Letter of Transmittal

Kimba Consultancy Ltd.

W234, West Chester Avenue,
Clairmont
CA – 91711

September 1st, 1961.

Mr. John Smith

President of Sands Corporation
701 E. Amherst,
Claremont
CA 91711

Dear Mr. Smith,

Enclosed herewith is the complete report for Sands Corporation’s dilemma on determining
the location for the new plant. This report is in accordance with the WAC format and
provides a detailed analysis of the situation. Kimba Consultancy has analysed the benefits
and risks of the two locations that have been chosen and has provided a recommendation.

This report has examined all the factors that are relevant and will have an impact on the
decision in the long-term.

Any concerns regarding the report can be addressed to Kimba Consultancy.

Yours Sincerely,

Wilma Flint
Kimba Consultancy.
 Executive Summary

Sands Corporation must determine a location for the construction of its new manufacturing
plant. The company was awarded a contract from the Government to manufacture parts for
the military vehicles. The company requires an additional plant for the fulfilment of this
contract as the existing plants are operating at almost full capacity. Sands Corporation has to
choose between two sites for its new plant – one at Kimberly Street and the other at
Hampton.

Both locations have potential benefits and risks. The Defence Department of the Government,
the Contract, the current situation of the union, and the long-term objectives of Sands
Corporation need to be analysed before making a decision. The impact on the operating cost,
the availability of skilled employees, the delivery deadline, the potential for expansion and
resale value must be considered for deciding the location of the new plant.

The decision must be made within two weeks to begin construction and avoid delay in
fulfilling the contract. It is also a strategic decision as it involves a large budget of $600,000.

Kimba Consultancy recommends Sands Corporation to construct the new plant at Hampton.
The potential benefits of this location outweigh the potential risks. The risks involved can be
mitigated. The Hampton will be an advantageous choice in the long-term for Sands
Corporation as well as the community of Hampton.
Situation analysis:

To fulfil the large contract from the Government, Sands Corporation must decide between
two locations, Kimberly Street and Hampton, for the construction of a new plant.

The construction must begin in two weeks to lay the foundation before the first frost. Each of
the locations has potential benefits and risks to be considered. Since the long-term investment
of $600,000 for the construction of the new plant is provided from the company funds, a
strategic decision has to be arrived at soon.

Location 1: Kimberly Street

Benefits
Kimberly Street has a labour surplus. Hence, operations can begin immediately after the
construction of the plant. The resale value of the land and buildings is high due to the urban
renewal project. Fewer administrative personnel would be required for the plant, implying a
reduction in the administration cost by $63,000. The annual costs of utilities are lower
compared to the site at Hampton (Exhibit 1).

Risks
The size of the land at Kimberly Street (2 acres) is significantly smaller. There is little
potential for expansion. The employees will be part of the union representing the main plant.
Considering the strike for higher wages by the union, the dissatisfaction in the renewed
contract and its expiration next year, there is a high probability of disruption of operations
while negotiating the new contract. This can delay the project.

Location 2: Hampton

Benefits
Hampton has a larger land available (10 acres). The potential for expansion is a significant
advantage. The employees at Hampton are unlikely to be a part of the union. This supports
the decentralisation model that Sands Corporation has successfully implemented in the two
branch plants.

Risks
The resale value of the land is low. There is also an apparent lack of skilled labourers at
Hampton. However, this risk can be mitigated by providing a training program, during the
construction of the plant, to equip the workforce with the necessary skills. Hence, there will
not be any delay in beginning operations.

Other factors to be analysed

The Defense Department
If this project is completed successfully, there is a higher probability that the Government
will award future projects to Sands Corporation. However, there is a risk of derived demand
in Government projects. The demand for military aircraft parts reduced by 95% after World
War II. This risk can be mitigated by the company’s diversification into the automobile and
agriculture industries.

The Contract
The Government will provide the equipment required for the new plant. Any delay in
fulfilling the contract will lead to a fine and the decreased possibility of future projects. The
contract was won through competitive bidding implying lower margins. Hence, the company
will have to lower operational costs.

Long-Term Objectives of Sands Corporation

Sands Corporation has three plants – one main plant and two branch plants. The two branch
plants were established in 1943 and 1946 in small towns following a model of
decentralization, (i.e.) without a union. This model proved successful for Sands Corporation.

The Union
The employees of the main plant of Sands Corporation were a part of the National Union.
The employees went on a strike in demand for higher wages in 1961. The issue was resolved
with a new one-year contract. However, the employees were not satisfied. The contract ends
in 1962 and will be renegotiated. This needs to be considered while deciding the location for
the new plant.

Problem Statement:
Where should the new plant of Sands Corporation be set up.

Options:
Sands Corporation has two options to set up the new plant
1. Kimberly Street
2. Hampton

Criteria For Evaluation:

1) The Union
The employees at Kimberly Street will be a part of the union while the employees at
Hampton will not be. The one-year contract that will be renegotiated will have an
impact in the operations if the new plant is set up in Kimberly Street. There will not
be any disruption in operations at Hampton.

2) Impact on delivery deadline

If the new plant is set up at Kimberly Street, there can be complications in the
operations due to the expiry of the one-year contract for the employees, which can
lead to a delay in the delivery of the contract. Such complications will not arise if the
new plant is set up at Hampton.

3) Impact on operating costs

The estimated operating cost at Kimberly Street is approximately $2.8 million and $3
million (Exhibit 1) at the Hampton. While the costs are lower at Kimberly Street, the
contract renegotiation can lead to an increase in the wages. Even a 10% increase can
cause the costs to be the same.

4) Availability of skilled employees

Kimberly Street has a labour surplus. This can ensure that operations can begin
immediately after the plant is constructed. At Hampton, there is a shortage of skilled
labourers. However, this can be resolved by training the existing workforce with the
necessary skills during the construction of the new plant preventing any delay in
beginning operations.
 5) Potential of expansion
The land area at Hampton is larger than the land at Kimberly Street. This gives an
increased potential for expansion at Hampton. Since Sands Corporation is considering
introducing new products, there will be a need for expansion in the future.

6) Resale value
The resale value of the land the buildings at Kimberly Street is high due to the urban
renewal project, compared to the land at Hampton which has no other manufacturing
concerns.

Recommendations:
Kimba Consultancy recommends Sands Corporation to set up its new plant at Hampton. The
employees are unlikely to unionise, following the model of decentralisation. This model has
its advantages which will extend to the plant at Hampton. It will ensure smooth operations,
meeting of the delivery deadline, and avoid potential increase in operational costs. There will
be future potential for expansion of the plant at Hampton and the Government will encourage
the economic development at Hampton.

Action plan:
Sands Corporation must plan for construction at Hampton. The company must also prepare
for training of the employees.
 Exhibit 1. An estimate of the costs of a new plant at Kimberly Street.

Cost per unit (in $) Units consumed Total cost (in $)

(estimate)
Fixed cost
Land 2 acres 50,000
Real estate and $3.54/$100 of assessed 1770
personal property tax valuation
(estimated)
Total Fixed Cost 51,770
Variable cost (Utilities)
Electricity 0.101/kWH 4 Million kWH 404,000
Gas 0.46/Mcf 50000 Mcf 23,000
Water 0.11/Thousand Gal. 24 Million Gal. 2640
Total Variable Cost 429,640
(Utilities)
Variable cost (Labour)
Skilled labour 2.25/Hour 300 1,350,000*
Semiskilled labour 1.85/Hour 150 555,000
Unskilled labour 1.50/Hour 150 450,000
Total Variable Cost 2,355,000
(Labour)
Total Cost 2,836,410

*Cost of labour is calculated assuming a 40 hour work week and 50 working weeks in a year.

Cost per unit (in $) Units consumed Total cost (in $)

(estimate)
Fixed cost
Land 10 acres 20,000
Real estate and $2.40/$100 of assessed 480
personal property tax valuation
(estimated)
Total Fixed Cost 20,480
Variable cost (Utilities)
Electricity 0.21/kWH 4 Million kWH 840,000
Gas 0.71/Mcf 50000 Mcf 35,500
Water 0.25/Thousand Gal. 24 Million Gal. 6,000
Total Variable Cost 881,500
(Utilities)
Variable cost (Labour)
Skilled labour 2.05/Hour 300 1,230,000
Semiskilled labour 1.75/Hour 150 525,000
 Unskilled labour 1.40/Hour 150 420,000
Total Variable Cost 2,175,000
(Labour)
Total Cost 3,076,980