Bridgeton

We all know what happened with the engine plant. The production workers did everything they could to cut production costs. They succeeded in bringing costs close to that of competitors. However, it was not enough. They were still told that they were not cost competitive and the plant was closed. We have already had to outsource oil pans and muffler-exhaust systems and despite our improvements in the production process, we may have to outsource manifolds. This would be regretful to our company if emission standards are raised causing increased demand for the light weight stainless steel manifolds produced here at ACF. Here we are on the same path to closure just as the engine plant. We have made many improvements. Yet, our cost are still rising causing us to lose business. This is an issue that needs to be addressed and needs to be addressed now.

Our main problem is that our costs are rising. When costs rise, we must raise our prices making cost leadership and the ability to compete much harder. We have had to outsource oil pans and muffler-exhaust. As you can see in exhibit 1, we had a slight decrease in the overhead allocation rate from 1987 to 1988. In 1987, overhead was allocated to each product at the rate of 437% of direct labor costs. As you can also see in exhibit 1, there was a significant increase in the overhead allocation rate from 1988 to 1989. This was due to the outsourcing of oil pans and muffler-exhaust systems which resulted in a decrease in labor. Product costs for the oil pans and muffler-exhaust systems were classified as Class III by the consultants due to the fact that their costs were 15% higher than competitors. However, we do not feel that the appropriate measures were used when classifying product costs. Gross-margin and gross-margin percentage calculations are useful when wanting to compare the profitability of different products. This can help us explain why some products have low profitability and help us see where we have been inefficient. No where in their strategic analysis did the consultants refer to the gross-margin values of our products.

Gross-margin calculations can be very useful in helping us understand why some products have low profitability compared to others and possibly see where some direct materials were wasted or whether labor was too high. As you can see in exhibit 2, gross margins of fuel tanks and manifolds decreased from 1988 to 1990.