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As it is explicitly stated in the case, TOYS, INC. is the reputable company manufacturing
Toys and Board games for about over 20 years. Despite this fact, the company has faced
declining sales during recent years. The production manager attributed lack of sales growth to
“the economy” and devised two methods to improve the situation. These are minimizing cost
of production and lay off in the design and product developments. The vice president of sales
has been concerned with customer complaints about defective model products provided by
the company. The assistant of the vice president proposed the following actions to be taken:
Replacing malfunctioning models with new ones, repairing the defective products and selling
it at discounted price, and Letting the current workforce to repair the faulty products during
slack time period.

Moreover, the production assistant suggested the 100% inspection of finished models before
delivering them to the customers, as the way to avoid the problems.

Therefore, this paper is designed to identify and analyse the real situation of the company
and recommend some measures that we would undertake, if we were in the shoe of the
consultant called in by the company’s president.


As it is elaborated in the case, the fundamental problem that challenged the company was
diminishing sales which in turn made the profit to slip. But, the company couldn’t manage to
identify the root cause of its problem. Different figures in the company attached different
factors to the issue. Hence, there was no consensus among people about what the radical
cause of the declining sales and profit margin is. Similarly, different personalities in the
company proposed various measures to resolve the same problem. According to our analysis,
this coordination failure created the vicious cycle on the company in the attempt to resolve
the problem.

The production manager stated that a cause of sales decline was “the economy”. According
to our analysis, even though, the production manager was prompted to undertake the belt-
tightening moves like cost reduction and layoff in product design and development

department, there is no need for lay off as the way to deal with the issues of inefficiency in
the company. Instead, the company could deploy various actions to achieve efficiency in the
process. Specifically, in order to cut the production cost, the following alternatives could be
opted. First, emphasizing on quality as the way to eliminate non value adding (NVA)
activities like rework, scrap, inspection, storage, transportation, etc. NVA activities are those
activities which neither support business process, nor considered as valuable in the eyes of
the customers. Since these activities are wastage activities, the company must get rid of them
in order to make efficient use of its economic resources and time.

Second, taking advantage of economies of scale through large volume production, it is

possible to minimize fixed cost per unit. Third, using the product design tools; like value
analysis and modular design in product design process. The value analysis is the method of
improving the product in the customer’s eyes by increasing its usefulness and reducing the
costs without compromising the quality of the product. It can result in great cost saving or a
better product for the customers. Similarly, modular approach to product design makes it
possible to have relatively high product variety and low component variety at the same time.
To the customer, it appears that there is great number of different products. To operation,
there are only a limited number of basic components and processes. This makes it possible to
produce more efficiently for larger volumes while also allowing standardization of processes
and equipment.

Fourth, investment in automation and information system- If the system is automated many
operations are performed by computers and robotics which are faster, accurate and diligent
than human beings. Besides, it can produce large volume of products within shorter time and
thereby achieving the company’s performance objectives like fast delivery, quality and low
cost production.

To sum up, the company should look for the options such as attacking NVA activities,
achieving economies of scale, Value analysis, Modular design, automation, etc. in order to
cut the costs of production.

The customers’ complaints about the company’s defective models production had been
considered as one of the cause for diminished sales and profit. To address this problem, the
provision of products with warranty had been proposed as the solution. In a sense, the
company was supposed to replace the malfunctioning models with the new ones. Well! This

is an appeasement policy towards dissatisfied customers and it also demonstrates the
company’s goodwill. But what about the cost that company is expected to incur in order to
replace each and every defective models? The cost would so high as it is one kind of external
failure costs. The external failure costs are the costs of producing defective items that has
been detected by the customer. They include cost of settling complaints, return of
merchandise, warranty cost, product liability cost, lost sales cost, etc. Usually, the external
failure costs are the highest costs of quality that must be avoided. We can partially avoid
these costs by focusing on preventing the error to happen, i.e. producing “zero defects”
products. This is based on the assumption that prevention is cheaper than correcting the
error after the fact.

Repairing defective models and reselling them at discounted price is the good option to
reduce the total failure costs. And also if the repair work is performed by the company’s
regular work force, the company could save the costs of hiring new employees. But, what
about the opportunity cost of doing so? It would be great! This is because if new staff were
employed, they might have come with innovative idea, special skill and knowledge that are
necessary to produce quality product. Other things remain constant, if the work forces are
qualified, the likelihood of producing more defective products will be minimized. Hence,
hiring new staff with caliber and providing existing employees with training is advisable if
the company is to succeed.

As it is mentioned in the case, the production assistant of the company proposed 100%
inspection of finished model before they were shipped as the way to weed out any defective
models and avoid the problems entirely. However, our analysis shows that inspection cannot
resolve the fundamental problem of quality. This is because most of the inspection activities;
if not all, are non value adding by their very nature. If after all the inspection is needed, we
have to determine how much, how often, and at what point to inspect. It is neither possible
nor economically feasible to critically examine every part of product. The cost of inspection,
resulting interruptions of a process or delays by inspection, a manner of testing typically
outweigh the benefits of 100% percent inspection. However, the cost of letting undetected
defectives slip through is sufficiently high that inspection cannot be completely ignored. The
amount of inspection needed is governed by the cost of inspection and the expected cost of
passing defective items.


Based on the problems identified and analysis made, we recommend the company to make
emphases on the following points.

 Proper coordination between various functional units in the organization- In a

sense there should be a team spirit in the company, whereby every department have
information about the plans of others and work towards the achievement of the overall
organizations goal. This is to eliminate the coordination failure.

 Implementation of Total Quality Management (TQM) - Successful TQM

programs are built through the dedication and combined efforts of everyone in the
organization. The company should find out what customers want and design a product
that will meet (exceed) customers’ wants, design the production process to make
things right the first time (strive to make the process “mistake- proof”).

 Prevention is cheaper than correcting the errors- Instead of repairing and

replacing the malfunctioning with new ones; the company must try to design the
product of superior quality and produce zero defect products. Moreover, the need for
inspection should be minimized by determining how much, how often, and at what
point to inspect. Therefore, it is neither possible nor economically feasible to do 100%
inspection of the products and processes.

 Continuous Improvement (CI) - the company should make never-ending

improvements to production process. The equipments, methods, materials and people
should be continuously updated to keep the system match with the dynamic
environments. The company that doesn’t engage in CI is more likely creating the gap
between itself and the competitors. Hence, it cannot satisfy its customers as they may
have better option to look for.

 Training for the employees- there is inherent need to shape knowledge, skills,
attitudes and perceptions of employees to increase the organization’s productivity in
general and to upgrade their potential in particular. By providing employees with
different training on various issues, it is possible make employees capable of
operating modern technologies, efficiently using resources and producing quality
products. Of course the list of advantages of training for employees and organization
is not exhaustive. Generally, the workforces equipped with necessary caliber, could
boost the productivity and minimize wastage. Therefore, it is mandatory for the
company to provide regular effective training for its workforce.

 Increasing efficiency of the process rather than layoff- if the cause of the declining
sales was the inefficiency, then the company should find the ways to cut the
production costs rather than resigning employees. The various options to cut costs are
attacking non value adding activities, economy of scale, Value analysis and modular
design, Automation, etc.


 Richard B. Chase, Nicolas J. Aquilano and F. Robert Jacobs Operations management
for competitive advantage; McGraw- hill/Irwin series; 9th ED
 William J. Stevenson. Production/Operations Management, McGraw-Hill, 6th Ed
 Joseph S. Martinich. Production and Management: an applied modern approach; John
Wilay & Sons, Inc. 1997