Operations help -

Kid Time Toy Company:

The Opportunity to Expand the Product Line

Introduction

Early in January 2001, Mary Anthony, the new president of Kid Time Toy
Company, was considering how she might strengthen the company’s
competitive position. Kid Time Toy Company manufactured plastic toys for
children. Products ranged from toy cars to animals to action figures,
all in a wide range of designs, colors, and sizes. The plastic toy
industry was a highly competitive business that was populated by a large
number of companies. Capital requirements were not large given the
simplicity of the process. Design and price competition was fierce (
new designs were often driven by fads and the manufacturing simplicity
of plastic injection-molded toys combined with highly competitive retail
prices created tremendous cost pressures for firms. Increased
competition and the continued presence of on-line “e-retailers” were
reshaping the distribution end of the toy industry and Anthony knew that
her firm had to become more competitive by better managing its cost
structure and making its operations more responsive to customer needs.
Recent anecdotal reports from its current retailers also suggested that
the quality of Kid Time’s products was generally lower than industry
average.

Kid Time’s board recently accepted Anthony’s proposal to begin
production of two new remote controlled vehicles. Kid Time already
produced electronic vehicles with remote-control capabilities, but the
new products would contain more sophisticated electronics with a
programmable computer chip. Mary’s concern centered on the higher cost
of the electronic components, the necessity to contract with a new
supplier, and the uncertainty of long-term demand. The current
production process was at full capacity, so the new products would
require creation of a new production area. Space for the new production
area was available in Kid Time’s current facility due to the recent
discontinuation of an aging product line. However, Kid Time would need
to purchase all new machines for production of these two new products.
Mary knew that selection of the right production process, and the right
machinery, was vital to the success of the new product. Members of her
management team recently presented her with three production-related
proposals. She knew that she now needed to obtain an unbiased appraisal
of the three alternatives.

The New Products

The proposed products include a Harry Potter Hogwarts Magic Transporter
(that resembled a Jeep) and a Pikachu Shuttle Bug (that resembled a
Volkswagen Beetle). All of the electronic/computer components would be
sourced from a new electronic supplier in China. The electronic
components would arrive at Kid Time’s plant fully assembled. Kid Time
would have to attach the transmitter to the vehicle; the remote
control/programmable device was fully assembled. Kid Time would use a
plastic molding operation to create the housing for the two products.
The plastic housing for the Hogwarts Magic Transporter (HMT) was larger
than that of the Pikachu Shuttle Bug (PSB) due to the overall larger
size of the vehicle. However, the same basic machinery could be used to
produce either product. The three production alternatives could be
summarized as follows:

Create an exact replica of Kid Time’s current production process in
the vacant space. This would require purchasing a duplicate set of the
current production machinery and producing both products on a single
line.

Create two smaller, product-specific near-replicas of the current line.
This would require purchasing the same machinery as Option 1, with the
exception of the molding machine. Rather than purchase a single,
high-capacity molding machine, Kid Time would purchase two smaller
molding machines, one for each product. Each product could then have
its own production line and production units would flow through the same
steps as the current process.

Create two cell-based, product-specific production lines that would
utilize newer, more flexible machinery.

Each of the three alternatives would utilize all remaining space in the
plant, so there would be no room for additional machines beyond the
number proposed. In addition, Kid Time was able to place a one-week
hold on the equipment necessary for any of the three options. However,
ordering any additional equipment would require a minimum of one year
lead time.

Product Demand and Production Scheduling

The marketing department felt that the new products would have a
four-year life cycle. They projected a selling price of $55 per unit
for both new products. Data on the sales forecast, production plan and
finished goods inventory are shown below.

Demand

Year 1 Year 2 Year 3 Year 4

Sales Forecast:





HMT

82,285 78,000 75,000 71,000

PSB

61,714 54,000 50,000 48,000

Production:





HMT

96,000 77,286 74,500 58,500

PSB

72,000 52,715 49,333 39,667

Inventory (units) a





HMT

13,715 13,000 12,500 -


PSB

10,286 9,000 8,333
-







a – Finished goods inventory is carried at total variable cost
(materials, variable labor, and variable OH)

In order to meet demand and satisfy targeted inventory levels in Year 1,
Kid Time had to produce 400 HMTs and 300 PSBs every day. Shipping
requirements and retailer replenishment expectations dictated that Kid
Time not deviate from this daily production schedule.

Kid Time’s new production area would also have to comply with all
existing scheduling policies. Kid Time operated one production shift
that worked 5 days per week. Local labor and zoning constraints
prohibited Kid Time from implementing either overtime or second-shift
operations. This constraint on production hours would apply to any
alternative selected by Mary. Quite simply, the plant could not operate
more hours. The workday was 7:00 - 4:30 with a one-hour (unpaid) break
for lunch and two (paid) 15-minute breaks. The plant closed during the
first 2 weeks of July for annual vacation. The workers also received 10
additional days off for holidays each year. The workers were paid for
both the 2-week vacation and the 10 holidays.



Option 1: Replicate Kid Time’s Current Process

Mary’s production manager, James Twomey, favored creating an exact
replica of Kid Time’s current production process. He supported this
alternative because he felt that it best leveraged the firm’s existing
capabilities. In order to support his position, he produced a detailed
description of the current assembly process that included production
times and human resource allocation at the various steps (See Exhibit 1
for a layout of the current production process).

James believed that the similarity of the products would permit Kid Time
to produce the two products with a single production line. The
production schedule called for production of 700 units per day, achieved
via alternating runs of 400 HMTs followed by a run of 300 PSBs. These
runs had to be sequential as Kid Time could not mix product in the
downstream production steps. In order to minimize change over time, the
plant could stagger production scheduling. For instance, if they
started Monday with 400 HMTs, followed by 300 PSBs, then on Tuesday they
would make 300 PSBs followed by 400 HMTs.

The molding step was completed in a batch mode, with the same size
batches for the two products. However, in order to produce two
different products, they would have to add a nozzle-like adapter to the
injection machine. This adapter would need to be cleaned before
beginning each batch, and the cleaning process would take 8 minutes.
Following the molding process, the products moved through the system on
carts that held 20 units each, regardless of product type. James
planned to keep enough carts in the system so that all workers always
had work to do. James didn’t know exactly how much work-in-process
inventory was in the plant. He knew that there would always be WIP
equal to the batch size, 100 units in this design, at the molding step.
Beyond this, he expected to have one cart either in transit or waiting
to be processed at each process step as well as one cart being worked
on at the process step. There were four material handlers that moved
the batches through the process on the wheeled carts. In addition to
the four materials handlers there were 2 supervisors and one production
manager (Twomey) assigned to the operations division.

The production-assembly process would involve 8 separate steps with the
following task times, labor requirements and machine allocations.



Plastic molding: The molding process required two workers utilizing a
single injection molding machine. The batch size for the molding
process was the same for both products – 100 units per batch. The
injection process took 65 minutes, regardless of product type.

Heat treatment: The second step involved a heat treatment process that
strengthened the molded plastic. There were four heat treatment
stations (ovens) and eight workers (two for each oven) at this
production stage. The heat treatment process took 20 minutes per batch.
Each oven accommodated 10 units at a time.

Transmitter/chip attachment: Following heat treatment the transmitter
and computer chips were attached to the back of the unit. Five workers
with five machines independently performed this task. The transmitter
attachment process took 3.30 minutes per unit.

Housing/electronic assembly: The next step in the process involved the
placement and attachment of the plastic housing over the transmitter
component base. This process took 3.5 minutes and was carried out by 6
workers. There were 6 machines (one per worker) that performed this
task.

Tolerance/visual inspection: Three workers performed the tolerance and
visual inspection after the housing attachment step. These workers
worked independently with each tolerance/visual inspection requiring 1.9
minutes. Each worker operated an automatic measurement device that was
inserted into the space to determine the tolerance. The purpose of the
tolerance inspection was to ensure adequate space existed between the
electronics and the plastic housing. If the space was too small, the
unit would overheat, causing an electrical outage. If the space was too
large, excess dust would collect and eventually damage the unit’s
electronics. A quick visual inspection checked for any bubbles or
irregularities in the surface of the vehicle.

Component assembly and product labeling: The next production step added
the component parts (lights, mirrors, bumpers) onto the vehicle and
placed appropriate product labels on the unit. This 3.25 minute task
was independently performed by 5 workers. There were 5 machines (one
per worker) that performed this task.

Testing and Inspection: Workers at the next production stage use an
electronic testing machine to ensure that the product’s electronics
were functioning correctly. In addition, a visual check looked for
missing or incorrect components. The testing and inspection process
took a total of 1.8 minutes to complete. This step required three
machines and six workers (two per machine).

Packaging: The final step in the process involved placing the fully
assembled vehicle into a shipping carton. There were 9 workers at this
station. Each worker placed the unit into a shipping carton along with
the appropriate instructional and warranty information. They then
sealed the carton and placed it on a conveyor that moved the product to
an inventory storage area in an adjacent building. This step took 5.50
minutes per unit. Products flagged as defective in step 7 are placed in
a large bin reserved for defects. These defects will later be moved to
a rework area when the bin is filled. There is no machinery requirement
at this stage, other than the conveyor belts.

Option 2: Product Specific Lines Using Kid Time’s Current Process

One of Mary’s process engineers believed that Kid Time should dedicate
separate lines to the two products. They felt productivity would be
higher since workers would be focused on only one product. In addition,
they felt quality defects would drop to 7% with this arrangement. This
quality improvement would reduce the materials cost per unit by 5%.
Under this proposal, one line would make 400 HMTs per day while the
other line would make 300 PSBs per day.

Their proposal involved splitting the machines and people that were
dedicated to the single line in option one into two product specific
lines. In those steps with odd-numbers of machines, the extra machine
would be dedicated to the HMT line because it needed to produce more
products, (400) per day, than the PSB (300) line. For example, 3 of
the 5 transmitter attachment machines in step #3 would be assigned to
the HMT line and the remaining 2 would be allocated to the PSB line (See
Exhibit 2 for a layout of the dedicated line proposal). The only other
difference was that rather than purchasing a single, high-capacity
molding machine, Kid Time would purchase two smaller capacity machines.
The batch size for these molding machines was the same regardless of
product type – 60 units per batch. The injection time was also the
same for either product – 65 minutes per batch. The engineers agreed
with James Twomey’s approach to WIP management and therefore expected
their WIP patterns to be the same as those in Option #1 above.

The molding machines that would be purchased for this option were less
expensive than the single machine used in Option 1. Each molding
machine would cost $400,000 and had additional costs of 7% of the
purchase price for shipping and installation. All other machine costs
were identical to the costs presented in Option 1 above.

Option 3: Cell-Based Product Specific Manufacturing

Mary’s other process engineer proposed that Kid Time implement two
product-specific production cells. The consultants stressed that the
ability to pool labor and machines within the cell would provide
significant advantages. The cells used more automated machinery, which
meant that 4 workers could manage up to 10 machines in Cell A and 7
workers could manage up to 15 machines in Cell B. As such, the cell
capacities were entirely a function of machine capacity, so long as the
number of machines remained below the maximum per cell. The cell system
also would reduce the need for supervisors to one for the entire
operation, since each cell would manage production of its own product
from start to finish. In addition, it was assumed the number of
material handlers could be reduced by 50%, since they would not have to
move products between departments, they would only be responsible for
replenishing the cells with raw materials and moving finished goods in
the warehouse. However, the equipment costs for the cell solution were
higher. It was estimated that quality defects would drop to 6% with
this arrangement. This quality improvement would reduce materials cost
by a further 3.5% from Option 2. (See Exhibit 3 for a layout of the
cell proposal.)

The details of the cell proposal are as follows:

Kid Time would create a cell-based product specific line for each
product.

Kid Time would again (as in Option #2) purchase two smaller capacity
molding machines – these are the same machines, with the same costs
and capacities, as recommended in Option #2.

Steps A1 and A2 replace process steps 2-4 with a 2-step process

Steps B1 and B2 replace process steps 5-7 with a 2-step process

Each step involves the use of a machine, except for packaging

In each cell, cross-trained workers can perform the two steps – A1/A2
or B1/B2

Tables 1 and 2 summarize task times, machine requirements and labor
allocation for the cell proposal

The allocated workers, 4 in cell A and 7 in cell B, are sufficient to
keep the automated cell machinery operating at capacity.

The packaging process times (step #8) are unaffected by the cell
configuration and packagers will be allocated as in option #2 – 5 for
the HMT product, 4 for the PSB. WIP would be reduced to an average of
five units per station in packaging.

Process engineers predicted a lead time of Ѕ day for each product. WIP
at the molding station would be the same as option #2. Mary expected
the consultants to determine the amount of WIP that could be expected in
the cell component of each product process.

Product Quality

Kid Time would rely on their electronics supplier to deliver high
quality electronic components. The supplier would be required to
perform 100% inspection, thereby ensuring that all components were
complete and fully functional. Additionally, Kid Time would inspect and
test the product at two points in the production process. The tolerance
check measured the gap between the electronic components and the plastic
housing. If the gap was too large or too small, the worker removed the
product from the production cart and placed the unit into a rework bin.
The visual inspection at this point checked for surface defects. When
the bin was full, it was moved to a rework area, which was located
adjacent to the production area. Similarly, the workers at step #7
moved products to a rework bin if the unit failed to turn on or failed
to operate properly during the testing stage or if a visual check
identified missing or incorrect components. The combined (total) defect
rate for the inspection and testing steps was currently 8.5%. This rate
applied to both HMT and PSB product lines. Kid Time planned to utilize
its existing rework area for the new products, so as not to impact the
new production area.

Products that moved to the re-work area followed different paths. If
the defect resulted from a gap tolerance problem, then the defect would
be corrected in the rework area and returned to the appropriate step in
the production process. Defects discovered at the testing stage could
follow one of two paths. If the electronics failed due to improper
attachment of the transmitter, then the defect would be corrected in the
rework area and the unit returned to the appropriate step in the
production process. If the re-work technician determined that the
electronics were damaged during production at Kid Time, then the unit
would go to the scrap pile. Visual defects due to surface
irregularities required scrapping the product. Units with incorrect or
missing components would be corrected in the rework area. There was no
salvage value in the units that went to scrap.

James Twomey believed that his inspectors would do an excellent job in
identifying and removing defective products from the production line.
Commenting on this James stated,

“Our numbers indicate that only about Ѕ of 1% of our products ever
come back from the customer for production defects. We’re proud of
that number. It tells us that we produce a quality product and that our
inspectors are catching the few defects that do occur.”

Exhibit 4 details quality results from the current process. James knew
that Mary Anthony was concerned about Kid Time’s ability to produce
and deliver a high quality product that was even more complex than
current products. Mary asked James to think more strategically about
how to ensure quality of the HMTs and PSBs.

Inventory Management

Mary Anthony offered the following when asked about the firm’s
inventory and distribution philosophy.

“Our market is highly competitive, with many lower-cost, off-shore
competitors. Our advantage is that we’re located closer to our
customers and this allows us to be more responsive. However, if we
don’t have the product, many of our customers will immediately go to
another supplier and I don’t know when or if I can ever get that
customer back. Having a little inventory helps us to meet unexpected
demand and protects us from stock out costs. We also use this inventory
to meet shipping requirements during our two-week summer vacation.”

Anthony estimates that raw materials and work-in-progress (WIP)
inventory would be approximately 1% of variable production costs.

Table 1: The Proposal for HMT

The HMT Cell

Step # Task Batch Task time Workers Machines

1 Molding 60 65 1 1

Cell A Heating, Trans. Attach & Housing Assm.

Step A1 1 6.20 5

Step A2 1 2.90 3

Total

4

Cell B Tolerance Check, Control Assm. Test / Label

Step B1 1 6.20 6

Step B2 1 6.50 7

Total

7



8 Packaging 1 5.50 5 5



Table 2: The Proposal for PSB

The PSB Cell

Step # Task Batch Task time Workers Machines

1 Molding 60 65 1 1

Cell A Heating, Trans. Attach & Housing Assm.

Step A1 1 6.20 5

Step A2 1 2.90 2

Total

4

Cell B Tolerance Check, Control Assm. Test / Label

Step B1 1 6.20 5

Step B2 1 6.50 4

Total 7







8 Packaging 1 5.50 4 4













PAGE 2