When Gerald Kramb arrived at the company offices early on Monday, July 1, 2006, to review the end-of-the-year sales and operating figures, several pressing matters commanded his attention. Sales had been much stronger than projected in 2005 to 2006, and existing production capacity had been fully utilized, with excessive overtime, to meet demand. Sales forecasts for the coming year indicated further rapid growth in demand, and Kramb knew that added capacity was needed. Several alternatives were available to the company, and he wanted to be sure that all the key factors were considered in making the decision.
Imaginative Toys was founded in Seattle, Washington in 1985. When he founded the company, Gerald Kramb envisioned that Imaginative Toys would develop and produce toys that "reach children's imagination and bring out their creativity." He liked to call these toys "learning toys." Two product lines quickly emerged as the mainstays of the company: construction toys that were similar to Lincoln Logs and Legos and maze and mind toys that focused on solving puzzles and developing hand-eye coordination. The toys were quickly accepted in the marketplace and became a popular choice for day care centers, preschool facilities, and elementary schools, as well as for parents.
Keys to success in this market were continual development of innovative products and a high level of product quality. Toys needed to be both creative and durable. Two other important factors were timing and availability. New products had to be ready to be introduced at the spring toy shows. Then, sufficient capacity was needed to fill retail orders by late summer in order to be ready for the Christmas buying season. Hence, Kramb knew that any capacity expansion decisions had to be made soon to meet next spring's production needs.
Because of the long-term nature of the decision, Kramb had asked Pat Namura, the marketing director, to prepare a four-year sales forecast. This forecast projected strong growth in sales during the four-year period for several reasons. First, the 1960s baby-boomers' children had reached preschool and elementary school age, and childcare facilities had been rapidly expanding to accommodate these children, whose parents typically both worked. A second factor was the growth of international markets. Domestic sales remained strong, but international sales were growing at the rate of 25 percent per year. An important factor to consider was that, in a trendy business such as toys, the European market was one to two years behind the U.S. market. Namura attributed this lag to less developed television programming targeted toward children.
Finally, Imaginative Toys had just launched a new line of toys, and initial sales figures were very promising. The new line of toys was called Next Generation Transformers. Much like a puzzle, each of the transformers could be rearranged and snapped together to form from two to four different toys. Designs were patterned after the robotic characters in children's Saturday morning cartoon shows. Namura was sure that this new line was just beginning to take off.
As Kramb reviewed the alternatives, he wished that expanding existing facilities were a viable option. Were the necessary space available, adding to the Seattle facilities would put much less pressure on the company's already thin management structure. As it was, suitable space was nowhere to be found in the Seattle area. However, the processes used to manufacture the three product lines could be replicated easily at any location. All three line processes were labor intensive, with plastic parts molding being the only skilled position. The construction toys consisted of molded plastic parts that were assembled into kits and packaged for shipment. The maze and mind toys required some parts fabrication from wood and metal materials. Then these parts were assembled into toys that were packed for shipment. The transformers were made from molded plastic parts that were then assembled with various fasteners and packed for shipment. The operating costs break-down across all three toy lines was estimated to be 30 per- cent materials, 30 percent labor, 20 percent overhead, and 20 percent transportation and distribution. Obtaining the raw materials used to manufacture the toys would not be a problem for any location.
Kramb and his staff had researched two alternative locations for expansion. One was in a maquiladora in Nogales, Mexico, across the border from Tucson, Arizona. The improving trade relations and relaxation of tariffs and duties made this an attractive alternative. Labor costs also could be substantially reduced. If skilled labor was not avail- able to mold and fabricate the parts, these operations could be done in the United States and the parts could be shipped across the border to Nogales for assembly and packaging.
The second alternative was to locate in Europe. A plastic injection molding company outside Brussels had decided to close and was looking for a buyer. Labor costs would be comparable to those in Seattle, but transportation cost would be 10 to 15 percent higher on toys shipped back to the U.S. market. However, the Brussels location was attractive because of the European Union's single- market program. It brought free movement of people, goods, capital, and services to the EU since the mid 1900s. The Cecchini report developed for the European Commission forecasted an increase of 5 percent in the gross EU product from this program. By producing in Brussels, Imaginative Toys also could avoid the 6 percent tariff on goods entering the EU.
As Kramb prepared to meet with his staff, he wondered how the company would be affected by expanding to a multi-site operation. Conceivably, the decision would be to expand into both Mexico and Europe. If the sales projections held, the demand would support a three-plant network.
1. In making the location decision, what factors would you consider to be dominant? What factors would you consider secondary?
2. What role, if any, do the competitive priorities of Imaginative Toys play in the location decision?
3. Use a Preference Matrix to show your choice of a new location for Imaginative Toys
Source: Dr. Brook Saladin, Wake Forest University, initially prepared this case as a basis for classroom discussion. It appeared in Lee J. Krajewski & Larry P. Ritzman. 2002. Operations Management: Strategy and Analysis, 6th ed. Prentice Hall