Toy World, Inc. k Analysis of the Case Study Friedrich Roeper Matthias Lohmann 26th of September, 2017

Contents Toy World, Inc. Financial Implementation Conclusion History Plastic Toys Industry (1994) Financial Profile Problem Solutions Seasonal vs. Level Production Financial Implementation Conclusion Digression: Aggregate Planning Sources 26th of September, 2017 VU Faculty of Economics

Contents Toy World, Inc. Financial Implementation Conclusion History Plastic Toys Industry (1994) Financial Profile Problem Solutions Seasonal vs. Level Production Financial Implementation Conclusion Digression: Aggregate Planning Sources 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. History Plastic toys manufacturing company founded in 1973 by David Dunton and Jack McClintock Originally a partnership, incorporated in 1974 with Mr. Dunton holding 75% and Mr. McClintock holding 25% of stock In 1991 Mr. McClintock assumed presidency due to the health conditions of Mr. Dunton 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. Plastic Toys Industry (1994) Highly competitive market Low entry barriers Simple production process and low capital requirements Many competitors Design and price fights Short lived products due to changing popularity and similar products offered by competitors Strong dependence on the invention of the next popular toy Trend: Import of cheaper plastic toys by foreign manufacturers with lower labor costs 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. Financial Profile Since 1973 rapid growth and profitable operations 1993: Net sales around 8 million dollars Net profit 270.000 dollars Loan outstanding 752.000 dollars 1994: Projected net sales around 10 million dollars Net profit of 351.000 dollars 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. Problem (thousands of dollars) Sales 1993 January $64 February 88 March 96 April May 87 June 95 July August 1.251 September 1.474 October 1.723 November 1.965 December 940 Pull production (start of production after order)  Highly seasonal production Around 8 % of annual sales  only 25 - 30% capacity use Around 92% of annual sales  total capacity utilisation  Add.: Overtime, recruiting difficulties, high quality control and training costs  reduce profits 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. Solution Level production Elimination of overtime premiums + 225.000 dollars Direct labour savings + 265.000 dollars Higher storage costs - 115.000 dollars + 375.000 dollars (savings) Costs of goods sold (70%  65,1% of sales) New credit line negotiations 26th of September, 2017 VU Faculty of Economics

Toy World, Inc. Seasonal vs. Level Production Seasonal Production Producing the equal amount each month Inventory costs are higher  Operating costs are lower Better customer service  Improved quality control Better cashflow Producing different amounts each month (dependent on season and orders) Inventory costs are lower  Operating costs are higher Recruiting difficulties Inefficient 26th of September, 2017 VU Faculty of Economics

Contents Toy World, Inc. Financial Implementation Conclusion History Plastic Toys Industry (1994) Financial Profile Problem Solutions Seasonal vs. Level Production Financial Implementation Conclusion Digression: Aggregate Planning Sources 26th of September, 2017 VU Faculty of Economics

Financial Implementation Excel 26th of September, 2017 VU Faculty of Economics

Contents Toy World, Inc. Financial Implementation Conclusion History Plastic Toys Industry (1994) Financial Profile Problem Solutions Seasonal vs. Level Production Financial Implementation Conclusion Digression: Aggregate Planning Sources 26th of September, 2017 VU Faculty of Economics

Conclusion Implementation of level production  Level clearly prevails in net profit over seasonal strategy Due to the competitive market situation a company has to strive for efficiency Advantages over competitors Present example: Toy "R“ Us Filed for bankruptcy on 18th of September, 2017 26th of September, 2017 VU Faculty of Economics

Contents Toy World, Inc. Financial Implementation Conclusion History Plastic Toys Industry (1994) Financial Profile Problem Solutions Seasonal vs. Level Production Financial Implementation Conclusion Digression: Aggregate Planning Sources 26th of September, 2017 VU Faculty of Economics

Digression Aggregate Planning Definition: Process for determination of necessary capacities in production, contractors, inventories, underages and pricing in a planning period (3 to 18 months). Aim: Maximize Profits Toy World Inc.: Detailed planning horizon, competitive advantage (e. g. against foreign manufacturers with lower labor costs), lower cumulative costs, maximize profits 26th of September, 2017 VU Faculty of Economics

Sources Case Studies in Finance, 7th edition, Bruner, R. F., Eades, K. M., Schill, M. J. (2014). Corporate Finance, 2th edition, Ross, S. A., Westerfield, R. A., Jaffe, J. F. (1990). Fundamentals of Corporate Finance, 10th edition, Ross, S. A. (2010). Principles of supply chain management, 2th edition, Crandall, R. E., Crandall, W. R., Chen, C. C. (2015). 26th of September, 2017 VU Faculty of Economics