![The case was written by PhD Fellow Irene Christensen from the
Department of Operations Management at Copenhagen Business
School.
The case is intended to be used as a basis for class discussion
rather than to illustrate either the effective or ineffective
handling of a
management situation.
.
The case is developed based on a real company, but the name of
the company is disguised.
SUSTAINABLE INDUSTRIAL
PRODUCTION:
A CASE OF A RECYCLING CENTER CORPORATION
315-051-1
Distributed by The Case Centre North America Rest of the
world
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- 1. The case was written by PhD Fellow Irene Christensen from the Department of Operations Management at Copenhagen Business School. The case is intended to be used as a basis for class discussion rather than to illustrate either the effective or ineffective handling of a management situation. . The case is developed based on a real company, but the name of the company is disguised. SUSTAINABLE INDUSTRIAL PRODUCTION: A CASE OF A RECYCLING CENTER CORPORATION 315-051-1 Distributed by The Case Centre North America Rest of the world www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903 All rights reserved f +1 781 239 5885 f +44 (0)1234 751125 e [email protected] e [email protected] case centre
- 2. This case has been made available as part of the CBS free case collection www.thecasecentre.org/cbsfreecases U sa ge p er m itt ed o nl y w ith in th es e pa ra m et
- 10. Waste is what is left when we run out of fantasy. – Anonymous INTRODUCTION The snow was piling up quickly on the windshield of Eric’s Tesla S and he shuddered slightly. He was stepping into his second year as the CEO of Recycling Center Corp (RCC). He had been headhunted by the parent company — Recycle Center (RC) Ltd. — to take on the CEO role, which required him to leave his position as COO of a successful multinational logistics organization. Eric had an impressive resume: more than 20 years of experience, numerous previous assignments in which he worked in the EMENA 1 region and fluency in five languages. Prior to Eric’s entry into RCC, RC Ltd.’s Board of Directors had raised serious concerns about the increasing deficits and had held Frank – the previous CEO – fully responsible for the company’s poor performance. In 2013, the Board had consequently replaced him with Eric under a generous three- year contract with a two year extension option. Eric was
- 11. charged with ensuring a strategic turnaround. Exhibit A – Key financial figures (in thousands USD) 2 FY2014 FY2013 FY2012 FY2011 FY2010 Revenue 284,549 395,695 284,629 374,088 210,320 EBIT -15,119 -9,381 22,032 9,072 -46,551 Financial items -2,281 -3,091 -3,839 -1,902 -6,803 Profits -17,400 -12,472 18,193 7,170 -53,354 According to the company’s announcement, the EBIT decreased in FY2013 and FY2014 due to lower earnings from metal recycling sales, which were affected by severe winter weather. Revenue increased in FY2013 as a result of the divestment of several non-core businesses. 1 Europe, the Middle East and North Africa. 2 The financial figures are for the entire organization (RCC) and include the ownership of numerous assets.
- 20. RECYCLING CENTRE CORP. RCC, a publicly traded company in the Scandinavian region, was established in 1985. Throughout its history, it was viewed as one of the largest specialists in the metal-scrap trading and recycling industry. Since its establishment, the company had been focused on the environment. This focus resulted in an ISO 14001 certification, which served as an acknowledgement of its strategic efforts to put as little strain on the environment as possible. The company’s major assets consisted of a heavy-duty shredder plant with a process capacity of 70 tons per hour (the equivalent of two cars per minute) and an output of 4000HP (2,150kW). Given municipal noise regulations, the shredder was allowed to run 52 weeks a year, five days per week from 7:00 a.m. until 6:00 p.m. The Operations Management department estimated that the shredder’s loading time averaged 55 hours per week at 95% of its rated speed. Furthermore, the machine had, on average, a waiting time of 11 hours per week due to material deficiencies, and another three hours per week due to breakdowns and other
- 21. mechanical failures. Moreover, of the final product, approximately 20% took the form of plastics and other by-products, which were deemed waste. Typically, variable costs in this industry were significantly higher than fixed costs. For RCC, the fixed production costs were estimated at USD 16 per ton, including such elements as utilities, rent and depreciation. The variable costs were divided into two parts: employee wages and freight costs, estimated at USD 27 per ton, and material-procurement costs, estimated at USD 260 per ton. The sales department accounted for a selling price of USD 360-370 per ton. Exhibit B – RCC site layout 3 Furthermore, the company owned two shear balers with shear forces of 3.75-6.5 tons per hour for the small machine and 14-16 tons per
- 22. hour for the large machine. The baling process consisted of compacting the material into a log or bale, which drastically reduced transportation and storage costs. The shearing process chopped materials that were difficult to compact, such as metal beams, railway tracks, pipes and other metal scraps. An automatic cycle of compacting and shearing was used due to the extreme efficiency in processing all scrap. RCC’s machines were grouped together in 3 Adapted from Slack, N. (2010). Operations management (6th ed.). Harlow: Financial Times Prentice Hall. 315-051-1
- 28. ni ve rs ity o f U ls te r. E du ca tio na l m at er ia l s up pl ie d
- 30. U J9 K -P JM N 9I O rd er r ef er en ce F 31 67 20 3 a cell-based layout, which rendered a faster truck useless during
- 31. the physical connection of the material’s flow (see Exhibit B). Other assets included a cable- stripping line, in which various types of electric cable were stripped and then segregated into different types of non-ferrous metals. In addition, the company owned a 1,000sqm yard located in an industrial area. PEOPLE MANAGEMENT & LEADERSHIP Eric was a welcome contrast to Frank. He was known as “Mr. Nice Boss” and a “booster”, attentive and inspiring manager and loyal to his company and its values. Those close to him felt privileged to come to work and would gladly put in the extra hour. Eric wasn’t an interloper, but a strategic hire and a reminder of what happens when a company with vast network lacked direction. With Eric now in charge, the company’s performance had significantly improved but it had still not fully recovered. The entire workforce consisted of 400 employees, of whom 80% were skilled and unskilled blue-collar workers with 15-20 years of experience in the scrap-handling and processing industry. They were compensated at an average hourly rate of USD 30.
- 32. The remaining 20% of Eric’s staff were corporate employees with engineering or managerial/foreman backgrounds. The majority of the blue-collar workforce operated in the yard and the collection centres, focusing on processing voluminous, bulky and heavy-weight scrap metal. Many of them served as metal analysts and/or torch-cutting specialists. In addition to the plant operators, RCC employed 30 truck drivers, who handled the logistics services. In the late 1980s, RC Ltd entered the metal-trading industry essentially through the acquisition of a number of smaller scrapyards, resulting in the creation of RCC. These scrapyards were located in a way that covered a wide range of customers from municipalities, to large construction companies to smaller collection points. They collected bulky waste, construction and demolition waste, chemical waste, unwanted electronic/electrical goods, plastic, paper, and glass. The day-to-day operations in the scrapyards were handled by a yard foreman. In most cases, these foremen were originally employees of the acquired companies.
- 33. The yards continued business as usual with the exception of the new chain of command as part of RCC. The performance-measurement system was mandated by RCC management and set to evaluate how much scrap revenue each yard could generate. One yard director, Bjarne, was the “employee champion”. He represented all of the yard foremen and helped develop plant operator and technical competence training programs. He was specifically chosen for this role owing to his loyalty, and his ability to listen and respond to the yard foremen and their needs regarding health, safety or training activities. The yard foremen had been rivals, and this rivalry was reinforced by the performance measures. Still there was solace by the time the first weekend of the month arrived and everyone got together for beers and BBQ at Bjarne’s backyard. When in meetings with the corporate directors, Bjarne spoke on behalf of all the yard foremen and he never ran out of jokes. 315-051-1
- 39. ni ve rs ity o f U ls te r. E du ca tio na l m at er ia l s up pl ie d
- 42. RCC used a combination of two structures to efficiently run its business operations; geographic and functional organizational structures. Exhibit C represents the circles illustrating the acquired scrapyards in their different geographic locations which RCC now manages. These scrapyards served as collection centres for the company’s local, inbound customers. Here, the scrap was assembled before being shipped to the central shredding facility. The functional organizational structure divided most of RCC’s administrative staff into departments identified by their duties. The corporate function was home to the office of the CEO, as well as the finance and HR departments. These functions were responsible for constructing the corporate strategy and processes, and for communicating them throughout the organization. Moreover, the corporate function was home to logistics and sales activities. Exhibit C – RCC organizational diagram It was no secret that RCC’s scrapyards competed fiercely for the same materials on a continuous basis. As one yard director commented: “there were very intense
- 43. discussions. There was an almost religious passion among the yard foremen as to who was the first to deliver large quantity material to the shredding facility”. This internal competition was mandated by the former senior management; nonetheless it had been damaging and had oftentimes led to significant losses. For instance, some foremen had promised and delivered extra services to some customers (e.g., new garbage disposals) free of charge. Eric had with other corporate managers tried to define “rules of engagement” and implement new customs and standardized practices in the scrapyards, but had found it an extremely challenging task. 315-051-1 5 U sa ge p er m
- 45. ac t i nf [email protected] th ec as ec en tr e. or g T au gh t b y A la n M cK itt ric
- 51. rd er r ef er en ce F 31 67 20 5 BROKERAGE AND TRADING IN THE METAL RECYCLING INDUSTRY One Monday morning, Eric found himself walking through the corridors of the corporate headquarters with a young journalist from an esteemed business magazine. He reflected on the history of the metal brokerage and trading industry, and on RCC’s strategic positioning:
- 52. ”Well, let us start with what we know – our main advantage is that we are a big player, and we therefore have contracts on our outputs. In that regard, we do not have any immediate problems with selling our metal. Industries that are commodity based, such as ours - the metals recycling industry, are subject to market-driven pricing volatility that is essentially outside our control. So assuming you trade in nonferrous metals, the base price of the material is set by the value of that particular material contract as traded on various commodity exchanges, like, the Chicago Mercantile Exchange (COMEX), the London Metal Exchange (LME) and the Shanghai Metal Exchange (SME).” Metal brokerage and trading activities at RCC covered a broad range of products, including ferrous and nonferrous scrap, scrap alternatives, and secondary and primary metals. Ferrous scrap prices were determined by supply and demand influenced by the geographical location of the material. However, ferrous contracts were recently introduced, and now ferrous scrap pricing may be influenced by stakeholders outside of the industry. The exchange prices for each material were defined by
- 53. fundamental economic principles resulting in a rather stable market. Historically materials such as copper, lead and zinc were traded since 1920’s, other metals found their grounds along the way; however over the past 10 years or so, the non- industry investment communities such as mutual and hedge funds have shown serious interest in base metals. As a result some materials -especially copper prices went from 2% - 3% fluctuations per day to dramatic swings of 11% - 13,5%. So assuming a copper inventory of $1,000,000, and the market indicated a downward fluctuate by 11%; the company would thereby get an unrealized loss of $110,000! Metal theft had over the recent years tarnished the reputation of metals recycling despite most businesses in the industry operating legally. New Scrap Metal regulations enforced by municipal squad teams for both site-based and mobile scrap metal traders aimed at limiting these networks for stolen metal, and enable local authorities to expose criminal activity and corrupt dealers. Some companies are however cynical about the extent of funding for these task force.
- 54. “The metal recycling industry is highly volatile,” Eric continued, “and there can be overwhelming fluctuations in earnings. However, one thing is certain – there is always a buyer. The final product is sold at a global price to the highest bidder.” The journalist wrote vigorously on his notepad. The challenge in the metal recycling and trading industry had always been locating reliable material suppliers, who were known as inbound customers. These were customers interested in disposing of their metal scrap while earning the highest margin possible. At every level of the business, Metal price eventually is based on an exchange price. At the retail scrap purchasing level, dealers lock-in pricing by selling to the yard at a fixed price. The yard sets its buying prices based on a wholesaler’s pricing. Likewise, the wholesaler’s price is based on a larger scrap metal dealer’s or a metal broker’s pricing, which is based on sales to consumers at prices that are set against an exchange’s price. The entire industry from retail buying to the sale of materials is closely linked, and pricing is consistently driven by the price of a particular product traded on one of the exchanges.
- 55. In addition, the industry was characterized by fierce competition. In RCC’s case, Eric knew that only a handful serious competitor of approximately equal size existed in the region. These competitors 315-051-1 6 U sa ge p er m itt ed o nl y w ith in th es e
- 63. 20 6 repeatedly outbid RCC when acquiring material, resulting in the decimation of the winning bidder’s profit potential. This perceived insidious situation was magnified by the lack of loyalty among the contracted logistics providers used by these organizations. “Our competitors are always on the lookout for the potential to poach extra scrap. Although that is not a controversial fact, sometimes pointing it out – to speak the truth – is controversial,” Eric continued. There was no doubt in Eric’s mind that sourcing material from more diverse markets might be a better alternative. RCC had outsourced a large portion of its logistics activities to external trucking companies in order to focus on its core competencies. These arrangements had often been inadequate and typically resulted in a loss to the competitor, solely because the truck drivers held a dominant position in the
- 64. upstream segment of the supply chain. The yard foremen had often reported that this situation was worsened due to the truck drivers’ recklessness, as well as other misconduct, leading to serious injuries on the job. In one case, this behaviour ultimately resulted in the termination of a contract between RCC and the client. With regards to logistics, ensuring that the company met basic performance objectives was obviously a complicated matter. However, managing these services was a crucial part of the overall operations. This was made particularly evident by the logistics director, who made the following comment during a strategy meeting: “We have a lot of transporting to do, as we are working with enormous quantities. On average, there are 300-400 tons of metal going through the shredder every day. Assume a single truck can carry 15 tons then you can do the math.” RCC’s own humble trucking fleet carried out the downstream segment of the value chain, transporting the scrap within the yards’ premises and transferring the processed materials to the shipping ports. Within this globally competitive industry, RCC supplied environmentally-friendly raw
- 65. material to over 600 metals manufacturers around the world. STRATEGY MEETING Under Eric’s leadership, RCC had been trying to get beyond the price parameter for over a year. This was evident in the most recent business update. The transcript of that meeting includes the following exchange: Bjarne (yard director): We have tried our best to secure a continuous supply of materials for the past two quarters, but we have not been fully successful. This by no means indicates that we are sitting on our “bums” all day long with our arms crossed! The Power Zerdiator 3000 [the shredder] has been handling the task with minimal maintenance work needed. That 20-year old machine would put any new generation shredders to shame! Nevertheless, we need to source material from somewhere else than our immediate market (knocks firmly on the table). Johan (financial director): As Bjarne points out; one of our biggest concerns is that we have major material planning challenges. The shredder is running inefficiently and, given our low profit margin,
- 66. this is something that we cannot afford. Something serious needs to be done to either obtain a greater supply of scrap or to heighten our profit margin on the current product. I would suggest that we occasionally acquire large orders of scrap from abroad. This would result in continuous operation of the machines during shortages of supply from our immediate market. For such overseas contracts, 315-051-1 7 U sa ge p er m itt ed o nl y w ith in
- 74. F 31 67 20 7 feasibility is my main concern. We can only be looking at acquiring HMS 4 1 & 2 scrap, and no less than 30,000 tons at a rate of USD 260 per ton. Then again, how often do we need these interventions? Karsten (operations director): Before we reach that stage, we need to map our nearest market suppliers because we do not have an overview of our inbound customers’ requirements. If we had a clearer picture of that, then we could come up with some more precise mapping parameters for each customer segment. I am fully aware of our company’s competitive position, but I am very doubtful that our inbound customers know it. Eric: I am worried about the fact that we are barely operating at
- 75. half of our machine’s capacity, and we need to do something drastic to come close to breakeven by the end of this year. Our procurement department has been lobbying numerous municipalities to alter some of the current regulations. Therefore, we might be looking at additional types of scrap to recycle, but would it be enough? I also agree with you, Karsten: the lack of awareness of our competitive position is also worrisome. What can we do to solve this problem? Karsten: I suggest that we develop a clear map of our cycle for our next department meeting. We can then come up with targets, generate alternatives and run a simulation model on three alternatives to determine how best to assess our customers’ needs. Gitte (logistics director): While all of these seem to be very good ideas, we have to remember that our main customer relations occur through our logistics-service providers. As it stands, we do not have full control of those providers. If our problem framing and alternatives are to work, we need alternative arrangements with these guys – agreements that strengthen our relationships with our
- 76. customers. Marie-Louise (newly hired communications manager): If I may change the focus a bit to an equally important point – last week, the Ministry of Environment sent out a call for innovation projects addressing how to recycle more household waste. The best project gets an award of USD 1.7 million, not to mention the priceless benefits of the PR exposure. This initiative derives from the latest statistics showing that only 22% of paper, plastic, glass, wood, metal and organic waste originates from households. I bet that not many of our country’s citizens know that a single kilogram of vegetable waste can be turned into biogas that produces enough electricity for a light bulb to be lit for 33 hours. I have put together a short list of potential projects. With your help, they can be evaluated and we can submit a proposal to the Ministry of Environment: 1. A pilot program with “nudging” aimed at increasing waste segregation in large apartment complexes. 2. An analysis of collection systems in residential areas and potentials for modifying them.
- 77. 3. A pilot program for a four-chamber sorting system. 4. Customized industry and municipal-specific waste solutions. 5. E-guidance for public participation in developing waste solutions, perhaps through an application. 6. An open forum for cooperation across sectors and interests on the recycling of household waste. 4 HMS: heavy melting scrap, 1 & 2 are the two grades of material specifications within that definition 315-051-1 8 U sa ge p er m itt ed o nl y
- 85. er en ce F 31 67 20 8 DECISION TIME Eric left the meeting feeling a little more content, as he now had a better idea of the problems that RCC was facing. However, the feeling of content was quickly overtaken by a feeling of uneasiness. He was certain that the innovation project for the Ministry of Environment was a great idea for getting past the price parameter. It might be what was needed to turn things around. However, the meeting made it clear that this issue was more comprehensive than he had expected. He was also subject to a time constraint, as he had an evaluation meeting with the Board in a few days. The Board did not care
- 86. about ideas – it wanted actions backed up by figures. It was now clear in Eric’s mind that he needed to develop a strategic and financial analysis for the Board that addressed these problems. 315-051-1 9 U sa ge p er m itt ed o nl y w ith in th es
- 94. 20 INDIVIDUAL COURSEWORK ASSIGNMENT Recycling Centre Corporation The case describes a commodity processing and trading company that is facing several challenges as it seeks to turn its losses into profit. Important themes are touched upon including: capacity planning and control; inbound versus outbound customers; incentives and their effects; and operations strategy. The issues of conversional waste management versus environmental awareness and recycling are raised in the case study and should be considered with regard to decisions around a proposed operations strategy. A. The case study enables for some quantitative analysis to be performed with regard to the company’s major asset: the heavy- duty spreader plant. The information required to perform the calculations is detailed in the section entitled Recycling Centre Corp. on page 3 of the case study. You should try to calculate: · The capacity of the heavy-duty spreader in tons per week* · The annual revenue currently being generated from this machine assuming a selling price of $370/Ton · The annual production costs of the heavy-duty spreader · The annual profit or loss** from this asset * You are given the theoretical process capacity in tons per hour. To calculate the actual capacity achieved, you must take into account losses from availability, performance and quality. · Availability takes into account any events that remove
- 95. production time such as waiting time or breakdowns. Production hours – (waiting time and breakdowns) gives the net capacity. · Performance takes into account anything that causes the machinery to run at less than the maximum possible speed when it is running. Net capacity – speed losses gives the effective capacity. · Quality takes into account any output from the machine that is unusable such as waste or scrap. Effective capacity – waste gives the actual capacity ** If the annual costs are greater than the annual revenue, then divide the difference by the selling price/ton to identify how many additional tons of raw material are required per annum. This information will be useful in conjunction with the qualitative information about the operations side of the business to enable you to make a fuller analysis of the organisational situation. B. Once the quantitative calculations have been performed, students should use the qualitative information provided in the case study of Recycling Centre Corporation to: (1) Analyse the operations management of the conversional waste management side of the business and identify the different managerial challenges facing the organization. Issues to be addressed should include: · An analysis of operations capacity management · A financial analysis of operational costs and revenue · A strategic customer requirements analysis (2) Assess and compare different possible options for the strategic direction that the company should take***
- 96. (3) Argue for what you feel are the most appropriate managerial actions to take *** You could consider using the Ansoff Matrix to help structure your arguments in this regard: The following webpage gives a useful synopsis of the tool: https://kfknowledgebank.kaplan.co.uk/business- strategy/strategic-choice/ansoff%27s-matrix Written Report The overall exercise will contribute 70% to the module assessment. The remaining 30% will be obtained from the three groupwork assignments worth 10% each. Marks for Individual Coursework Report · Quantitative Analysis: 20% · Analysis of the operations management of the business: 20% · Assessment of possible strategic direction: 20% · Argument for what you feel are the most appropriate managerial actions to take: 10% 70% It is expected that the written report will not exceed 3,000 words. All published information that has been used in the preparation of the written assignment report should be included as an
- 97. appendix. It is expected that you will use the Internet for the following: · To visit web sites of similar organisations to Recycling Centre Corporation (the case is developed based on a real company but the name of the company is disguised) to better understand the industry and the market pressures. · To visit other relevant sites regarding environmental strategies · To obtain academic literature from electronic databases to provide support for your expressed views The written report should include at least 15 references to academic literature. All references cited should be included in a bibliography at the end of the assignment. The written report is to be submitted via Turnitin by midnight on the Friday 1st May 2020.