22. Novelette: So You Want to Eliminate a Plant in a Foreign Country

Not all production facilities turn a profit for their stakeholders. When they start losing money, they are at risk of being discontinued. Usually, decisions to eliminate a plant are at the executive level in an organization, but who actually eliminates it are the same people who generally created the plant in the first place: the operations management people. Just as they can engineer a plant that does not work, so too can they fix it to work!

The Executive VP whom I work under came to my office to inform me of a decision he had made. “Hi, Bill. As you know, we bought a facility in Korea eight years ago to produce our medium-sized automobile engines that we sell to the car manufacturers, principally in Japan, but also throughout Asia. I know they have been a pain to work with in terms of late deliveries and quality issues with regard to your overall supply chain efforts for many years. They have also been in the red for all eight years we have owned them. I have pitched the closing of this plant to the CEO, and she has given me permission to begin the process. Because this type of operation falls under your area of responsibility, I am asking you to begin closing the plant now in combination with our VP of Global Operations. Because of the complexity of the paperwork and the general activities required in closing a plant in Korea, you will have a year to phase down the operation and reorganize your global supply chain operations to take the closing into consideration. I personally want to see this as a done deal in a year, since I was against purchasing this plant in the first place. It helps me validate my original opinion of this purchase,” he stated.

As the VP of Operations for the entire organization, I was aware of the troubles in the Korean facility, but was not really allowed to do much about it because it fell under the responsibility of the VP of Global Operations, who is in charge of the success of all foreign global operations we operate. That being said, I was now given full responsibility from the Executive VP to get an operations management team from the Medium-Sized Engine Division into the Korean plant and see what was going on that actually led to the Executive VP’s desire to shut it down. I called in Barack, our VP of Operations for Medium-Sized Engines, and had him create a project team for this phasing down job. The project team was made up of a director of project management or project director (since it was an international job, we used the title director rather than manager as would be done in the United States), the current plant manager of the Korean facility, the director of procurement and materials, and a small team of Six Sigma-trained industrial engineers.

A month into the project, Barack called me to say, “Bill, we have an interesting situation in the Korean plant shutdown project.”

As I anticipated the usual foreign project outcome of trouble, I said, “Okay, but don’t surprise me with anything that is going to cost more money.”

Barack in a laughing tone added, “No, nothing like that, but based on what the project manager is telling me, I think we can turn this plant around to turn it into a moneymaker.”

Thinking, but still remembering the Executive VP’s desires, I said, “Barack, that was not what you were sent out to do. The Executive VP really wants to kill this plant. The corporate people are in the process of drafting the paperwork to officially end the plant.”

Barack replied, “What we have learned is that the people in the plant really didn’t know how to manage inventory, their supply chains, or even their production processes. It is like we bought this plant and then just ignored it. Also, they have too many people, and some don’t have the skills to do their jobs.”

Never wanting to turn down a challenge, while at the same time not wanting to go against the Executive VP, I suggested the following course of action, “Okay, you have what you need in a team out there, so there won’t be any additional costs that I would have to hide. So, have fun for the next eight or nine months training people and changing systems as you want. But remember, in about 11 months we will be closing the plant down. In the meanwhile, your training efforts will benefit the employees by enriching their skills and, in turn, helping them to be more prepared in their next jobs. We can write this off as a new job training program, or at least that is what I will call it if I am pressed by anyone here.”

The project director worked closely with the plant manager. During this time, the Plant Manager was told that everything would be fine for him, just to hang in there (as the firm was going to give him an umbrella when they announced the closing of the plant). Basically, they would continue his employment to further manage the elimination of the plant and its assets after the closing date. This would provide employment for as long as it took to sell the plant and equipment.

The project director then launched into programs to identify production problems and explained. “Hi, Barack, you asked me to keep you informed about what we are doing on the Korean project, and I just wanted to let you know that we have implemented an education program for those who have the skills the plant needs. Others are being retrained for new jobs, and some employees are being let go because they were just not needed. The industrial engineers have set up Six Sigma training programs to help employees find problems and come up with solutions to correct them. The plant people and the plant manager are working very hard to learn and turn the facility around. They were easily schooled in lean and other quality-improvement methods. We also provided them with some additional training in supply chain management and logistics effectiveness. We are all working diligently with the supply chain to lower the costs and improve the logistics, but we need all the help we can get. We are using lean and Six Sigma methodologies to assemble the engines with the least labor possible. We got rid of all the waste and will continue to look for more.”

The project director asked Barack for help in finding additional supply chain cost reductions that might be beyond the plant’s scope of control. Barack had Todd, the Head of the Supply Chain Department, come up with some ideas. After investigation, Todd suggested the following, “Barack, it appears this plant was left all on its own to do a lot of its supply chain activities since we purchased it eight years ago. For example, we found that they were not bundling orders within our Division or with any of our other Divisions to obtain quantity discounts, even on standardized parts that are interchangeable on our other small and large engines. So, they were paying full price on parts and materials, where we could easily have reduced the cost by 40%.”

Surprised, Barack asked, “What does that add to their bottom line?”

“Barack, just this one area of cost reduction will add $10,000 in monthly savings, and we are not done yet. It turns out they haven’t ever used our database on suppliers to find the best suppliers or the least cost for services, materials, and parts. That will save thousands over the year.”

“Todd, as you know, we are scheduling this plant to be discontinued within the year, so short-term cost reductions will be a greater value to us.”

Todd, being quick to reply, said, “Yep, I know that, so I also brought in some of my expert procurement buyers to reverse what they do best and find sources to sell off obsolete materials this plant has accumulated and didn’t know what to do with. As you know, culturally, Koreans are very frugal. They don’t waste things, so they had piled up a lot of unneeded goods that they had purchased over the years, but the goods had become obsolete or useless. Just the space in warehouses they were renting to store them will save thousands more each month. In addition, the plant had accumulated logistics equipment that was either in disrepair or no longer used. Like the obsolete inventory, they were just collecting dust. We will have some of our buyers help sell off these and other assets that we have nearly or fully depreciated to help shore up the bottom line of this plant.”

“Todd, is there anything else you might want to share with me about this facility and our supply chain in a final report that I am preparing for the VP of Operations?” asked Barack.

“Barack, it should be noted that the location of the Korean facility is important to our supply chain network. We use it as a distribution breakout center. Basically, we ship engines from our U.S. and Chinese facilities to distribute through this center, where we stage and sort the products going to our Japanese customers, who are major consumers of our automobile engines and parts. Without the facility in Korea, we will have to start up a distribution center in Japan, which could be very expensive, given land and building costs. Also, the facility acts as a conduit for access to rare metals from China that we use in our products. Our connections in Korea have made possible our access and licenses to procure the rare metals from China. Without that Korean contact, we may lose this arrangement and have to have a more costly route to obtain them. I join others in suggesting that the positives of operating this plant supporting our supply chain outweigh the negatives. I hope the board changes its mind on the plant closing,” implored Todd.

“Todd, that is a good point, and I will include it in my final report. As it stands now, we will be closing the plant in a few months. I appreciate your continued hard work in getting what you can out of the facility and helping them improve their supply chain efficiency.”

As the VP of Operations charged with the responsibility of handling this plant’s discontinuance, I review monthly the organization financial-performance information. As the year went on, I was pleasantly surprised to see the financials from the Korean plant had started improving on same/similar sales levels. Costs were going down and profit was going up without an increase in sales, which was clearly a contribution of the operations people. The paperwork indicated that we had started making a profit. Obviously, the project team was having a significant impact on plant operations. Unfortunately, none of this had any effect on the corporate plans to discontinue the operation. Time had finally run out, and the showdown at the Board of Directors meeting was imminent.

Like most board meetings, the CEO, Executive VP, other corporate VPs (myself included), the comptroller, corporate lawyer, and Division VPs, whose areas were impacted by board decisions in this meeting, as well as some of their subordinates who had prepared applicable reports, were all present. Those of us connected to the Korean plant closing project were there: I, as the VP of Operations; the VP of Global Operations in charge of all international operations; Barack, the VP of the Medium-Sized Engine Division; his Supply Chain Department Head, Todd; and the Project Manager who prepared the operations report. Everyone in the meeting had access to the financial reports on the Korean project, and there was dissension among the VPs on whether to close the plant. The Executive VP was still determined to close the plant, for personal reasons if nothing else. We started the meeting with a review of general business and market conditions for the organization as a whole, discussing a few insignificant items on the agenda. Then, we brought up the Korean facility closure item. Our CEO was well respected by all. She had been very successful for the organization, and she did not like losing money on any projects or facilities. We handed her the paperwork and documents to close down the plant for her final signature. These had been drafted over the past year by the Executive VP, lawyers, and other international experts who specialize in Korean government policy on plant closing legalities. A lot of work went into drafting the documents, and they had already been countersigned by all the appropriate authors, except our CEO. Like any new project, you need a capital authorization or statement of capital expenditures at the head the document so that it can be weighed in the final decision. If you are going to close something, as were planning to do here, you also need to have a capital authorization. This document serves that purpose. The document was placed in front of the CEO, who, with pen in hand, looked at it with disgust given the losses of this facility during the eight prior years.

She looked upset, and wanting to be angry one more time, she asked me, as the VP of Operations, “Bill, how much money did we lose this ninth year of the operation?

Happily I replied, “We are not going to lose any money this year.”

The CEO sat back, put her pen on the table, and started tapping her fingers on the document that awaited her signature and asked, “Bill, how much money will we make from this facility this year?”

I quickly replied, “We are going to make a $1 million.”

The CEO, in shock, said, “$1 million! Really? Haven’t we lost money here for the last eight years?”

I replied, “Yes.”

She then asked, “What happened? I know we didn’t have that much more in sales, so what happened?”

And with glee that only an operations person can have in such a situation, I replied, “Well, the operations people got in there and fixed a lot of things that were going wrong and found things could be done with fewer people.”

The CEO, still a bit puzzled, asked, “How much money are we going to making in this facility during the next timing horizon?”

“I am happy to inform you, that if we continue down this path, we should make about $8 million during the next timing horizon.”

The CEO started looking at the discontinuance document in front of her asked, “Who brought me this paperwork today?”