ZycholChemicalsCorporation

ACaseStudyPresentedto
Mr.RomiReyes
DecisionScienceDepartment
RamonV.delRosarioCollegeofBusiness

Inpartialfulfillmentofthecourserequirements
forOPEMANAK31
Abalos,Elika
Balila,Richmond
Romero,Regina
Tamayo,Philip
Yabut,Sage
Yu,Andrea

01June2016

I.

BackgroundInformation

Bob Richards the production manager of Zychol Chemicals, in Houston, Texas, is

preparing his quarterly report,which istoincludeaproductivityanalysisforhisdepartment.One
of the inputs is production data preparedbySharonWalford,hisoperationsanalyst.Thereport,
whichshegavehimthismorning,showedthefollowing:

2006

Production(units)
Rawmaterialused(barrelsofpetroleumbyproducts)
Laborhours
Capitalcostappliedtothedepartment($)

2007
4,500

6,000

700

900

22,000

28,000

$375,000

$620,000

II.

ProblemStatement

A new company emerged as Zychol Chemical Corporations rival, the companyneeded

an increase in costs in order to gain competitiveness in the market. However, the increase in
costs did not only increase labor cost per hour and capital cost, but also the cost per product.
What could be the main reason as to why all costs rose? and how can this affect the
productivity? Results could either be an increase or decrease in productivity which may
determine the success of reaching one of the goals of the company, which is to improve the
annualproductivity.

The main problem of the company was jumping intoanactionwithoutmuchthoughtput

into it. Zychol corporations was running smoothly until a new company opened just across the
streetwiththesameinterests.Withthis,Zycholchemicalscorporationrushedtheirproductionto
compete with the other company, butneglected theimpactonthecostoftheirproductionwhich
showsanegativeandunwisedecision.

III.
AnalysisofCaseData

ProductiveAnalysis

2006

2007

AdjustedCost

AdjustedTotal
Cost

Production(units)

4,500

6,000

MaterialUsed

700

900

MaterialCost

$320

$360

$345.60

$311,040

LaborHours

22,000

28,000

LaborCost

$13

$14

$13.44

$376,320

CapitalApplied($)

$375,000

$620,000

$595,198.10

$595,198.10

ProducePriceIndex(PPI)

120

125

$1,282,558.10

TOTALCOST

$1,282,558.10

*ProducePriceIndex=(125/120=1.04167)

IV.

Recommendation

The group recommends that Mr. Richards should improve overall operations
maintenance. Managing the number of loops or processes/repetitions an operator/laborer
handles can mean a lot of savings or increase inproductivityin thelongrun.Iflaborerswereto
be given an increase in production quotas, the company may be able to get more from them
with the same price. But of course, an increase in required output will also need additional
compensation. This may be given in the form of indirect monetary incentives. These can be
given in many forms like access to VIP Food in the mess, or Free Merienda, or even
establishing an Employee of the Month system to increase the laborers willingness to strive
hardforthedepartment.

Additionally, renegotiation of current contracts, any that isrelatedtotheproductiondepartment,

for a better price would also aid greatly in the departments control of the utilization of costs.
However,thisisoptionalfortheproductionmanager.

V.
DiscussionQuestions

1. PreparetheproductivitypartofthereportforMr.Richards.Heprobablyexpects
someanalysisofproductivityinputsforallfactors,aswellasmultifactoranalysis
forbothyearswiththechangeinproductivity(upordown)andtheamountnoted.

AccordingtoStevensonandCheeChuong(2010),productivityisameasureoftheeffective
useofresources,usuallyexpressedastheratioofoutputtoinput.

Computingfortheproductivity,wehave:

Productivityfor2006
Productivity=Output/Input

Output=4,500productionunits

RawMaterialsInput=$320perbarrelx700barrelsofpetroleumbyproducts
=$224,000

LaborInput=$13labourcostperhourx22,000labourhours
=$286,000

CapitalInput=$375,000

MultifactorProductivity=Output/Input
=4,500units/($224,000+$286,000+$375,000)
=4,500units/$885,000

=0.005084745763unitsperdollarinput

Productivityfor2007

Productivity=Output/Input

Output=6,000productionunits

RawMaterialsInput=$360perbarrelx900barrelsofpetroleumbyproducts
=$324,000

LaborInput=$14labourcostperhourx28,000labourhours
=$392,000

CapitalInput=$620,000

MultifactorProductivity=Output/Input
=6,000units/($324,000+$392,000+$620,000)
=6,000units/$1,336,000

=0.00491017964unitsperdollarinput

Productivitygrowth=[(currentproductivitypreviousproductivity)/previousproductivity]x100
=[(0.004910179640.005084745763)/0.005084745763]x100
=x100

Productivitygrowth=11.67664671%

Therefore,thereisa11.68%decreaseinproductivityfrom2006to2007.

MultiFactor
Productivity
Analysis

2006

2007

%Change

LaborProductivity

4,500/22,000=
0.02454545

6,000/28,000=
0.21428571

4.79%positive
change

MaterialProductivity

4,500/700=
6.42857142

6,000/900=
6.6666667

3.70%positive
change

CapitalProductivity

4,500/$375,000=
0.0120

6,000/$620,000=
0.0097

19.17%negative
change

Intheanalysisofproductivityinputsforallfactors,laborproductivityandmaterialproductivity
increased.However,capitalproductivitydeclined.

2. Theproducerpriceindexhadincreasedfrom120to125,andthisfactseemedto
indicatetoMr.Richardsthathiscostsweretoohigh.Whatdoyoutellhimarethe
implicationsofthischangeintheproducerpriceindex?

ChangeinProducerPriceIndex(PPI)=[(125120)/120]x100
=4.1667%

There is a 4.1667% increase in the PPI. This means that even though productivity has
increased from 2006 to 2007, the cost per unit of materials used and labor hours are higher in
2007thanin2006.Also,thiswouldresultintoanincreaseinthepriceforconsumersin2007.

3. ManagementsexpectationfordepartmentssuchasMr.Richardsisanannual
productivityincreaseof5%.Didhereachthisgoal?

2008

2009

MFPbefore
adjustment

0.00508

0.00449

(0.004490.00508)/
0.00508=11.61%

MFPafter
adjustment

0.00508

0.00468

(0.004680.00508)/
0.00508=7.88%

The goal was not reached. Although labor and materials productivity is favorable, multifactor
productivity was not positive even after adjusting the variables for inflation. It has fallen by
11.61%beforeadjustmentandby7.88%aftertheadjustmentforinflation.