Operational Decision: Tinker’s Toys
Tinker’s Toys is a small toy manufacturer that specializes in a niche market. It creates hand-crafted wooden toy model sets with gears and motors. The sets are then sold for the end user to put together, and the finished products replicate old-fashioned wooden toys in both their look and movements. Tinker’s Toys has been in business for the last fifteen years and markets primarily to small model-shops and educational toy retailers. It does not have any large customers like Hobby Lobby, Michael’s, or Toys R. Us. It does not have an online retail direct-marketing presence, but does manage some of its wholesale sales online. Tinker’s Toys main competition was a firm called Wooden Wonders, but Wooden Wonders expanded quickly just prior to the recession and then closed in late 2011
Environmental Scan Factors
“Environmental scanning is the acquisition and use of information about events, trends, and relationships in an organization’s external environment, the knowledge of which would assist management in planning the organization’s future course of action. Organizations scan the environment in order to understand external forces of change so that they may develop effective responses which secure or improve their position in the future” (Choo, 1999). Therefore, the organization must look at both internal and external factors to determine the business environment.
Many businesses think that the economy is the most significant environmental factor in business decisions. This may be true for a firm with no resources to whether economic cycles, but in an organization that has some resources, losses in a down economy do not dictate that the business be closed. On the contrary, long-term economic decision-making may benefit by keeping a company running, even at a loss, during a slow economic cycle. Demand for hobby toys has been down as a result of the recession, but with the economy slowly recovering, orders for the toys have been increasing again. A competitive firm closed because of the economic downturn, which places Tinker’s Toys in a good position to increase market share as the economy recovers.
Social and cultural trends suggest a strong market for Tinker’s Toys. The recent elections reveal a strong nostalgic feeling in a large segment of the American population. By advertising these toys as nostalgia pieces, it should be possible for Tinker’s Toys to capitalize on these feelings of nostalgia. Moreover, the toys are somewhat “nerdish” in that they require building the pieces and mechanical parts. While “nerds” have long-been marginalized by society, they are actually seeing somewhat of a cultural heyday. The most popular sit-com on network television, Big Bang Theory, features a group of nerds, and the overall societal stigma that once attached to hobbies that were academically inclined seems to be waning.
The government trends are a significant factor for a small business and the healthcare mandate will have a financial impact on the business. In 2014, the business will be required to provide healthcare coverage for all employees. That is expected to cost the business some money, as the insurance cannot cost the employee more than 9.5% of salary and has to cover 60% of healthcare expenses. However, the actual costs of that insurance are not yet determined, as the legal struggles over the healthcare laws and the insurance company response to those laws has not yet been determined. Those expenses will not directly impact the next fiscal operating year.
Financial Performance
The monthly operating expenses for the firm include wages and fixed costs. They have 100 workers, working 20 days/month at $70 a day. The total in wages is, therefore found by the following equation: 100*20*70= $140,000. The other costs are $2,000 per day at 20 days, 2000 *20= $40,000. Therefore, the firm’s total monthly operating expenses are $180,000. The firm produces 6,000 units at $32 per unit, which is 6000*32= $192,000. This appears to leave a profit of $192,000 – $180,000 = $12,000 per month. However, the information received from the firm is that the fixed costs are high enough that total costs are greater than total revenue. This means that fixed costs exceed $12,000 per month. The marginal cost of the last unit produced is $30, which suggests at a $32 selling price [32-3] means a $2 potential profit for the last item produced, and we will assume that same profitability level for each additional item produced over that amount, although that calculation depends upon the total of all fixed costs, a number that is not supplied. Currently, 100 workers, working 20 days are producing 6000 units. That means that each worker is producing 6,000 / (100*20) = 3 units per day.
Given only those financial figures that have been provided, it is impossible to do a complete financial calculation. A huge part of the decision making for this scenario depends upon the marginal cost of additional production. Marginal cost refers to the cost of producing one more unit of a product (Sullivan & Sheffrin, 2003). In economies of scale, the greater the production, the lower the marginal cost, so that increasing production increases profit. However, there is not enough information to determine if this is true for Tinker’s Toys, and, if so, to what number it would be true.
Improving Profitability
Without knowing the fixed costs and worker capability, it is impossible to determine some critical financial numbers. Can workers reasonably increase production or is a 3 unit per day production capacity the maximum that can be sustained with the current workforce? How high are fixed costs? Would an additional $10,000 in orders be sufficient to cover fixed expenses, or is the company losing tens of thousands in fixed costs each month? If so, where are those fixed costs and can they be reduced? Without the answers to these questions, it is impossible to make solid recommendations about improving profitability. However, assuming that marginal costs decline and will continue to decline with increased production so that there is potential for increased profit, I would recommend the following measures; profit mapping, identify customers who should be in the company’s sweet spot but are not and focus on sales to those customers; and implementing a net profitability-based sales compensation system (Byrnes, 2011).
The first thing that I would do is form a profit map. “Profit maps show exactly where profit is flowing and where it is lost” (Byrnes, 2011). A profit map is far more detailed than figures that yield net profits, and can help determine the biggest expenditures and whether those can be reduced. Therefore, someone needs to sit down and examine all of the costs for the units and then sit down and look at all of the costs associated with the various customers. Sometimes the biggest customers, who are assumed to be the most valuable, are actually the least profitable because they may have higher return rates, greater shipping costs, or higher associated sales costs because of their size. Once the company has examined each individual customer, it can then look at those customers that should be the most profitable but are not, and attempt to increase sales to those customer, this increase in sales should be done through a sales force whose commissions are not based solely on the number of units sold, but on the profitability of each unit sold.
Continuing Operations or Ceasing Operations
Without information about fixed costs, it is impossible to suggest whether the company should discontinue operations. Even fixed costs are frequently not fixed. However, if the fixed costs are truly fixed and increasing production would increase profitability per unit, then it does not make sense for the company to continue operations. However, it is important for a business that closes to do so in a responsible manner, which leaves open the possibility of re-starting the business, makes executives and management more attractive to other employers, and does not abruptly leave employees without jobs. The company should inform customers that it will cease taking new orders in a specified period of time, notify employees that the company will be closing on a specific date, and fill all existing orders two weeks prior to that date.
References
Byrnes, J. (2011 August 8). Improving profitability from a granular level. Business Finance
Magazine. Retrieved November 12, 2012 from Business Finance Magazine website: http://businessfinancemag.com/article/improving-profitability-granular-level-0808
Choo, C.W. (1999). The art of scanning the environment. Bulletin of the American Society for Information Science, 25(3), 13-19.
Sullivan, a., & Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River:
Pearson Prentice Hall.
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