Toy World

Historical perspectives:

Toy World, Inc. was founded in 1973 by David Dunton & Jack McClintock was a manufacturer of Plastic Toys for children: cars, trucks, rockets, spaceships, etc. Toy World, Inc. was originally a partnership when it was incorporated in 1974. Company had grown rapidly since its founding, with profits increasing every year since 1976. Jack McClintock assumed presidency in 1991. In 1993 David Dunton & Jack McClintock hired Dan Hoffman as the production manager. The context of the case study is early 1994 and Toy World faced a large number of foreign and domestic competitors in its industry especially with low barriers to entry, short product life cycles, and significant price competition. The production and sales at Toy World had been highly seasonal with over 80% of dollar volume between August and November. In 1994 Dan Hoffman suggested a level monthly production vs. seasonal production as he saw Recruiting difficulties and high overtime expenses, strained working Capital and increased wear and tear of the machinery due to stretched production during peak season. On the initial analysis, Mr. McClintock would consider Dan Hoffman’s proposal to switch from the traditional seasonal production cycle to a more predictable level production cycle as it would reduce the production costs.

Toy Industry Environmental Scan and Internal Analysis:

The industry of Plastic toy manufacturing was known to be highly competitive, populated with many manufacturing companies. Also of notice was the fact that imported toys put pressure on smaller firms. There were low barriers for competitors to enter the industry. The industry’s big plus was that there was a high margin potential on new popular toys. Toy World had experienced rapid growth since 1976; they reached $8 Mil in Sales in 1993, and were projected to hit $10 Mil in 1994. Toy World sold to large variety toy stores and toy brokers. Although Toy World quotes 30 days, but in actuality it took 60 days to collect from customers. Toy World’s practice had been to produce in response to customer orders as they had no marketing team design or come up with brand new toys. Due to seasonality, overtime premiums amounted to $185K from year to year. Also recruiting was an issue as majority of it had to be done right before August. Toy World saw Net Profit of $270,000 in 1993, and they were projected to hit $351,000 in 1994. Since the inception the operations have expanded, straining Working Capital: it was at bear minimum of $200,000 in 1993. Toy World management borrowed unsecured funds from bank periodically to come up with immediate funds. As of the Dec 1993, Toy World had $752,000 loan outstanding to a bank.

Company Goals and Production Strategy:

Toy world has grown substantially over the past two decades and had profitable operations since its founding in 1976. The company had grown to an 8 million dollars revenue company in 1993. The primary goal of the company was to expand its operation and maximize profitability by adopting operational efficiency. Revenue and profit growth in 1994 is projected to be approximately 25% compared to the 1993 revenue and profit.

Toy World’s production strategy was similar to the Just in time (JIT) production strategy. JIT is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. The process is driven by a series of signals that tells the production processes when to make the next item. This strategy gives a rapid turnover and thus decreases the amount of money tied up in raw materials and finished goods inventory. Due to the low inventory strategy Toy World had adopted, its inventory turn over ratio was 9.52. Although this strategy lowered inventory costs for Toy World, it came with a substantial cost. Toy Worlds production strategy caused the company to waste up to 70% of its capacity to produce during the non peak months of January to July every year and strained its working capital in peak production months. Also the substantial increase in customer orders in the peak months incurred approximately 185,000 in overtime costs. Hence, operational efficiency was the focus of senior management as the key area to improve to achieve higher profitability.

SWOT Analysis:

Strengths: Toy World had experienced a rapid growth since the inception. Its production line was very simple and does not take much effort to set up a new batch of product. The workforce employed was extremely flexible in that it could be hired in peak seasons, and lay off during off peak season, and worked overtime in peak seasons as required. Toy World’s profitable product line was also strength.

Weaknesses: Toy World did not have any innovative products or was poor in creativity; it simply depended on customer orders and demands. There were no exclusive distribution channels or customers available to Toy World, there were no patents outstanding or pending, Toy World did not have a strong Brand name in the market, and lacked significant cost advantages from proprietary know-how, or exclusive access to high grade natural resources. Toy World’s sales were highly seasonal and customers took around 60 days to pay for the orders. Recruiting posed difficulties as it took long time to find resources during peak seasons and overtime expense peaked in peak seasons. This all lead to strained working Capital.

Opportunities: There were numerous opportunities for Toy World, on which it should act on timely to stay competitive. In this industry popular/innovative toys earned high profit margin, therefore Toy World should seek contracts with cartoon companies such as Disney, Time Warner, Viacom etc to become their exclusive toy manufacturer and establish a predictable production line. Additionally, Toy World could hire a Creative/Marketing department to develop innovative toys on its own rather than waiting for market demand. Toy World could create more opportunities by expanding its sales force initially nationwide and further expand worldwide to gain more coverage, and wider Distribution network, and lastly Toy World could outsource some of its production to cheaper locations to save on operating expenses and cost of goods sold.

Threats: Low Industry and market entry barriers for manufacturers to enter the market and the emergence and import of Foreign made toys posed were the threats to Toy World.

Financial Analysis:

Toy world had a tremendous increase in profit from 1993 to 1994, an increase in 153%, however due to the high operational costs, its profit was only 3.3% and its ROE was 8.2%. The company had a good assets turn