Dale Long, vice president of manufacturing for ToysPlus, Inc., finished reading the weekly production report for the week ended September 16, 2016. Inventories were up once again, and service levels were lower than expected. Dale wondered why these problems could not be solved once and for all. Last year he had installed a new production and inventory control system on the companys server. While the system drastically reduced inventories and improved service levels at first, things had gotten worse over the last few months.

Dale took the report and walked to Andrea Melines office next door. Andrea had received her M.B.A. a few years ago from a prestigious business school and was now in charge of production control for the company. After exchanging the usual greetings, Dale asked Andrea why the latest figures were not better. Andrea responded, Dale, we continue to get poor forecasts from marketing, and we have to carry more inventory than we would like in order to protect ourselves from unreliable vendor deliveries. The sales promotion that we ran last week on surplus toy trucks did not work as well as we expected. Dale interrupted, Andrea we can no longer afford to achieve these kinds of results. You have got to find a solution. I am counting on you to come up with something to improve the situation. Otherwise we may both be out of a job.

BACKGROUND

ToysPlus is a small, privately held company in the toy industry, with sales of about $20 million a year. The com- pany was started in 1951, manufacturing an innovative line of plastic toys and trucks that were very durable and low-priced. Over the years it has added several lines of

EXHIBIT 1 Organization chart.

toys and is now making 22 different toys, including games, dolls, toy vehicles, and novelty items. The company has a typical functional organization, as shown in Exhibit 1.

ToysPlus has had relatively poor financial results, as shown in Exhibit 2. Profits are averaging only 5 percent of sales, and return on assets is less than 10 percent. To improve the situation, the company has decided to make a major effort to reduce inventories and to improve cus- tomer service. In an effort to reduce costs, the company has begun to redesign the toys for manufacturability and automate its production process. The company feels that unit production costs could be reduced at least 5 percent per year by these efforts. The company also wants to achieve at least 15 inventory turns per year1 and a service level of 95 percent. Service level is defined as the percentage of orders filled within one week of customer order. The current service level is 90 percent.

Manufacturing operations are organized around the different types of toys that are manufactured. Each type of toy has its own assembly line and its own dedicated workers. For example, three plastic toystrucks, autos, and robotsare assembled on line 1. Only one toy can be assembled at a time on this line; then there is a changeover to the next toy. Currently, line 1 has 10 workers who engage in assembly, inspection, and pack- ing of the toys. Some of the parts that are assembled into the finished toys are made on the companys plastic-molding machines. Other parts are purchased from outside suppliers.

1 Inventory turns are based on the ratio of COGS to inventory.

This case was prepared as a basis for class discussion, not to illustrate either effective or ineffective handling of an administrative situation.

470

Marketing/Sales, Ron Manon

Production Control, Andrea Meline

President, Tom Tercel

Manufacturing, Dale Long

Finance/Acct., Kristen Lee

Quality Control, Chip Smith

Purchasing, John White

Production, Jerry Lang

Process Engr., Sue Tercell

EXHIBIT 2 Financial statements.

ToysPlus, Inc.: MRP 471

Profit and Loss (in $000) Year Ending June 30, 2016

Balance Sheet (in $000) As of June 30, 2016

Net Sales

$20,100

Assets

Cost of goods sold

Current assets %

Direct labor

$ 2,353

Cash

$ 1,050

Materials

6,794

Accounts receivable

2,500

Overhead

2,608

Inventory

2,400

Total COGS

$11,755

Other

540

Total curr. assets

$ 6,490

Gross profit

$ 8,345

Fixed assets

Net fixed assets

4,900

G&A expense

4,932

Marketing costs

1,776

Total assets

$11,390

Profit before tax

$ 1,637

Liabilities

Income tax

650

Current liabilities

Net profit

$ 987

Notes payable

$ 3,300

Accounts payable

3,200

Accruals

400

Total curr. liab.

$ 6,900

Long-term debt

2,300

Total liabilities

$ 9,200

Capital stock

$ 1,500

Retained earnings

690

Total net worth

$ 2,190

Total liabilities and net worth

$11,390

Production control is based on the MRP system. Every week a master schedule is prepared for the next six weeks. This master schedule specifies for assembly line 1, for example, the number of trucks, autos, and robots that will be produced in each week, as shown in Exhibit 3. Forecasts of weekly demand are received each week from marketing. Using past experience, Andrea adjusts these forecasts to reflect more realistic estimates of demand. She also utilizes the lot sizes shown in the Exhibit 3 master schedule for each of the three toys. These lot sizes are based on past practice in the company. A run-out time philosophy is used to first schedule the toy that has the lowest ratio of inven- tory to weekly demand (the run-out time). As a result, the master schedule is prepared and entered into the computer. However, this master schedule might be infeasible when not enough parts are available in inventory or insufficient lead time remains to order more parts. As a result, the master schedule is checked for feasibility and adjusted accordingly before a final master schedule is approved.

The computer performs a parts explosion using the bill of materials and the on-hand inventories shown in

Exhibit 4. Each toy requires several parts, as indicated in the bill of materials. For example, each auto requires one body, four wheels, two side windows, and one wind- shield. These parts are assembled, the product is inspected, and the toy is packed, which requires a total of .1 labor hour per auto. With 10 people working on the assembly line, at present, there are 350 hours of pro- ductive time available per week (35 hours each times 10). If the entire week is used to make autos, a total of 3,500 autos can be produced (350/.1). It takes .2 hour to make a truck and .15 hour to make a robot, thereby making it possible to produce a maximum of 1,750 trucks or 2,333 robots, if the entire line is devoted to either of these products. Production, however, is sched- uled in lots, and the entire week is not necessarily devoted to only one toy.

In between products it takes all 10 people one hour to change the setup of the line. This changeover involves moving out the parts for the old toy, moving in the parts for the new toy, arranging the jigs and fixtures for assembly, and making trial runs to make sure that quality is right. The shop labor rate is $14 per hour for wages, including fringe benefits. It costs 25 percent to

472 Part Seven Case Studies

EXHIBIT 3 Master schedule prepared September 16, 2016.

Sept. 19 Sept. 26

Auto 3,500 500 Truck 1,500 Robot

Weekly Forecast of Demand

Sept. 19 Sept. 26

Auto 1,100 1,150 Truck 500 450 Robot 700 650

Oct. 3

1,750

Oct. 10

2,333

Oct. 17

2,333

Oct. 17

1,400 300 625

Oct. 24

3,500

Oct. 24

1,500 300 600

Toy auto

EXHIBIT 4 Bill of materials.

Products

Toy truck

Cost Each

$3.20 1.45 .30 .15 .25 $6.50 1.70 .25 .30 2.20 $4.10 1.80 .35 .25 1.10

Toy robot

Part Number

1019 523

525 529 531

1021 615

617 619 621

1023 730

732 734 736

Description

Toy auto Car body

Wheels

Side windows Windshield

Toy truck Cab

Wheels dual Wheels single

Trailer Toy robot

Body Arms Legs Head

Number Required per Unit

1 4 2 1

1

8 sets 2

1

1 2 2 1

Weeks

Lead Current Time Inventory

1 4,000 3 2,500 2 9,800 1 4,300 2 2,620

2,000 3 1,800 2 9,900 2 2,500 4 4,600 1 1,500 2 1,600 2 3,500 1 4,020 2 2,150

On Order

800 due 9/26 1,200 due 10/3

Week Beginning

Week Beginning

Oct. 3 Oct. 10

1,200 1,300 400 350 650 625

carry inventory for a year. For parts and components that are ordered, it costs $25 to place each order. When the line is changed over, not only is a setup cost incurred for the labor to change the line but also an order is also triggered for each of the parts that is used to make the final product. The total setup cost of a line changeover is therefore the total of these costs.

Purchasing does not always buy the exact number of parts that are ordered by the production control depart- ment. Adjustments are made to take advantage of price breaks from suppliers or to achieve full-truckload ship- ments. As a result, some additional parts might be pur- chased in order to reduce purchasing costs. Also, suppliers do not always ship the component parts when promised. As a result, ToysPlus carries safety stock inventory to protect the master production schedule and to keep the assembly lines running, no matter what. About one week of safety stock is carried to protect for late supplier deliveries. Management has mandated that the assembly lines will not shut down.

Dale Long has stated that the company will not lay off workers on a week-to-week basis. Thus, if demand should be less than capacity, for example, by 10 percent in a week, production will be scheduled to full capacity to keep the workers busy. If this condition should con- tinue for several weeks, workers will be laid off to adjust capacity. In a similar way, workers will be put on over- time to meet demand temporarily. But if demand exceeds normal capacity for several weeks, more work- ers will then be added.

A six-week rolling production schedule, based on existing capacity and lead times, is used. Each week one more week is added to keep the total master sched- ule horizon at six weeks. Production is adjusted each week in line with available parts, capacity, and observed demand for toys.

HAPPY HOUR

Andrea walked to General Joes, a favorite watering hole, for happy hour with her friend from purchasing, John White. Andrea began,

John, I dont know what I am going to do. Dale Long has laid the law down that I must reduce inventory and improve service levels. There is no alternative or excuses this time, I must do it! Im not sure where to start. I would like better sales forecasts, but is that realistic to expect? Can I depend on marketing? I also could reduce inventory by achieving more reliable

deliveries from our suppliers. Will they cooperate? Maybe we will have to react faster in laying off and hiring workers in order to keep capacity closer to demand. What do you think of this situation? Is there a solution?

John answered,

You must remember, Andrea, the world is filled with hustlers and liars. The salespeople lie to you about forecasts, so they can have more inventory, just in case they need it. We in purchasing lie to our suppli- ers about when we need the parts, so that we can be sure to get them when we really need them. You pad the production schedule a little bit, just to make sure you can meet the shipments. We all are trying to cover ourselves so that we dont run out of stock. There isnt a solution to this problem, because we are dealing with human nature. I hate to say it, but maybe top managements expectations are a bit unrealistic that inventory should be reduced and service improved. How can they expect anyone to accomplish these goals in an environment like this?

Discussion Questions

1. Calculate economic order quantities for each of the three types of toys. The EOQ formula is recommend- ed from the supplement to Chapter 14 that considers uniform lot delivery of the toys.

2. Prepare a master production schedule for the next six weeks using the EOQs calculated in question 1 and a workforce of 10 employees. What inventory turnover ratio is achieved by this master schedule? How does this turnover compare with past levels and with managements goals?

3. Prepare a parts explosion to support the master schedule. What parts should be ordered each week? Are there enough planned orders in time to support your master schedule?

4. WhatshouldAndreaMelinedotomeettheinventory and service goals stated by management? Hint: If

the turnover is too low from your first analysis and is not feasible using available parts, try another master schedule that is feasible with reduced production lev- els, uses the available parts and has a turnover of 15.

5. How should Andrea deal with the organization is- sues presented in this case?