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CIMA Case Study: Jot Toy Company

Hazel Rose P. Cometa Zoren C. Laylo Joyce Ann Padua Deanne Coleen A. Ponce Audrey B. Reano

A4A Mactwo January 26, 2013

Summary

Large number of companies of various sizes design and sell toys to retailers globally. The manufacturing of toys is often outsourced by most toy companies and currently 86% of the worlds toys are manufactured in China. The current trend in toy sales is towards electronic toys and computer assisted learning. Many of the electronic toys are highly developed to be attractive to children.

There is a wide range of companies which operate as toy design and distributing companies. The Jot brand was established in 1998 by Jon and Tani Grun. The company initially designed a small range of toys that were manufactured in their home European country. These toys are popular in their home country and Jon Grun expanded the range of products. The founders were encouraged to see Jots products ordered by many large toy retailers across Europe within five years. By this stage, the company had grown considerably, and has annual sales of almost 2 million. Jot started outsourcing all of its manufacturing to a range of manufacturing companies in China in order to reduce its cost base and to enable the company to price its products more competitively in 2004. By the end of 2010, sales revenue exceeded 8million and the company had achieved considerable sales revenue growth each year. Jot has seen its sales revenue grow by 16% in the year ended December 31, 2010 and by almost 18% in the year ended December 31, 2011.

Jot uses a specialized company based in Europe for the manufacture and testing of all prototype products and there are often two or three stages involved before the prototype product is produced to the satisfaction of the designers. Only when each product is signed off by the design and management team can Jots legal team apply for the Intellectual Property Rights for the product design. Then the approved new product designs go into production by outsourced manufacturer.

Jot currently has 12 product lines which are licensed products from popular film and TV programmes for the manufacture and sale of toys. A fixed licensed fee is paid to the licensor in accordance with the licensing contract and the fee is usually paid at the time Jot places an order with its outsourced manufacturer. Their inventory counts at the end of the year are reconciled with JOTs IT inventory control system and any discrepancies are written off. Jots inventory is valued at the lower of cost or realizable value based on the first in first out basis. Inventory value

is based on outsourced manufacturing contracted charges, using the unit price from manufacturing invoices, unless the realizable value is lower. Jot has seven main customers which account for almost 70% of Jots sales and are considered key players with high power. The Jot brand name is known for quality toys but it is important that its products appeal to cost-conscious retailers and price sensitive customers. There is every reason to consider that Jot will continue to be successful and profitable but it needs to urgently address the problems with, and shortage of its outsourced manufacturers. Jots management team has to guarantee that it works closely with its outsourced manufacturers so that a good business understanding is established and that the outsourced manufacturers can produce the right quality products at the right time, for Jot to supply to its customers. This will allow Jots management team to focus on the business of designing and selling a range of innovative toys.

Problems 1. Jot Toy Company produces only educational toys and sacrificing a little bit of the overall appearance of their products on the market. It makes their products not too much attractive on the market, especially to the parent of the children.

2. It currently does not produce any toys for babies aged less than one, toddlers aged less than 3 years old or children aged over 8 years old. This hinders a potential market wherein the market needs toys on their developing stage (0-3 years old) and on their exploration stage (8 years and above). 3. Jots bank has been very responsive to the companys needs for cash in order to fund its growth. But at present, it has indicated that it would not be able to provide any additional long-term finance and currently has a problem in collecting their accounts receivable.

4. Jot Toy is currently experiencing a difficult decision when placing orders with outsourced manufacturers, between ordering too much inventory and not selling it and the opposite of losing sales because of lack of inventory.

5. Jot Toy uses off-shore outsourced manufacturing. Off-shoring is burdened with hidden management problems and subsequent costs that translate into headaches and sometimes nightmares for the customers of off-shoring providers. SWOT Analysis

Strengths

1. Profitability Jot Toy brand which was established in the year 1998 had achieved substantial sales revenue growth for the past years. For the year ended 31 December 2010, an increase of 16% and for the year ended 31 December 2011 of almost 18%.

2. Good and Quality Product Designs Jot has its own in-house team of designers who are in-charged of the thorough process of designing toys. They see to it that the toys are unique, innovative and fun to play with. Also, Jot

launches around 5 totally new products each year. Enhancements are provided to certain aspects of some of its products to refresh their appearance and features. Jot is known for making quality toy products and they serve this reputation.

3. Experienced Key Personnel The company employs skilled and knowledgeable people with an array of experience in its own field.

4. Ensured Product Safety All products meet the required product safety regulation of the European Union. The CE marking confirms that the certification experts have carried out all applicable testing to identify hazards and risks. Weaknesses

1. No official published CSR The management is aware of the importance of its CSR but still have not officially published what it does or how it will improve its CSR plans.

2. Too dependent on its seven primary customers These seven large companies comprise toy retailers, large international supermarket retailers, department stores and one on-line retailer. Over 68% of Jots sales in the financial year ended December 31 2011 were to these 7 customers based in Europe and the USA out of a total of 350 customers.

3. Heavy reliance on outsourced manufacturers Off-shore outsourced manufacturing is defined as shifting work to foreign, distant companies in order to reduce production costs. All of Jots outsourced manufacturers are based in China and Jot is reliant on them when it comes in the production of its toys. 4. Dependent on customers preference Toy products are being aligned with the changing customer preference. Aligned with this are the sales of licensed products defined as toys which uses logo, design or character from a film or

TV programme with intellectual property rights. Jot has 12 product lines which are licensed products which are highly based on demand.

5. Dependent on product designers Without the design team, new product innovations alongside with the application of market trends would not be implemented. Also, the design team is kept fresh by the introduction of new designers each year.

6. Seasonal business Jots business is highly seasonal with significant proportion of sales occurring in quarter 3 and 4 The preparation for higher levels of sales causes the cash flow for the second half of the year to be negative. Opportunities

1. Increasing Geographical Market With the aim of targeting other areas of the world, Jot would like to expand its sales to the Russian and Asian markets. The types of product that Jot sells are highly in demand in these markets.

2. Inventory Control over the Outsourced Manufacturers Currently having 20 offshore outsourced manufacturing companies, Jot still maintains inventory control oven the said companies. With a good level of understanding and commitment established between Jot and them.

3. To sell slow moving products rather than write-down the inventory. As practiced by Jot, any unsold inventories are being sold to customers at substantially reduced prices to clear them out.

4. Near-shoring Near-shoring is defined as the transfer of business processes to companies in a nearby country. With the wage rates increasing in China, this would be an opportunity for Jot to have some outsourced manufacturers within Europe.

Threats

1. Designers perceived as burnt out are let go With the aim of providing innovative toy products to the market the design team is kept fresh at the expense of letting go those which are perceived to be burnt out. The designers full potential cannot be maximized if not given the chance.

2. Competitive Industry There is a large number of companies of various sizes which design and sells toys to retailers globally. Certain actions should be done like price control while retaining quality in order to compete with the others and be able to capture the market.

3. Limited Serviced Age Group Jot only caters to only 2 age groups which are ages 3 to 5 and 5 to 8. It does not produce any toys aimed at babies aged less than one, toddlers aged less than 3 years old or children aged over 8 years old. This may cause its competitors to have an advantage over them when it comes to market segmentation.

Recommendations

Gross Profit Variance Analysis

Year Ended December 31, 2012 000 Revenue Cost of Sales Gross Profit 11,568 7,832 3736

Year Ended December 31, 2011 000 9,866 6,719 3147

Figure 1. Extract form Statement of Comprehensive Income

2012 Average Unit Selling 13.3

2011 14

Price Average Unit Cost 9 9.5

Table 2. Average Unit Price

Based on Figure 1 & 2, gross profit variances can be computed as follows: Sales Variance Sales Price Variance Sales Volume Variance Cost Variance Cost Price Variance Cost Volume Variance Gross Profit Variance

(13.3 - 14) x 868,500 (868,500 706,300) x 14 (9 - 9.5) x 868,500 (868,500 706,300) x 9.5

= 607,950 U = 2,270,000 F = 434,250 F = 1,540,900 U

1,662,850 F

1,106,650 U 556,200 F

There will be an unfavourable sales price variance during the year (assuming forecast for 2012 is met) but there will be a favourable sales volume variance. Management may consider further reduction of sales price to increase sales volume. Based in the sales volume variance analysis, the average sales price decreased but there us a large quantity of increase in sales volume. This management technique, when applied, should consider the trade off between the reduction of sales price and the increase in sales volume and its ultimate impact on the gross profit as well as the operating income of the company. This method may also be used to penetrate markets and further increase market share. Although there has been increasing labour rate in China where most of the Jot toys are manufactured, a favourable cost price variance cab ne expected by the end of the year. The decrease in the average cost per unit may be associated with lower production cost from manufacturing companies they outsource. This is because Jot can choose the lowest production costs for a product from several manufacturing companies.

1. Develop a Market Position for the Product Market positioning is important for a product because it changes a consumers view of the product as compared to its competitors. Jot Toys can be positioned as the toy for a childs learning. This way, not only the babies or children will choose Joy Toys but also their parents

since they are branded as educational toys. But this does not limit Jot to produce only educational toys; the product position only enhances the attractiveness of Jot products to the market.

2. Expansion of Market Jot should expand the range of its market by including the babies aged less than one, toddlers aged under 3 years old and children aged over 8 years old. Thru this action, the company can occupy a large portion in the market thus establishing competitive advantage over its rivals. Moreover, it will benefit the company in the long run by having shares of each market of the toy industry.

3. Improve Collection of Receivables On the financial side, the company should improve the collection of receivables since it has low cash inflows specifically in operating activities. Comparing the cash inflows under operating activities of 91,000 and the revenue for the year of 9,866,000, we can say that Jot has serious problem with regards to its collection processes. It is also manifest by the accounts receivable turnover ratio, which result to . With 21,000 cash and cash equivalent, Jot will be having a problem in satisfying its currently maturing obligation and unforeseen need for cash. Jot may use several strategies in order to conform to this problem. It may consider hiring competitive people to manage its accounts receivable, pursuing regular training, studying accounts receivable summary reports, working on the detailed report on aging of receivables, and taking action promptly on past-due accounts. Looking at the long term liabilities of the company, we can perceive that there is maturing obligation at the beginning of 2014 or late next year in the amount of 500,000. Matching this amount with the companys cash and cash equivalent account, it clearly portrays that a serious problem may arise next year.

4. Engage forecasting methods

Due to poor control over inventory and slow moving products which could result in an inventory write-down, Jot should use methods for forecasting the demand of a product. Sales opportunities could be lost due to insufficient supply of manufactured products especially during the peak sales in the fourth quarter of every year. Jot may consider using different business forecasting methods like moving average, weighted moving average and exponential smoothing. Thru the use of these techniques, Jot can easily anticipate the sudden increase or decrease in the demand of its products, thus, contributing to the profitability and efficient management of its inventory.

5. Consider near-shoring Jot should consider near-shoring. This process may result to lower outsourced manufacturing costs, lower selling price and highly competitive price in the market. This may reduce the risk of concentrating the companys manufacturing base in Asia, particularly in China. This does not lead to a total overhaul of the manufacturing companies from which Jot toys would be manufactured but a slow decongestion of the manufacturing companies Jot outsources in China. Although the overall economy of Asia has a promising outlook for the next years, there is still a risk associated with the concentration of these manufacturing companies since they operate under, in general, the same economic and business environments and a sudden change in the environment surrounding them would have a huge impact on the operations of the company.

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