Toy World: On the Level?

Toy World: On the Level?

McClintock, president and part owner of the manufacturing firm Toy World, is faced with a decision: he can continue to run the company such that manufacturing fluctuates with seasonal demand, meaning that machinery is idle much of the time and there are numerous costs and complications regarding the labor force, or he can switch to a level production plan that will eliminate many of these problems but lead to higher storage and handling expenses and reduced efficiency in cash flow. Currently, the company is spending close to $200,000 on overtime premiums during seasons of high production when profits are not even up to $300,000 (though they are estimated at this level for the coming year). At the same time, the company is usually able to complete and ship production runs in a single day and delivers essentially on-demand, with virtually no carrying costs or delays in cash inflow. Moving to level production would change things at the company dramatically.

Issues for Consideration

There are many different issues that Mr. McClintock will need to consider in rendering a decision in this case. The labor issues are among the most significant factors involved in the decision, as these represent the most substantial costs at the current seasonal production method (and thus the greatest potential cost savings for switching to a level production scheme), and this should be a major point of consideration for McClintock and the business. Savings on overtime expenditures, savings on training and training/retraining, and creating a more even and consistent labor pool and cost structure would all be achieved by moving to level production. In this issue, the most effective decision for the company is quite clear. The retooling and reorganization of production machinery and other equipment/processes is also a consideration that makes a shift to level production appear beneficial; different production lines could be run with fewer changes in between, however materials and cash would be made less efficient as manufacturing would occur based on annual sales projections rather than on-demand on terms closer to the actual sales times. Storage and handling processes and costs must also be considered, but client and supplier issues really are not going to be significantly impacted by a change to level production.

Potential Savings