CONFIDENTIAL

For Mr. J.P. Lawrence (President)

Internal Recommendation Report
Closure of the California Plant

Class-2, Group-3
Arvind Thanu, FT213018
Gautham Govindarajan, FT213029
Krati Gupta, FT213038
Shubham Gandhi, FT213080
Madhurima Das, FT213046
Parth Krishna, FT213055
Samarth Lahoti, FT213072
 Table of Contents

1. Executive Summary……………………………………………………………(i)
2. Introduction……………………………………………………………………….Page 1
3. External Factors Justifying Closure……………………………………..Page 2
4. Internal Factors Justifying Closure………………………………………Page 3
5. Recommendations……………………………………………………………..Page 5
 Executive Summary
A combination of factors, both internal and external, have made it necessary to seriously
consider the closure of the California plant. Market conditions, operational inefficiencies and
much needed future proofing are a few of the factors that have fueled this urgent
recommendation. In order to justify this recommendation, we have elaborated on all factors
and thus comprehensively considered the opportunity costs of not closing the California
plant.
There are present demand side
pressures due to decreasing
viability of the carpet industry’s
main target market which is the
housing market. This has caused
inefficiency due to excessive
capacity. This can severely affect
the bottom-line of the company
and threaten its long-term
survival. While re-balancing or
reduction of capacity in both
plants can be considered, an
analysis of internal factors
suggests otherwise.
In terms of operational efficiency and financial considerations, it is a demonstrable fact that
the Georgia plant is much more efficient compared to the California plant. This analysis has
considered parameters like the age of equipment, profit from sale of land, relocation costs,
worker wages, annual shipments and so on. Based on all the parameters, it was quite
unanimous that the Georgia plant is much better than the California plant.
In order to make this closure successful and re-optimize the Georgia plant, we have also given
several recommendations at the end of the report. These recommendations include but are
not limited to operational and strategic factors.

(i)
 Introduction
The current economic scenario combined with the unfavorable operational realities of the
California plant have made this plant a liability. Based on all internal and external feasibility
factors, the Carpet Company (thereafter mentioned as, ‘the company’) modernized the
Georgia plant three years ago in anticipation of steady growth. This has enabled the Georgia
plant to outperform the California plant across several parameters and it is capable of
handling more production if required.
Currently, the excess capacity
at both plants has the
potential to put the company
in a financially untenable
position in the medium to long
term. This is because market
demand is not favorable
enough to justify maintaining
this excess capacity. Holding
on to this excess capacity will
indicate a lack of financial
prudence. It will affect the
company’s bottom-line and
cause operational cost overruns.
Due to the
combination of
factors discussed
above, closing the
California plant and
compensating with
an increase in
production in the
Georgia plant will
not only fulfill the
company’s
operational
requirements but
also ensure the
company’s financial
stability. Therefore, it is in the company’s interest to finalize a plan for the closure of the
California plant on an urgent basis.

(1)
 External Factors Justifying Closure
1) The Housing Market
The housing market is undergoing an unprecedented depression and the company’s
business is heavily dependent on this market. Due to a cascading effect, a drop in
demand for housing has led to a drop in demand for carpets.

It will take our sales and marketing teams a considerable amount of time to
penetrate alternative target markets. These business development initiatives will
also require
more funds to
be routed to
the sales and
marketing
budget. This
could mean an
increase in
financial strain
on the
company and
less availability
of funds for
operating two
plants at the
same time.

2) Tax Benefits in Georgia

Georgia has a much lower tax rate as compared to California. With the assumption
of closing down the
California plant, a basic
financial analysis has
revealed considerable tax
savings and a deep dive into
the financial statements will
be undertaken. These could
reveal further avenues for
cutting down the company’s
tax expenses.

(2)
 Internal Factors Justifying Closure
1) Operational Factors

A comparative analysis of the operations of both plants has revealed that the
Georgia plant is
significantly more
cost effective
than the
California one.
This analysis
involved factors
like age of
equipment,
number of
workers, whether
the workers are
unionized or not,
worker wages and
value of output
from the plants.

Lack of
unionization and a
lower hourly base
wage combined
with a higher
annual production
make the human
resources at the
Georgia plant a
cost saver for the
company in both
the short and long
terms. Newer
equipment at the
Georgia plant
means lesser
budget allocation
in the short to medium
term for maintenance and repair activities. In light of the above findings, it can be
concluded that the Georgia plant has established itself as a more efficient and
productive location for the company.
(3)
2) Financial Factors

Based on certain required assumptions (which we present in the recommendations

below), closure of the California plant will improve the company’s financial position in
multiple ways.

An increase in productivity and decrease in labor costs are the gains that will
continue to reap dividends for the company through the thick and thin of this
demand crisis. Additionally, the sale of the California land will bring in a profit of over
a million dollars which could potentially be routed to the company’s marketing and
sales budget for fueling new market discovery and customer segment identification
activities. The plant and equipment of the California operation is completely
depreciated. This implies that the sale of this plant and equipment will not be
presented as a loss
and any cash
intake is
additional
capital for the
company.
Moreover, the
cost of closure
which includes
both relocation
and severance
costs is
minimal
amounting to
about
$250,000. This
can be easily
compensated
by selling the land.

(4)
 Recommendations

We strongly recommend the closure of the California plant for the short, medium and
long-term benefit of the company. In order to ensure that this closure is done
optimally and the Georgia plant can handle the added responsibility we recommend
the following changes:

1) Transfer 5 of the most productive and proven workers from California to Georgia
who are willing to make the move and can add value to the Georgia operation.
They will assist in logistical transfer of data and inventory from California to
Georgia
2) Lay-off the remaining 75 workers in the California plant
3) Hire 45 new workers for the Georgia plant in order to increase the worker count
to 150. This is essential for the Georgia plant to match the additional capacity
needed to take on present customer orders which were dependent on the
California operation
4) Initiate further studies and build relationships with logistics companies. This will
be essential for cheap transport of goods from the Georgia plant to customers who
are closer to California. Any disruption in deliveries to our customers in and around
California should be kept to a minimum
5) Aggressive sales and marketing campaigns for finding additional markets and
customers not directly linked to the depressed housing market

(5)