Michigan Manufacturing Corporation

Michigan Manufacturing
Corporation: The Pontiac

Plant, 1988
GROUP – 9
Background
• Michigan Manufacturing Corporation (MMC) is a leading manufacturer
of axles and related components.
• MMC's product range includes on-highway and off-highway axles,
serving various industries.
• The Pontiac plant in 1988 comprised four distinct product groups,
each with different characteristics.
• The plant is grappling with challenges concerning the economic
viability of its product groups.
• MMC is considering the possibility of relocating production to other
plants within its network.
• A critical decision under consideration is the potential closure of the
Pontiac plant.
• Decisions will have implications for the plant's workforce, the local
community, and the company's future.
• MMC must balance financial performance, customer needs, and
workforce considerations.
Product groupings at Pontiac
Closing the Oldest Plant in HED Division
Financial Challenges Operational Inefficiencies
• Sustained financial losses over • Aging equipment

several years • Elevated variable manufacturing
• Unsustainable operating deficit overhead
Product Group Assessment Capacity Utilization
• Groups 1 and 2 deemed transferable • Potential for economies of scale

with cost-saving potential • Consideration of Pontiac's capability to
• Group 3 considered economically handle low-volume products
unviable
Alternatives
Various Value-Added Costs
Overhead Costs
Direct Costs Facilities, Utilities and

Maintenance
Labor and material costs
Overhead Costs: Overhead

Labor Costs: With economies
costs can be distributed more
of scale, the per-unit labor cost
efficiently across a larger
decreases as production
production volume, reducing
volume increases.
the per-unit cost for all groups.
Materials Costs: Bulk

purchasing of materials for
larger production volumes can
reduce the per-unit material
cost.
The Accounting System Misleading Managers
Overhead Allocation Absorption Costing

•Inclusion of Fixed Overhead: Absorption costing includes
•Predetermined Rates: Traditional accounting system both variable and fixed manufacturing overhead in product
uses predetermined overhead rates. costs.
•Mismatch with Actual Usage: These rates may not align •Cost Structure Complexity: In the MMC Pontiac Plant
with the actual consumption of overhead resources by case, Group 3 is identified as unprofitable due to high
different product groups. direct labor and low volume.
•Misleading Profitability: As a result, profitability •Oversimplification: This approach may oversimplify the
assessments might not accurately reflect the resource cost structure, potentially leading to incomplete cost
usage and can lead to misleading conclusions. information.
Lack of Timely Data in the MMC Pontiac Plant Neglecting Non-Financial Metrics
•Missed Efficiency Gains: Neglecting economies of scale •Primary Focus on Finance: The decision to close the Pontiac
means missing out on opportunities to reduce per-unit costs Plant in the MMC Pontiac Plant case is largely based on
through increased production. financial data.
•Misleading Profitability: A group may be labeled •Overlooking Vital Factors: Non-financial factors like product
unprofitable based on current volumes, even though scaling quality, customer satisfaction, and employee morale are
up could improve profitability. crucial but often omitted from financial assessments.
•Resource Underutilization: Failing to consider economies of •Incomplete Picture: Relying solely on financial metrics
scale can lead to inefficient resource allocation. provides an incomplete picture of the plant's health and
potential for long-term success.
Operations Strategy
• Quality (High): MMC emphasizes producing high-quality products, which is particularly crucial given
that they are in the manufacturing business. This focus on quality aligns with the goal of maintaining
a reputation for producing reliable products.
• Speed (Fast): While speed and efficiency are not the primary focus of MMC, they seem to prioritize
rapid production in certain areas. For instance, they aim for quick time-to-market for their products.
• Dependability (High): The company strives to provide consistent and reliable products. Dependability
is crucial, especially in industries where customers rely on the products for their operations.
• Flexibility (High): Flexibility appears to be a priority, given the emphasis on adapting to changing
customer demands and custom orders. The ability to respond to market changes and accommodate
varying customer requirements is essential for competitiveness.
• Cost (Low): MMC aims for cost-effective production while optimizing resource allocation and
utilization. Efficiency in resource usage is crucial for cost reduction.
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Michigan Manufacturing Corporation

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Michigan Manufacturing Corporation

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Michigan Manufacturing

Corporation: The Pontiac

Financial Challenges Operational Inefficiencies

• Sustained financial losses over • Aging equipment

Product Group Assessment Capacity Utilization

• Groups 1 and 2 deemed transferable • Potential for economies of scale

Direct Costs Facilities, Utilities and

Overhead Costs: Overhead

Materials Costs: Bulk

Overhead Allocation Absorption Costing

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