Toy World Inc.

Background:

Toy World Inc. or TWI was founded by Jack McClintock and David Dunton in 1973 as a plastic toy manufacturing company. TWI has a seasonal spike in sales that begins in the latter half of the year continuing through the holidays. TWI produces its toys on demand thus having to make higher quantities of inventory in the second part of the year and less in the earlier months. Currently TWI has a line of credit from City Trust Company (CTC) of up to two million dollars. The production manager has brought the idea of changing to a level monthly production schedule to the boards attention and is being reviewed.

Major Problem:

TWI’s current production schedule is under review for cost efficiency and overall effectiveness. The manager in charge of overseeing production quality and efficiency has brought up alternative production methods. Switching to the monthly production will have implementation costs and change the cash flow schedule, possibly resulting in the need for increased financing from CTI.

Alternative Courses of Action:

The first option would be for TWI to transition into a level monthly production schedule. The second course of action would be to continue with seasonal production method in place now.

Analysis of Alternatives:

A level production schedule can reduce the Cost of Goods Sold (COGS) by five percent versus the seasonal structure TWI uses now. The savings come from reduced overtime labor in the high demand months of the year and reduced total hours paid over the year. This savings would be more significant if not for the storage and handling costs associated with stock piling the extra inventory in early months. Additional pros include a healthier use of production equipment, more regular material order from suppliers and less risk of supply shortage in periods of high demand. TWI will need to extend their current credit limit with CTI to account for the increased working capital need to produce the higher inventory. A concern for this mothed would be if the item being sold becomes a fad before the holiday buying season begins making the company very illiquid. A seasonal production schedule will allow for a safety net if a product were to suddenly become unpopular. TWI could implement new ordering policies so as not to get backed up causing the need for unexpected overtime labor.    

Suggested Course of Action:

TWI should seek the increased credit limit with CTI and adopt the new level monthly production method which will increase net income by lowering COGS. The switch will create a smoother production schedule for a less stressed staff that must work overtime during the holidays to keep up with sales. TWI should produce products with stable long-term sales using level production and newer products with an uncertain amount of sales on a seasonal basis to test the market.