The toy industry has been very seasonal in nature. A change from a seasonal cycle to a level production plan would necessitate additional capital requirements. Should Toy World, Inc. proceed with shifting to a level production plan or stick with its seasonal cycle?
W. Carl Kester
Harvard Business Review (295073-PDF-ENG)
November 23, 1994
Case questions answered:
- What factors could Mr. McClintock consider in deciding whether to adopt the level production plan?
- Estimate the savings from Level Production.
- If you were the banker, how would you evaluate whether to extend the line of credit required for shifting to a level production plan?
- Estimate the monthly pattern of funds required if the company adopts level production instead of seasonal production.
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Case answers for Toy World, Inc.
This case solution includes an Excel file with calculations.
Introduction – Toy World, Inc.
Ex-Naval officer, Mr. David Dunton, started a toy manufacturing company named Toy World, Inc. The company was established with one of the ex-service friends and officers named Jack McClintock, with a 25% share of Toy World post-incorporation in 1964.
Mr. David, with a 75% share of the company spearheading the organization and did quite well. By the end of 1993, the company was making a profit of $270,000, and it grew further in the year 1994 to $351,000.
However, the toy industry has been very seasonal in nature. The demand for toys peaks from August to November. These months accounted for 80% of the total sales made by the company.
The industry’s seasonality made it impossible for the company to adapt to the changing taste and preferences of the customer. Toy World, Inc. had high operational costs, idle machine hours, and even had to pay overtime and bear additional labor costs during the peak seasons.
These issues made Mr. David reassess the entire situation and consider an alternate production model than the seasonal production model that had been followed since the incorporation of the organization.
The new model would be a Level Production Model, which would even out the production of toys thought the year, which would eliminate the problem of additional labor during the peak season and adapt to the customer’s changing needs. However, shifting to the Level Production system would mean that the company now had to hold up inventory for a longer period. It would also increase the organization’s cash cycle.
Deeply concerned by the pressing issues, the Operational manager – Mr. Dan Hoffman, suggested Mr. McClintock adopt the Level Production model by monthly output level in 1994.
The question now remains, what should Toy World, Inc., in this case, do? Would going for the Level production be beneficial or would the existing seasonality model suffice? What is necessary to shift to a Level production model? Do they need an extra line of credit? What would the estimated projections look like?
1. What factors could Mr. McClintock consider in deciding whether to adopt the level production plan?
The top industry works on the seasonality of their products. Thereby, whether to adapt to the level production plan or not boils down to the trade-off that we need to consider between profitability and liquidity of the business.
There are several differences between the two methods of production. Some of the factors that should be kept in mind while considering the level of production to choose are as follows: