Capital Investment Plans - Tate and Lyle - Assignment Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Tutor : xxxxxxxxxxx Title : Case Study Course : xxxxxxxxxxx @2010 Tate and Lyle to review capital investment plans- Case Study Tate and Lyle is a multinational company majoring on food manufacturing and located in UK. The company is a major manufacturer of refined sugar, food ingredients, starches, and animal feed and operates worldwide. The company was established in 1921 after the joining of two competitive sugar refiners, Henry & Sons and Abraham Lyle & Sons and it is listed on the London Stock exchange under the symbol TATA. Currently, the company operates internationally with operations mainly in Europe, Asia and America. It supplies ingredients solutions and services to food, beverage and industrial clients (Anthony, 1978). Tate & Lyle runs with the aim of becoming the world’s leading renewable ingredients business and with the dream of growing joining businesses and partnerships in developing the worlds leading ingredient business and developing a reliable global portfolio of typical, cost-effective, high value solutions in products and services for their clients (Gleeson 2010). Tate & Lyle is a sugar, food and industrial ingredients company. Tate & Lyle is a world-leading renewable food and industrial ingredients company, supplying an international market from more than 45 production facilities throughout the Americas, Europe and South East Asia. It’s competent, large-scale manufacturing plants manufacture farm products, corn and cane sugar, into important ingredients for its clients. These ingredients affix taste, texture, nutrition and augmented functionality to products that millions of people all over the world use or consume daily. Tate & Lyle's variety of leading renowned food ingredients consist of Sucralose, Dietary Fiber, Polydextrose, Tate & Lyle Fairtrade Sugar and Lyle's Golden Syrup. Tate & Lyle also manufactures renowned industrial ingredients which include Bio-PDO, Ethylex and paper starches; and staple ingredients like high fructose corn syrup, sugar, ethanol, citric acid and vital starches. Besides offering a variety of ingredients Tate & Lyle professional sales and product applications teams hold up clients by offering technical advice and proprietary customer imminent studies (Stittle 2008). Tate & Lyle, Share price (Gleeson 2010) Tate & Lyle manufactures an approximated 4 million tones of cereal sweeteners and refines more than 2 million tones of sugar annually into about 35 countries. It is the number one globally in industrial starches and wheat proteins and the only producer of sucralose sugar substitute, Splenda. Day Chart (19-Jan-2010) (Pearsall 2009) Case Study The sucralose plant in McIntosh, Alabama is one of two that Tate & Lyle which were in operation. However, the firm decided that a breakthrough in the manufacturing procedure means it can now tackle all of its production requirements from just one production plant and consequently picked the newer plant in Singapore and decided to mothball the older firm located at Alabama. The new development produces 25 per cent more produce than the old one and Tate & Lyle claims that this stands for only half the potential benefit (Willmott 2008). Tate and Lyle recently mothballed its facility at McIntosh, Wisconsin and consequently it is producing all its sucrose form the new firm located at Singapore. The Singapore plant started its operations in 2007 and makes use of the fourth generation manufacturing technology. The site will remain shut for unspecified time but the company is not planning to lay off the employees of the mothballed plant. Tale & Lyle has made reassurance to its clients that they will not be affected since the new plant which will be operating singly has sufficient capacity to meet the present demand of its products and thus the Singapore plant is in a position to maintain the required stock level singly (U.S. News & World Report 2009). The mothballed factory at Alabama was itself a receiver of investment in 2004 when the plant was expended to meet the increasing demand of its product, namely, the high intensity sweetener sucrose. The mothballed firm had established a solid sucrose market allover (Gleeson 2010). Tate & Lyle has plans of maintaining the core employees at McIntosh to enable it restart production if need arises over time. Basically, it is normal for a food manufacturing company to spread its production across several locations to enable them to have a back up incase unforeseen circumstances occurred at one site. Resulting form the closure of the McIntosh firm, there has been no indications of the employees losing the jobs but cash expenditures of the move will be pain within the coming three years. The costs will be covered by the operation costs that will be saved since only one plan will be operating. The 2009 financial year results indicate a £97 million exceptional charge from the impairment of carrying the plant from the time the decision was made to mothball the plant. Tate & Lyle acknowledges that it expects the market of high intensity sweeteners to reduce and this is as a result of price competition of the product which is progressively growing from the other product suppliers and new entrants as well (Wiggins Teape Ltd 2007). The decision of mothballing the McIntosh has resulted into estimated cash costs of about £55 million. In regard to the availability of the supply, Tate & Lyle says that it is having noteworthy stocks at McIntosh over the change period and it anticipates that most of the high cost material at the closed firm to be used completely within the second half of the year. Tate & Lyle anticipates that the closure of the McIntosh firm will lead to its sucrose manufacturing being produced in a more cost effective way and it will lead to reduced freight expenses through supply chain optimization and savings in labor and administration expenses. Furthermore, the company intends to continue with finishing and packaging at McIntosh until its financial year ends and the plant will be maintained in good condition so as to enable it to restart within a short period if need be (Chalmin 2008). Tate & Lyle chose to manufacture the product exclusively in Singapore not only because the plant is more resourceful, but also because of generally lesser costs at the new Singapore plant and a better geographic location to serve the whole world. The company anticipates saving a lot of money by shutting down the firm and anticipates that the expenses which will be incurred with the whole mothball process will be recovered within three years from the Singapore firm. Tate & Lyle decided to shut its operations from McIntosh operations which has about 120 workers in regard to the fact that Singapore which is more efficient can produce as much of the artificial sweetener, referred genetically to as sucralose as the company currently requires. The decision has been attributed to the fact that there has been notable and sustained yield improvement that has had a significant impact on the company’s production capacity. Consequently, all the sucralose will be produced in the new Singapore plant for the foreseeable future. The company is likely to maintain a crew skeleton and could restart later (June 2009). The study of the above case study is important since mothballing comes with its own effects to any given company. For instance, after mothballing, Tate & Lyle could end having detrimental effects to the company at large. The remaining single production firm based at Singapore may with time experience low business and at such time Tate & Lyle would not have a fall back. In case the firm experienced the low season while both firms were in operation, Tate & Lyle could end up concentrating more on the unaffected firm and thus compensating for the firm that is experiencing low business (Jess 2009). So the above case is important since it will help analyze the negatives and positives that come with mothballing a given firm. Moreover, the case study will help in analyzing the things to put in consideration when deciding o such a grave matter (Hoover 2008). Basically, there are several benefits that come with mothballing option. From a theory perspective, a firm can be reopened after some period if need be but most of the firms stay shut permanently in practical terms. The most obvious benefit that comes with the decision of mothballing the McIntosh firm is that, it will not cost a lot of money for the Tate & Lyle company to mothball this plant and then reopen it after some time but incase Tate & Lyle decided to close the McIntosh firm permanently, in many jurisdictions, Tate & Lyle would be charged with clean up expenses which would be very costly for Tate & Lyle. Furthermore, the company would be left with brownfield site, meaning that the company would have to dig out all its soil, clean it and clear with the whole operational process which would be very expensive to the company (Photo-Pictorialists of Buffalo 1997). Thus it is to the advantage of Tate & Lyle especially in this economic time to mothball the firm and then carry out a clean up after five to ten years later or after the shortest time possible it becomes necessary to re open. Previous studies indicate that mothballing not only saves a company from all the remediation expenses, it also provides the company with some possible market leverage (Pearsall 2009). Therefore, this will present Tate & Lyle Company with a fair bargaining tool since any difficulty regarding purchasing of raw material from other suppliers at a reasonable cost and the threat of starting the firm all over again and adding more volume into the market will avail the desired bargaining tool (Broadway 2008). Clearly, incase Tate & Lyle was experiencing troubled times at McIntosh firm, temporal closure of the firm would present a powerful tool for Tate & Lyle Company as a producer. However, the challenge is here is if Tate & Lyle will be in a position to re-open that firm if things picked up and it became necessary to restart. Mothballed plants hardly ever restart because of the costly expenses and technical difficulty as well (Sutton 1989). Still, for the company to be able to mothball the McIntosh firm, it will be required to notify the regulators, maintain safety at the mothballed site despite not being in operation, might be required to vary the operational permit, should make liable plans to break the current use of the firm and has to address and solve all the lease matters. Moreover, since Tate & Lyle has no intention of laying down the workers at the mothballed site, this would mean that the company will be having and paying many employees some of which are not being productive enough to the firm. This may in the long run be costly to the company and not economical to the company as well. Finally, the company may end up losing all its customers located at Albania to its competitors since the other remaining firm may not be sufficient enough to supply all that market (Cooper 1999). However, the decision of Tate & Lyle Company to mothball the plant could come up with several benefits to the firm. First, it does not require the company to dismantle the McIntosh firm and also after operating the single Singapore firm it might eventually be in a position to restart the mothballed firm again. Again, Tate and Lyle Company do not have to surrender the operational permit and the mothballing and not permanent closure save the company from any repayment grants (Plunkett 2009). It would be clever of Tate & Lyle to invest in improving and expanding the new Singapore plant. This will ensure that despite the closure of the other firm, the Singapore firm will be in a position of producing enough products to supply all its customers. This is important since it will satisfy the present demand of the company’s product and thus prevent other companies from having an edge over it. This could be priced competitively as the company has large economies of scale and the quality of their products is high. An investment in expanding the remaining plant will improve the productivity and hence the profitability (Hines 1999). Since the new plant has cut the freight costs, this means that expanding the new plant will not only increase productivity but will also lead to reduced operational cost since sufficient products will be produced in the same firm and save the freight charges as well. Moreover, the expansion will lead to adsorption of the employees from the closed firm and thus the company will not have inactive employees and is not likely to lose the employees to the competitive companies (Pearsall 2009). From the above case study, the lesson is that it is necessary to have sufficient stock and have the remaining firms before deciding to mothball any of the companies operating firms. This is because the accumulation of the stock and ensuring that the other remaining operating firms are stable is likely to ensure that there is continuous and sufficient supply of the firm’s product to all its clients. It is the restocking by the company’s clients that saw Tate & Lyle experience, a new rush in sucralose sales within the last 6 month. This was after running down combined supplies; and stocks at the mothballed US firm and most of the customers were expecting the stock to go down by the year’s end (Broadway 2008). This can also save a company from experiencing lower comparative price since contracts with long term clients includes volume incentive arrangement leading to more competition as the case with Tate & Lyle whereby the price of the product was comparatively lower because the market of the high intensity sweetener turned out to be competitive. Without doubt, some new sucralose suppliers have been introducing material on the market of late, produced in China and India and making use of first generation technology. This is what has led to all round price pressure to the market product, even though Tate & Lyle is still the market leader (Dunning 2006). Before any company makes a decision mothball its firm, it should ensure of the integrity of systems pending to reopen as well as ensure that all the raw materials and waste are removed especially if the waste is vulnerable to deterioration. The company should also ensure that the mothballed firm is put on stand by maintenance routine and that the firm is offered good security always. Again, any mothballing firm should ensure that it is not merely many hours required to prepare a firm for mothballing and maintaining it when the operations have been stopped, but also the expensive costs of restoring the firm to its usual active operations. The message here is preservation and prevention (Hoover 2002). With no proper preservation of the mothballed firm, the list of required technicalities and possible difficulties which may require to be tackled to bring the firm back to operation could be lengthy and very expensive depending on the seriousness of the damage (International Food Information Service 2009). Bibliography Anthony, H., 1978, Sugar and All That... A History of TATE & LYLE, Gentry Books, London. Andrews, A., 1998, Tate & Lyle: a record of the activities of the Tate & Lyle group, Tate & Lyle Co, London. Chalmin, T., 2008, The making of a sugar giant: Tate and Lyle, 1999-2007, Harwood Academic Publishers, Bristol. Broadway, E., 2008, Case studies in human relations, productivity and organization, Business Publications, California. Cooper, F., 1999, British agricultural policy, 1912-36: a study in conservative politics, Manchester University Press ND, Manchester. Dunning, H., 2006, The world directory of multinational enterprises. Gale Research Co, Michigan. 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Willmott, H., 2008, The reengineering revolution: critical studies of corporate change, SAGE, New York. Read More