Toy World Inc.
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INTRODUCTION
Toy World, Inc. was a manufacturer of plastics toys for children. Its product groups included toys cars, trucks, construction equipment, rockets, spaceships and satellites, musical instruments, animals, robots, and action figures. The products are a wide range of designs, colors, and sizes. This kind of business was a highly competitive business. Moreover, this industry was populated by a large number of companies, which were short on capital and management talent.
Since capital requirements were not large and the technology was relatively simple, therefore it was easy for new competitors to enter the industry. Design and price competition was fierce, resulting in short product lives and a relatively high rate of company failures. To invent an innovation of new toy could be a competitive advantage for such company. This will make a high margin for recent time until competitors were able to offer a similar product. This kind of profit might contribute importantly to recent year.
In recent years, competitive pressures on smaller firms had also intensified due to an influx of imported toys produced by foreign toy manufacturers with low labor costs.
COMPANY BACKGROUND
Toy World, Inc. was founded in 1973 by David Dunton after his release from naval service. Before his military service, he had been employed as production manager by a large manufacturer of plastic toys. Mr. Dunton and his former assistant, Jack McClintock, established Toy World, Inc. with their savings in 1973.
Mr. Clintock then served as production manager, and Mr. Dunton as president who was responsible for overall direction of the companys affairs. After a series of illness, Mr. Duntons health deteriorated, and he was forced to retire from active participation in the business in 1991. Mr. McClintock assumed the presidency at that time. In 1993, Mr. McClintock hired Dan Hoffman, a recent graduate of a prominent eastern technical institute, as production manager.
Mr. Hoffman had worked during summers in the plastics plant of a large diversified chemical company and thus had a basic familiarity with plastics production processes.
PROBLEMS IDENTIFICATION
In the early of January 1994, Jack McClintock, president and part owner of Toy World, Inc., was considering to adopted level monthly production for the coming year. In the past, the companys production schedules had always been highly seasonal, reflecting the seasonality of sales. Mr. McClintock was aware that a marked improvement in production efficiency could result from level production, but he was uncertain what the impact on other phases of the business might be.
The companys production processes were not complex. Plastic molding powder, the principal raw material, was processed by injection molding presses and formed into the shapes desired. The toy sets were then assembled and packaged in cardboard cartons or plastic bags. All runs begun were completed on the same day, so that there was virtually no work in process at the end of the day.
Toy World Inc.s practice was to produce in response to customer orders, or also called seasonal production. This meant only a small fraction of capacity was needed to meet demand for the first seven months of the year. The first sizable ordered for the Christmas business arrived around the middle of August. Toy World Inc.s was greatly expanded and put on overtime, and all equipment was used 16 hours a day in August to December. In 1993 overtime premiums had amounted to $185,000. Overtime premiums reduced profits; seasonal expansion and contraction of the workforces resulted in recruited difficulties, high training, and quality control costs. Machinery stood idle for seven-and-a-half months and then was subjected to heavy used. Accelerated produced schedules during the peak season resulted in frequent setup changes on the machinery. For these reasons, the company then wanted to adopt a policy of level production in 1994.
We can then breakdown the problems as below:
What are the advantages and disadvantages of each production method (seasonal and level)?
How will the level production affect the companys net profit? This will affect the companys decision of which production method they will use.
PROBLEMS ANALYSIS
PROBLEM 1
First, we need to see what the meanings of each production method are:
Seasonal production
A strategy of production planning which the manufacturer produce goods at adjusted level of production to meet with the quantity of demands.
Level production
A strategy of production planning which the manufacturer produce goods with stable production level and workforce number.
The advantages and disadvantages of each production strategy can be explained like this:
Seasonal Production
Advantages:
Relatively low inventory cost (low handling and storage cost).
Easily following market trends and responding consumer demands.
Disadvantages:
High overtime premiums which reduced profits; seasonal expansion and contraction of the workforce resulted in recruiting difficulties and high training and quality-control costs.
Machinery could stood idle for a quite long time (could take months), and then subjected to heavy use. This might shorten the machines life and high maintenance cost.
Scheduling program changes very often, creating inefficiencies.
Low quality control because of the high frequency of employee change.
Bad learning process because of not continuous production process.
Level Production
Advantages:
There are additional savings from the direct labor cost.
There are savings from overtime cost which could be eliminated.
There are also savings from training and learning process because it does not require frequent machinery