a result the customers are switching to products by competitors as they are not ready to wait for the company to get back to its health. Though other plants are trying to increase the production and meet the market demands but they cannot compensate totally.
Therefore the company is losing its pie from market share to its competitors and this is The damage due to ransack of the plant machinery and equipment was pegged at INR 525 crores. The company decided to purchase high tech machinery from Germany and Japan costing 12 Mn Euros ( euro=INR 69. 89) to replace its obsolete machinery. A team of engineers from Germany was also appointed to install the new machinery. The team proposed a time window of 42 days to successfully install the new machinery. There was also a need to train the existing employees of the company to handle the machinery optimally.
That requires a period of 25 days. The company plans to raise the amount required for buying the equipment with a mix of debt and equity. The return on investment the investors of the company expected was 16%. The company managed to get the loan from HHH Bank at the rate of BPLR + 200 BP. The lead time for procuring these equipment from Germany was 32 days. During this time the company’s various departments were busy in churning out information that would help the company to cope with the change.
The Finance department predicted that the rupee value may experience fluctuations in the coming months owing to Global economic unrest. The machinery’s original cost was INR 750 crores and was used for only 8 years and 9 months before the ransack. The machinery has a salvage value also. The company charged 10% depreciation under WDV method. A foreign merchant has agreed to enter into a contract to buy the old machinery from the company. While the company’s plant was closed, there was a production loss of 1400 units per day.
There was also a piling up of finished and semi finished units in the company’s inventory. The sales team projected that for every day the plant was suspended the retail revenue reduced by INR 70 Crores. The warehousing cost stood at 18% of the revenue per unit. Pending orders and backlogs created a lot of customer dissatisfaction leading to cancellation of orders to the tune of 86 orders per day on an average. Calculate the overall cost and formulate strategies to reduce the cost. (Consider Hedging, Rupee depreciation news- to be put in a news flash)