Note to TSG
Through Mr.N.Divil
BAT M2nuractujjnr Capacity - Interim Revort
1. Purpose
The purpose of the report will be to determine Group production capacity to meet
forecast sales and surge demand over the next four years and hence to evaluate the
need for Group machinery investments on capacity grounds.
T'his interim report sunimanses the current Group production capacity and outlines the
efrect on this capacity of new technology and old technology machinery, different
product specifications and the potential to increase capacity through longer working
hours. However more detailed information is required in these areas and a final report
will then be issued.
2. Backrround
This interim report is based on the information contained in the B&W Manufacturing
Capacity Report 1993, but uses machine utilisation as a single measure to sununanse
the time for which a machine is used in order to meet the sales forecast as a ratio of
the time for which it is "able for use, rather than separate sales forecast, capacity
and reserve 6gures.
However, utifisation can be calculated in a number of Merent ways depending on the
factors which are taken into consideration e.g. working hours, time for cleaning or
maintenance, machine performance etc. For the purposes of the final report, it is
proposed to use the following definitions of machine utilisation.
PO
C)
PO
NJ
Q-4
co
.;:lb
BAT Industries document for Province of British Columbia 23 April 1999

Demand Sales forecasts. including contract manufacture, but
without any production or other contingencies.
Normal Utilisation Demand
Normal Capacity
Where 'Normal Capacity' is based on current
working hours. adjusted for time used for cleaning,
maintenance, without any additional overtime or use
of surplus machinery.
Maximum Utilisation Demand
Maximum Capacity
Where *Maximurn Capacity' is based on maximum
working hours which can be achieved on a permanent
basis. This will vary from one site to anotber
depending on local environmental, legal or other
restraints.
In this interim report machine utiUsation figures have been calculated from the B&W
values for sales forecasts and production capacities of major Group companies. It
should be noted that, in contrast to the definitions above, the B&W Wes forecasts
included a production contingency usually IO*/* and the capacities included some extra
overtime or additional shift working. Thus the calculated uttUsation figures in this
report will not be completely consistent with those in the final report, but they do give
a general view of the overall Group position.
However utdisation figures calculated for the Group as a whole can give only a limited
view of the actual situation at individual Group companies. Since machinery is not
readily flexible from one product specification to another, overall utUisation figures do
not identify where shortfalls or surpluses may exist for a particular product
specification.
2
C)
co
-r-
BAT Industries document for Province of British Columbia 23 April 1999

When considering Group' production flexibility, the key product specifications are King
Size Box and King Size Soft Cup. Demand for King Size Box is forecast to increase
from 321/6 of total demand in 1994 to 4r/o in 1998. King Size Soft Cup. on the other
hand, declines from 38% to 32% over that period. These changes reflect the
increasing demand for King Size international brands in Hinge Ud versions, though
there remains a strong regional demand for other product specifications e.g. demand
for non King Size or Super Long specifications is still 161/o of total demand in 1998.
The final report will therefore concentrate on the King Size product specifications,
taking into account where there are different detail specifications within this segment
e.g. Compact. Super Compact, Compressed Pack i .
Ibe final report will also emphasise the utUisation of new technology machinery since
it is these machines which are more likely to provide the necessary product quality and
output to allow Group sourcing flexibility and which are more capable of being
transferred from one Group location to another if required
In this respect, machinery is categorised as new technology where speed is greater than
7000 cigarettes per rrinute (or 350 packs per minute), intermediate technology from
4000 cpm to 7000 cpm (200-350 ppm) and old technology below 4000 cpm
(2DO ppm).
There is considerable interest within the Group to move towards longer working hours
to improve machinery u0sation in general, where additional capacity is required, or to
produce maximum return on machinery investment. Extended working hours can be
very cost effective where wage costs are relatively low, However, this may not be cost
effective compared to machinery investment where wage costs are high or where there
are large additional shift or overtime prerift required.
The final report will include Group capacity figures based on maximum utilisation
defined above, in order to indicate where sourcing flexibility could be achieved.
3. Conclusions
3.1. Based on the B&W figures, there is an overall Group Machine utUisation of
7r/* in 1994, rising to 78% in 1999 (Appendix I).
N)
3 C)O
Co.
BAT Industries document for Province of British Columbia 23 April 1999

Mew, I
In the key KS HL segment, machine utifisation is 7211/o in 1994, but this rises to
81% in 1998 reflecting increased utilisation at every company except ITL. There
is thus overall spare capacity over the next four years, but there is considerable
variation from one company to mother. For example in 1994, BATCo A&B and
Souza Cruz are shown to have only 5911/o utilisation, whereas BATCF has 84%
and B&W has 95% utdisation (Appendix 2).
3.2 Although there appears to be little need at this time to invest in additional
machinery for overall capacity purposes, investment wiD continue to be required
e.g.:
0 Replacement of old technology machinery, particularly where it is still being
used for international or for drive brands
* Quality improvement
0 Non standard production, such as Long Size Belmont in Venezuela or niche
products such as 30s picks
a N13D. where there is genemlly a reluctance to consider transfer of old or
intermediate technology machinery.
3.3 Group Production Capacity is achieved through a mix of machinery. In 1994 63%
of overall capacity is planned to be from new technology machinery and this is
forecast to rise to 74% in 1998 (Appendix 3).
Within BATCo, indications are that where new technology co exists with
intermediate or old technology machinery, then the new technology machines wiU
be very highly utifised. The only situations where new technology machines are
not highly utilised is where they are used as single macl@ncs for non standard or
riche products when it has not been possible for the product to be rnade elsewhere
for cost or other reasons (Appendix 4).
4 M3
co
ita.
Ln
BAT Industries document for Province of British Columbia 23 April 1999

Since older machines will have little or no book value@ they will tend to be retained
as a reserve but not crewed. The extent to which new technology machines are
utdised for the key product specifications wiU be addressed in the final report.
3.4 Some Group companies have already moved to extended working hours
(AppendixS). It is likely that there is stiD potential to extend this process to other
operating companies, particularly where there is a low cost environment and where
there are capacity pressures e.g. Chile, Indonesia, Venezuela. However, movement
to the full Uberlandia 3 shift 7 day week may not be feasible in many companies
due to the additional costs involved.
The final report wiU include Group capacity figures based on the maximum hours
which a plant could achieve on a permanent basis.
3. 5 Variations in product specifications throughout the Group remain a constraint to
Group production flexibility. In these circumstances, opportunities to increase
Group machine utibsation can only be addressed on an-individual basis. The broad
product segments used in the Group capacity study do not provide enough detail to
allow this to take place. To achieve this level of control, a group wide data base of
production capacity by product specification would be required, updated on an
annual basis. This could be achieved through an extension of the existing BATCo
system which holds records of each production capacity by product specifications
for each factory within the Group. (Appendix 6).
V
S. M. AMEN
3.5.94
5 CD
co
-th.
CrN
BAT Industries document for Province of British Columbia 23 April 1999