Operations Management Case Study ToysPlus, Inc. Essay Example

it has added several lines of 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 below. Finance/Acct, Ramu Manufacturing, Murthy Marketing/Sales, Chandran President, Hameed Quality Control, Priya Production Control, Asha Purchasing, Senthil Production, Divya Process Engr, Niaz ToysPlus has had relatively poor financial results, as shown in the Financial Statement. Profits are only averaging 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 customer 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 toys – trucks, autos, and robots – are 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 packing of the toys. Some of the parts that are assembled into the finished toys

are made on the company’s plastic-molding machines. Other parts are purchased from outside suppliers. Production control is based on the IBM 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 each week, as shown. Forecasts of weekly demand are received each week from marketing. Based on past experience, these forecasts are adjusted by Asha to reflect more realistic estimates of demand. She also utilizes the lot sizes shown in  master schedule for each of the three toys. These lot sizes are based on past practices in the company. A run-out time philosophy is used to first schedule the toy that has the lowest ratio of inventory 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.  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 windshield.

These parts are assembled, the product is inspected, and the toy is packed, which requires a total of 0. 1 labor hour per auto. With 10 people working on the assembly line, at present, there are 350 hours of productive time available per week (35 hours each time 10). If the entire week is used to

make autos, a total of 3500 autos can be produced (350/0. 1). It takes 0. 2 hours to make a truck and 0. 15 hours to make a robot, thereby making it possible to produce a maximum of 1750 trucks or 2333 robots if the entire line is devoted to either of these products.

Production, however, is scheduled 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 run to make sure that quality is right. The shop labor rate is Rs. 100 per hour for wages, fringe benefits are 33 percent additional, and there is Rs. 300 per hour charged for overhead. It costs 25 percent to carry inventory for a year.

For parts and components that are ordered, it costs Rs. 1250 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 order is also triggered for each of the parts that are 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 department. Adjustments are made to take advantage of price breaks from suppliers or to achieve full-truckload shipments.

As a result, some additional parts might be purchased 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 against late supplier deliveries. Management has mandated that the assembly lines will not shut down.

Retained earnings 34500 Total net worth 109500 Total liabilities and net worth 569500 Murthy 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 workers busy. If this condition should continue for several weeks, workers will be laid off to adjust capacity. In a similar way, workers will be put on overtime to meet demand temporarily. But if demand exceeds the normal capacity for several weeks, more workers 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 schedule horizon at six weeks. Production is adjusted each week in line with available parts, capacity, and observed demand for toys.

HAPPY HOUR

Asha walked to Cafe Coffee Day, a favorite watering hole, for happy hour with her friend from purchasing, Senthil. Asha began, “Senthil, I don’t know what I am going to do. Murthy 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!

I’m 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? ” Senthil answered, “You must remember, Asha, 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 suppliers 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 don’t run out of stock. There isn’t a solution to this problem, because we are dealing with human nature. I hate to say it but maybe top management’s 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 recommended 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 management
   

goals?