Fonderia Di Torino S.P.

Cabreros | Dela Isla | Elefan | Eugenio | Siy |

Villanueva | Tansiongco
 EXECUTIVE SUMMARY

Fonderia Di Torino is an organization that specializes in the production of precision

metal casting for the original-equipment manufacturers in the industry of automotive,
aerospace and construction. Presently, it is faced with a dilemma of purchasing a new
automated molding machine or just retain their semi-automated machines in the plant.
The latter is more labor intensive, needing 24 operators in a day. On the other hand,
labor costs can be saved with the new automated machine which only needs two
operators a day.

However, although the company can benefit from the efficiency of the purchasing of
the new machine, there are labor implications because there will be unnecessary labor
force that needs to be wither laid off or transferred to a much lower-paying janitorial
position.

Fonderia Di Torino now has to measure whether the benefits can outweigh the costs
of buying the new automated machine.

In order to do this, the group took on the point of view of the managing director,
answering the problem whether to push through with the investment or not. The case
was analyzed using financial/economic frameworks (cost comparison, hurdle rate, net
present value) and non-financial analysis as well. One major assumption of the group
was the case happened in the Philippine setting, to have a better analysis and
comprehensive recommendations especially in the sensitive issue regarding labor
regulations.
I. CASE CONTEXT

Founded in 1912 by Benito Cerini, Fonderia di Torino was created to produce

castings for the armaments industry. But in the 1930s, the company expanded to the
production of precision metal casting for the automotive industry.

Since the expansion, the company has been a stand out due to the quality of its
products. And because of this, Fonderia di Torino captured the market of the OEMs
(original equipment manufacturers). The confidential market-demand information that
Fonderia di Torino received from the OEMs helped increase the precision of production
scheduling and the company received relatively long-term supply contracts from the
OEMs.

In November of 2000, the companys managing director, Francesca Cerini, was faced
with the decision of purchasing an automated molding machine called the Vulcan Mold-
Maker to replace the existing the semi-automated molding machine. The old molding
machines were more labor intensive and hazardous to the health of the workers, while
the new molding machine has a higher productivity and efficiency rate. However, a
major factor that may hinder the purchase of this new machine is the collective
bargaining agreement between the company and its labor union. The company must
now decide whether to push through with the purchase or not.

II. POINT OF VIEW AND PROBLEM STATEMENT

Employing the point of view of the managing director, the main problem that should
be addressed is whether to approve the major investment of upgrading the current
molding machine to the Vulcan Mold-maker machine. The following questions should
be answered:

What are the economic benefits of acquiring the Vulcan Mold-maker machine?
What are the non-financial benefits of acquitting the Vulcan Mold-maker
machine?

III. FRAMEWORK OF ANALYSIS

In order to answer the problem, the following were the methodologies used to
analyze the case:

A. Economic analysis

1. Cost comparison of the two molding machines

2. Hurdle Rate (WACC)
3. Net Present Value
 B .Non-financial analysis

1. Advantages

IV. ANALYSIS

A. Economic Analysis

1. Cost comparison of the two molding machines

Old molding machine:

Number of machines 6
Purchase price $ 415,807
Depreciation $ 130,682
Average depreciation $ 47, 520
Annual depreciation $ 69,301
Useful life 6 years
Sales offer $ 130,000

Workers per shift 12

Hours per shift 8
Working days in a year 210 days
Hourly rate $ 7.33

Maintenance worker per shift 3

Hour per shift 8
Working days 210 days
Hourly rate $ 7.85

Maintenance supplies cost $ 4,000

Electrical power $ 12,300

Cost of workers = workers x hour x shifts x working days x hourly rate

= $ 295,546.60

Cost of maintenance workers = workers x hour x shifts x working days

x hourly rate
= $ 39,564

Total recurring cost = cost of workers + cost of maintenance workers+

maintenance supplies + electrical power
= $ 351,409.60
 New molding machine

Number of machines 1
Purchase price $ 1,010,000
Depreciation $ 126,250
Useful life 8 years

Skilled operator 1
Hours per shift 8
Shifts 2
Working days in a year 210 days
Hourly rate $ 11.36

Contract maintenance $ 59,500

Electrical power $ 26,850
Savings annually $ 5,200

Cost of workers = operators x hour x shifts x working days x hourly rate

= $ 38,169.60

Total recurring cost = cost of workers + cost of maintenance workers+

maintenance supplies + electrical power - savings
= $ 119,319.60

Based on the cost comparison between the two machines, the new
molding machine will generate lesser annual recurring cost compared to the
old molding machine. The improvement in the labor efficiency is the major
contributor to the cost difference of the two molding machines.

2. Hurdle Rate

WACC = (E/V x Re) + (D/V x Rd) x (1-Tc)

Re = Rf + B(Rm-Rf)
=5.3%+1.25*6%
=12.8%

Rd = 6.8%
Tc = 43%
E/V = 67%
D/V = 33%

WACC = (67% x 12.8%) + (33% x 6.8%) x (1 - 0.43)

= 0.08576 + (0.02244 x 0.57)
= 9.86%
 3. Net Present Value

In order to calculate the initial outlay of a Vulcan Mold-maker machine we

need to have the cost of buying a new machine but we also need to calculate the
current after-tax market value of the six old machines and by subtracting the
costs on the revenues we get the net outlay for the new machine which is the
initial outlay.

B. Non-financial analysis

Advantages

One of the notable advantages of buying the new machine is the

improvement in quality and decrease in the rejection rate of the products. It can
also increase the capacity to produce, making the company more efficient by
increasing the level of production. Also, the new machine does not need too
much space, hence the area saved can be used for other purposes.

Purchasing the new molding machine will decrease medical claims.

Employees experience back injuries due to lifting of heavy objects, which
resulted to expenses for the company due to their medical claims. These claims
doubled since 1998 due to the mix of casting products that shifted toward heavy
items. If the new molding machine is purchased, the demand to lift heavy objects
will decrease, which will result to the decrease in medical claims leading to
savings in insurance costs.

Currently, the company needs to regularly have their workers trained in

order to attain the consistency in the mold quality of the old molding machine
due to its semi-automated process. But for the new molding machine, which is
fully automated, regular trainings will not be a requirement. This may result
again, to savings for the company. Also, upgrading to a fully automated machine
will lessen the possibility of human error during the process that will result to
lower rejection rate, lower volume of scraps and wastes produced while
maintaining and even improving product quality.

Disadvantages

The new molding machine is fully automated which means it is not as labor
intensive as the old machine. If this type of machine is purchased, about 14
workers will be laid off, or if not re-assigned to a lower job classification. This
may become a possible problem to the company especially that there is a
collective bargaining agreement between the management and the employees
union. Retrenchment of employees may result to labor cases against the
company.
 Termination of Employee

The group also reviewed literature related to Labor and Employment. In the
assumption that the Fonderia De Torino is a company based in the Philippines,it
is imperative that all employment processes and guidelines must be in
compliance with the Philippine Labor Code.

Article 283 of the Philippine Labor Code states that Employee Termination
must be done only if it is within the authorized causes. The employer may
terminate the service of any employee due to the installation of labor-saving
devices, redundancy, retrenchment to prevent losses or the closing or cessation
of operation of the establishment or undertaking unless the closing is for the
purpose of circumventing the provisions of this Title, by serving a written notice
on the workers and the Department of Labor and Employment at least one (1)
month before the intended date thereof. In case of termination due to the
installation of labor-saving devices or redundancy, the worker affected thereby
shall be entitled to a separation pay equivalent to at least his one (1) month pay
or to at least one (1) month pay for every year of service, whichever is higher. In
case of retrenchment to prevent losses and in cases of closures or cessation of
operations of establishment or undertaking not due to serious business losses or
financial reverses, the separation pay shall be equivalent to one (1) month pay
or at least one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered one (1) whole
year Redundancy - Where the services of an employee is in excess of what is
reasonably demanded by the actual requirements of the enterprise.

V. CONCLUSION

Based on both the analysis, it seems that Fonderia di Torino will gain more if
it replaces the old semi-automated molding machines with the fully automated
Vulcan Mold-Maker. Thus, the company should push through with the
purchasing of the new molding machine.

There will also be qualitative or nonfinancial ups and downs. Since the new
machine is more efficient, there will be employees that need to be laid off, which
can scar the labor relations of the company. On the up side, there will be a safer
environment for the workers resulting to less medical claims, and there will be
savings on training personnel since the new machine does not heavily need
manual operation.

VI. RECOMMENDATION

In order for the company to successfully upgrade from the semi-automated

molding machine to the fully automated molding machine to be able to reap its
benefits, the management must first come to an agreement with the employees
union to avoid labor problems which may result to even greater financial damage to
the company.

This installation will result to the lay-off of 24 Union employees. To

operationalize this, the Fonderia De Torino should be able to have the following in
place to ensure seamless execution

1. Communication Plan It is critical that the affected employees clearly

understand why they are being separated from the company. Ideal talking points for
this situation are:

Changing and growing business/customer requirements

Organization review was done with third party consultants
Objective of becoming more efficient through the use of various systems,
processes and technologies

2. Separation Package As required or mandated by law, employee separation due

to Redundancy must be accompanied by severance package which is equivalent to
1 month salary for every year of service. As a profitable company, Fonderia De
Torino should acknowledge the contribution of their employees by providing
premium to the separation package. Understanding the employee needs and their
families, the recommended package follows below:

2 Months Basic Pay for every year of service (tax free)

Cash conversion of all vacation leave and sick leave credits (tax free)
Pro-rated 13th month bonus and Year-end bonus based on basic monthly
salary (tax free)
2 year Extension of the HMO coverage for the retiree only, up to January 31,
2014
2 year Extension of the Group Life Insurance coverage for the retiree

3. Union Management A clear discussion of the communication plan and talking

points above is required to ensure no labor strikes or mishaps will follow the
decision. To anticipate possible union action, the below table is a proposed action
plans.
 Potential Union Action
Union may file Notice of Strike with
prayer for TRO. (Ground: ULP)
Mitigation Plans
External Legal counsel to handle (DOLE to
assume jurisdiction given nature of the
business)
Discuss with union/federation leaders and
counsel
Activate Business Continuity Plan

Show active resistance through
concerted activities:
Red Arm Bands
Lunch time rallies
Boycott
Apply counter mass actions guidelines and
code of conduct
Heightened security alert

Use of social media to air their Corp Communications to take the lead in
issues managing all media related threats

Network with connections Discussion with union/federation leaders and

counsel
Other groups may take the cudgels External legal Counsel to handle
for the non-union members (may
file case, etc)

4. Soft Landing Programs To cushion the impact of this event to the personal and
financial lives of the affected employees, the group recommends that there should
be soft landing plans in terms of livelihood programs. In the Philippine setting the
following seminars and business opportunities can be considered:

Magnegosyo Seminars
Franchising Seminars
Livelihood Courses
o Commercial Bread making & Bakery Mgt.
o Basic Meat Processing
o Laundry Soap and Detergents
o Operating a Laundry Business
o Food Service Management
o Starting up a Junk Shop Business