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.
QUESTIONS
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