AWC - Richard Ivey School of Business 7 I E The University...

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Unformatted text preview: Richard Ivey School of Business 7 I E The University of Western Ontario ' o AWC lNC.: THE VENTILATION DlLEMMA Wayne MacLeod. David Ager and Alan And/on prepared this case under the supervision of Professor Donald J. Lecraw solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. lvey Management Services prohibits any form of reproduction, storage or transmittal without its written permission, This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing, lvey Management Services, c/o Richard lvey School of Business. The University of Western Ontario. London. Ontario. Canada. N6A 3K7; phone (5 ‘i 9) 661—3208; fax (519) 661—3882; e—mail cases@ivey.uwo.ca. Copyright © 1994. lvey Management Services Version: (A) 200207-30 In July 199E, Alex MacDonald, President and owner of AWC 1110., returned to his office more frustrated and confused than ever. He had just met his 64—year-old father. the company’s founder, for lunch to seek his advice. AWC’s pollution control systems were not in compliance with Ontario’s Environmental Emissions and Health and Safety regulations. To comply with the Health and Safety regulations, the company would have to install new ventilation equipment in the welding shop. The cost of this ventilation equipment was estimated at somewhere between $240,000 and $400,000. and would rcquirc a Certificate of Approval under environmental regulations. The costs of such an investment would have a major effect on the company’s profits and cash flow. AWC lnc., founded in 1950 by Jim MacDonald, was a Southwestern Ontario aluminum fabrication plant specializing in the production of commercial aluminum windows, doors, storefronts, and curtain wall products. Sales and shipments varied from as small as a single door and window to contracts to supply aluminum framing and glass curtain walls for cntirc buildings.1 AWC was well known for the quality and design of its products as well as its competitive prices. 7A curtain wall is the visible exterior glass envelope of a highvrise building. commonly consisting of glass windows and panels in an aluminum frame. The frames are generally suspended from mounting brackets built onto the structure of the building. Page 2 According to Alex’s father, there was no issue: Son, in all my years running this company, never once has anyone from Toronto come poking around my business. As long as the politicians in Toronto knew that l was providing honest work to the local community, no one ever bothered me. I don’t see how anything has changed. Work translates into votes, and, given the government’s poor economic performance, the last thing they want to do is to shut us down. They’d be hanging themselves, especially with the number of businesses that have shut down in our area over the past year. Those regulations will only be applied to the big companies like General Electric and General Motors, not to small operations like ours. They know you don’t have the money to buy all that fancy air- cleaning stuff, and furthermore, they don‘t expect you to buy it. They know that compared to the large companies, the amount of stuff you pump out into the air doesn’t have much effect on the environment. Case in point, Alex: do you ever read in the newspaper about a small company being fined for polluting the environment? Never, it’s always the ‘big guys.” How could Alex argue with that logic? His father had run the company successfully for 40 years, before retiring due to health problems, and handing over day—to~day management to Alex the previous year. Still, there was something that made Alex feel uneasy about ignoring the issue altogether. AWC INC. Since its founding in 1950,_AWC lnc. had grown and prospered. Many of the people working in the company in 1992 were the children of the first employees Alex’s father had hired back in 1950. AWC was more than a company, it was a family. As Shirley Jenkins, Director, Design Engineering, explained: I came to work here in 1962 as an engineer. Over the years AWC has helped me to provide a comfortable life for my family. When my children were going to university, AWC always made sure there was work for them over the summer months. AWC treats all its employees this way. It’s not uncommon to see the workforce increase by 10 to 15 people between May and August. This may not be unusual for Northern Telecom, but for a company of l00 employees it’s quite something. I 9A94H005 P93 ,, . . ,. ._ . ., ,, “94H” Sandeep Shanna, a production line manager, added: l’ve been working in the plant since l952. The company has always sponsored one or two teams in the local hockey and basketball leagues. Recently. they’ve started sponsoring a local soccer team as well. And, anytime anyone has a problem — you know, financially —» AW C is there to help them out, and the company doesn’t make you feel embarrassed or ashamed about it. It’s no wonder people take such pride in their work. I’ve seen people rework entire orders without being told to do so, just because they aren’t satisfied with the quality of the final product. We just don’t want to see the company name going on anything that isn’t perfect. I might add that what we consider less than acceptable quality, our competitors sell as ‘top’ quality. Of the HM people employed by the company, 45 were production workers and 55 were office staff. The office staff consisted of 25 engineers who worked closely with customers from the design—proposal stage through quoting and on to the final installation. The company found that design and product perfonnance were critical to success in this market, and that the best way of achieving this was through a force of competent and capable engineers supported by committed, skilled and quality-conscious production workers. ALUMINUM FABRICATlON INDUSTRY Aluminum is a relatively easy product to work with and is suitable for numerous applications. Aluminum fabrication does not require heavy machinery and production is often handled on a one-shift basis. (There is no need to run the equipment 24 hours a day to maximize use of expensive equipment, as is the case with steel fabrication.) AWC purchased aluminum of various alloys and with various finishes in 20 and 24—foot lengths, cut the lengths to size, and machined and assembled them. AWC employed different assembly methods including: corner bracket, tie-rod, and welding. Finished products were shipped completely assembled or as pro—machined, ready-to-assemble components. As a result of the minimal costs required to set up an aluminum fabrication operation, AWC had 37 competitors in southwestern Ontario alone. This number did not include the 15 suppliers of extruded2 aluminum, some of whom also manufactured door and window products. 2Aluminum extzusion is the process whereby aluminum ingots are heated and shaped into various sizes and lengths. The resulting extruded products are sold to fabricators who use them in making various products including doors and window frames. 39 . .. . ., . . , _ 9A94H°5 Most of the contracts received by AWC were awarded through a competitive bidding process. Very often these contracts were for standard products, although configuration and usage differed. Price, and sometimes distance from the supplier, were the only factors distinguishing one operation from another. Yet, even for these contracts, it was essential for AWC’s engineers to work closely with a customer in order to determine the specifics of a particular project to ensure that the product met performance standards including air and water infiltration and structural requirements. The quotation also needed to be competitive, and at the same time profitable, for AW C . Because of the number of projects the company was involved with at any one time at the bidding, design or installation phase, the company required its large engineering force and its large office staff. Competition for these contracts was fierce, and had become even more so as a result of the construction slow—down in southwestern Ontario over the 19894991 period. Alex explained: Since the late 19805, competition for contracts has become incredibly fierce. Whereas before you could expect to earn five to seven per cent profit on a contract, today we’re lucky to get three per cent. And the recession, at least in the construction industry, shows no signs of recovery for at least the next three years. T here were also some “custom” contracts. These were rare and occurred only when an architect’s drawings called for a specific product that was available exclusively through a particular fabricator. To secure such a “specification” was a time-consuming, costly process and rarely occurred unsolicited, although the rewards could be significant. AWC had earned profits of up to 20 per cent on such contracts. The industry had seen many other recent changes. Alex commented: Over the past five years I have witnessed many changes in the industry. One third of my competitors have gone out of business, while others have joined together to spread their overhead costs over a larger volume. Profits in the industry are minimal. On average, they are approximately three per cent. To survive, I’ve had to reduce my workforce through attrition, although I may soon be forced to lay off employees. This is not something that I’ve done easily. nor did I do it without a lot of deliberation and heartache. When any of my employees leave, even if it is through attrition, I feel like I’m firing my own mother. The construction industry, the major client for our product, has been devastated by the recent recession. Although there has been a shake—out in the aluminum fabricating industry, we have survived, a9 5 but only by drastically cutting our prices, margins and profits and increasing our efficiency. The bulk of our fabrication costs are labour costs and engineering overhead. We cannot at this time afford any increase in these costs, unless we wish to jeopardize the business. But if we’re to remain competitive in the industry. we can’t lay off engineers. They are our future. The C anada-U.S. Free Trade Agreement has threatened to increase the competitiveness in the aluminum fabrication industry. The reduction in tariffs will allow large US. fabricators with lower cost structures to enter the Canadian market and offer lower priced products of equal quality. I see this as the beginning of the end of Canadian aluminum fabricators. AWC AND ALUMINUM FABRICATION Recently, AWC had introduced a superior door design for general purpose use. This had resulted in a significant increase in the company‘s sales of commercial aluminum doors and the need for high volume production. Not only was the new product more attractive in terms of price and case of assembly, but it also offered equal or superior performance to comparable products. The door was designed and fabricated using a tie—rod assembly. When the door was intended for heavy use areas, for example, the entrance way to a shopping mall, the door assembly would need to be reinforced by a stronger weldcd~conier design that required a greater time in the production process, specifically on the welding line. This design enhancement was a requirement in many orders. The AWC welding line was used for existing products, but not on a full—time basis. To meet the production demands for the new door product, the welding line was now being used full-time, and, depending on the volume of product flowing through the plant, very often required a second shift. The problem with a second shift on the welding line was twofold. Alex commented: if we move to a second shift on the welding line, we need to find someone who is capable of supervising it on the second shift. Not only does this cost extra money, but also, finding someone qualified to supervise the line will be difficult. I know this because it took us six months to find the supervisor we have at present. And even 9A94H05 Pages then, she required additional training. The second problem with a second shift is that AWC will be required to pay a shift premium to the six people who operate the line. This will increase costs. As well, the output of the night shift will have to be stacked all over the floor of the plant. We have no easily accessible storage area. One option is to install a second welding line. We could then have the existing supervisor assume responsibility for both welding lines. This would save a shift premium and reduce work in progress inventory. On the other hand. the equipment for a second line would cost $75,000. THE TORONTO TRADE SHOW At a recent trade show that he had attended in Toronto, Alex had visited a booth set up by the Ontario Ministry of the Environment. The booth was staffed by various government representatives. Among other information, they provided an overview of various aluminum fabrication processes and the harmful by—produets of each. In addition, the government representatives outlined the various regulations concerning the emissions of various substances into the air, and they outlined the penalties for failing to comply with the regulations. Of particular interest to Alex was the discussion that centred around welding. The welding, process for aluminum produced various fumes composed of toxic and environmentally harmful metal particles and metal oxides. The law was quite specific: releasing high concentrations of these particles into the internal work environment or outside the plant was forbidden, and was punishable by fines of up ' to $400,000 per day. According to Ministry of the Environment and Ministry of Labour studies, even in small concentrations, these particles had been proven to be responsible for serious respiratory damage and, in some cases, cancer after long- term exposure. As one government representative put it, “lnhaling these particles is more harmful than smoking a package of cigarettes a day." Alex was puzzled by this last comment: We‘ve been welding for years and have never vented the fumes from the plant. To date we’ve received no complaints. I wonder how sound these studies really are. After all, if the stuff really is harmful, Dad would never have let us work in the plant as kids. In fact. I’ve been in and out of that plant for almost 40 years, and look at me. no problems. 39411005 Page 7 Sure, the welding line has never been used as much as we are using it to meet the demand for our new product, but then maybe all we need to do is cut a hole in the ceiling of the plant and let more fresh air than usual in to mix and dilute that other stuff. While at the trade show, Alex had also visited a booth set up by a company that specialized in ventilation emission control systems. He had taken advantage of this opportunity to do some research on systems that, if installed, would ensure that AWC did not contravene existing environmental legislation. EMlS-SION CONTROL SYSTEMS If AWC were to install an emissions control system, it had a choice of two different types of emission control. The first was an exhaust system that would vent fumes outside the plant. While an exhaust system that vented the fumes to the outside was by far the cheaper of the two options, Alex had determined that the system would cost approximately $240,000. Although it satisfied Ministry of Labour occupational health and safety regulations, this system merely moved the problem from inside the plant to outside the plant. If AWC simply used the ventilation system, it would be subject to Ministry of the Environment regulations concerning external emissions of by—products. According to the regulations, AWC would be required to obtain a Certificate of Approval from the Ministry of the Environment for its industrial exhaust system. The Ministry of the Environment would require an air quality impact study he conducted on neighbouring property owners, and based on the results, would decide whether to approve AWC’s exhaust system. Alex continued: I couldn’t believe it when I first heard about that requirement. 1 mean, my neighbour out here in the industrial park is a ready—mix concrete plant. They throw more dust and gunk into the air in one week than we could produce in a lifetime. The second, and more expensive alternative, was to install a recirculating titration system. Alex had determined the cost of the system AWC required would be $400,000. This system would take the air from the Welding station, run it through a set ot'electrostatic filters, and expel it back into the plant. While these filters would not require approval from the Ministry of the Environment to operate, as they were not releasing the air to the outside of the building, the system would have to be approved by the Ministry of Labour, Department of Occupational Health and Safety. fl .1 9A94005 P998 _. .. , . . , _ , , , “Hogs There was an additional requirement for this system. The filters in a recirculating system had to be cleaned once a month to function effectively. The cleaner was a proprietary substance which had no acceptable substitutes. The cleaner was also corrosive and caustic, and would require special employee training and protection from health and safety hazards. in addition, the cleaning process generated about two litres of toxic sludge that had to be disposed of as a hazardous material under Ministry of Environment waste disposal regulations. AWC could not legally store this sludge on its plant site unless it was first licensed as a hazardous materials storage site, which would require expensive facilities and safety precautions. Neither could AWC legally haul the materials to an authorized storage or disposal site as AWC vas not licensed to haul hazardous materials. Again, seeking such a license would require an investment in specialized equipment and training. Under the law, the only option open to AWC was to usc the services of a licensed hazardous waste disposal company who would pick up and dispose of this material at a cost of $500 per trip. The fee was fixed; whether the shipment was one litre of sludge or 101 litres of sludge, AWC would be charged the same price. The hazardous waste disposal companies also insisted on testing the substance each time, at a charge of $200, before they would collect and dispose ofit. Alex concluded: i can’t believe that the-government creates all of these obstacles for us. They won’t let us vent directly into the plant, and they won’t let us vent directly outside the plant. They expect us to somehow ‘clean’ the air entirely. So, first they require us to put in equipment that creates the sludge, then they make it nearly impossible to dispose of it. ENVIRONMENTAL REGULATIONS Over the previous few years, the provincial government in Ontario had raised the profile of environmental issues in response to demands from various stakeholder groups and as part of their underlying belief that the government must regulate business to preserve the environment. The province had reviewed its environmental legislation and had increased the legal and economic deterrents for polluting. in particular, tines were substantially increased and new penalties, such as incarceration, were introduced. Under the new rules, company directors, managers, and employees could be held personally liable for regulatory infractions. A furniture manufacturer in Cambridge had recently been charged for exhausting paint fumes and other harmful vapours, a lay—product of their finishing process, 39 . _, . . ., 9A94H‘m5 into the air. in response to complaints from neighbours, the provincial government approached the firm to eliminate the problem. The recommendation of the province was that the company install a two-process system that consisted of an air scrubber and a filter that would capture by-products. The price tag for this new system was $1.25 million. The company responded by stating that they would rather relocate to the United States than incur the cost of compliance. Because the company refused to comply, the province took it to court. The company was subsequently fined $100,000 and the company’s general manager was personally fined $25,000. The case was still in appeal. Alex MacDonald had done some Checking and had discovered that of the 1,000 companies who had been charged for emitting harmful substances into the external environment, only 250 had actually been prosecuted, of which only 100 were fined an average of $30,000 each. As well, of the 1,000 charges, only one person had been incarcerated. Alex estimated that all in all, over 50,000 companies were affected by the law and 70 to 80 per cent were probably in violation of it. Alex knew that in his situation, the maximum penalty for the firm was a fine of $500,000. At the same time, he was also aware that he could personally be fined $25,000, and that any of his employees could be fined up to $25,000 for violating the health and safety legislation. In all the years that AWC has been in business, l can’t remember having been visited by an environmental inspector, nor can I remember any of my competitors having been visited by an inspector, except perhaps for one or two of the larger operations like World Aluminum Industries. This explains why my large competitors have installed expensive air quality control equipment in their plants. This doesn‘t seem all that unusual though. After all,- their plants are usually very prominent in the community, have multiple locations, and are unionized. As well, they are large, and by virtue of this fact, create a large amount of pollution that is highly visible. The government guys are always breathing down their backs; hell, if one of the guys gets a paper cut from his pay cl eque, the union calls the health and safety guys in. I can also tell you that those big guys have been struggling lately; their costs are so high, and they are having a hard time getting profitable contracts in this recession. Alex figured that if there was a problem, someone would have said something by now. _, _ .. , , .. . ,. 994H5 One employee described the work environment: ' Sure, it‘s noisy and smelly in here, but hey. this is a factory after all. I work next to the welding line. Yes, sometimes I go home with a headache, but then so does my wife who works in an office. Who says the world is perfect? At least we have a job when many don”t. And it’s a good job at that. Another employee commented about his experience at AW C : My dad worked here, I spent my university summers here, and Mr. MacDonald’s dad even helped me get my engineering degree. I’m proud to work for this company and have a hand in designing what I think are the best damn aluminum doors and windows in the country. THE DECISION As Alex muiled over the estimates before him and his projected. financial statements (Exhibits 1, 2 and 3), he began to become annoyed. AWC had been in business for more than 40 years and no one had complained. Furthermore, as his father had said: “We’re running a factory, not a hospital operating room!” Alex added some additional thoughts about the firm: My dad, mom, sister, and brother have all worked in the company. We started out as kids coming in on the weekends and helping to clean things up, or watch Dad draw up estimates for customers. 1 still have some of Dad’s original staff here, and some of their children work here. Just like my Dad did, I help my employees send their kids to college when they need help. I went to school and studied business administration, but you know, I hated shuffling paper, This is where my heart is; this is where l’m happiest making things. When Dad was forced to retire early, I was glad to jump in. We build things here — if the boys on Bay Street are so smart, how come so many firms are in trouble? Just look at the real estate developers. Howcome we keep reading about all of these large businesses that keep screwing up because they tried to become so-ealled financial conglomerates? All they do is shuffle paper and push buttons on computers, but without people like us who actually create things, those guys would have zip! Before people go to work for the government, they should spend some time in the real world! They complain about our lack of Fag“ . . a V , . ,, .. , “94ml” competitiveness, about the job drain and the brain drain. Then they slam the working person and their employer with taxes, taxes, and more taxes, and with more and more of the same damned regulations that tie me in red tape anytime l want to do something. And then they wonder Why firms are moving out of this province and setting up shop in Mexico! Alex reviewed the figures in front of him. To comply with the provincial environmental regulations would be financially devastating for AWC and would lead to 100 people becoming unemployed. Alex reasoned that such an argument would suffice in explaining to the provincial environment officials why AWC might decide not to comply with the reguiations. And after all, what were the chances of being caught? Alex leaned back in his Chair, realizing that resolving his dilemma would not be easy. 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AWC - Richard Ivey School of Business 7 I E The University...

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