Kool King Case Analysis Group A7

Introduction Kool King is a division of the TIA (Television Industries of America) Corporation. The Kool King division manufactures and markets air conditioners at a plant in Melrose Park, Illinois. The division produces seven different types of air conditioners, which are marketed by TIA s marketing division. They are then sold to retailers through TIA s distributors in several large cities. A group of key people at the division are meeting to decide the forecast and production plan for fiscal year 1980, and related issues. Summary of 1979 Operations The Kool King division faced a number of problems during fiscal year 1979. The most pressing of them was the stockouts of a number of their product lines. Four of the products, Midget, Mighty Midget, Breeze Queen and Breeze King (the 115V and 208V models), faced stockouts at various points of the year. Since retailers in the air conditioning business do not wait for factory shipments, Kool King is losing a large amount due to mismatched production and demand. Continuation of this production-demand mismatch could lead to a loss of reputation for the company, and therefore a loss of future sales. In addition to stockouts, the division s products seem to have a variety of very minor quality defects, leading to an increasing number of quality complaints. Since Kool King is aiming to increase its market share aggressively in a market that itself is growing, even minor quality issues become important to deal with. Part of these issues may have to do with the employee turnover rate, especially at the lower grades. Since the company is working at close to capacity, the pace required on the job is high, and many employees seem to not be able to keep up with it. The employee turnover rate itself presents a problem to the company, with the cost of hiring a new worker estimated to be $284.50 (taking into account the value of lost time). Finally, the demand for air conditioners is extremely seasonal, with most sales taking place in the months of April to July. However, the company has to produce throughout the year to meet this demand, leading to extremely high inventory costs. Capacity also presents an

issue, since Kool King will have to increase capacity if it is to meet its forecasted production plan for 1980. Although there are a number of problems faced by Kool King, the division is still in an extremely competitive position. Their products are free of any major quality issues, with less than 0.5% of sold products being returned for repairs under warranty. This signals an extremely competent manufacturing setup. This also reflects well in the sales of their products, with total sales exceeding forecasted sales by a small margin. However, this was largely made up by three products, Midget, Breeze Queen and Breeze King, where demand exceeded expectations by 22%, 17% and 66% respectively. Given these results, the company has projected 1980 sales to be 20% higher than 1979 figures. Kool King has also implemented a fairly successful discount policy, offering lower prices to customers who buy in the off-peak season. This allows them to maintain a more level production plan throughout the year, which is certainly a huge advantage. Sales under their early-order discount plan are projected to increase to 24,000 units, up 50% from 16,000. Finally, the division has a well laid out assembly line that enables it to produce all seven products on a single line. This layout also enables new employees to reach their peak efficiency within two days of being hired, which somewhat offsets the costs of their high employee turnover rate. Assessment of 1980 Operations Given the issues and the strengths of their 1979 production, some analysis of 1980 operations can be made. The production-demand mismatch is likely to grow along with the growth in sales, if the division does not change their production plan. Inventory costs will also increase in proportion if the production plan is not modified to reduce inventory levels by a significant amount. The actual number of changeovers in production is far higher than the estimated number. In fiscal year 1979, 8 changeovers were planned, but there were actually 14, accounting for a significant increase in cost. Since the management of Kool King seems to accept the high employee turnover as uncontrollable, the minor quality problems such as crooked nameplates and loose knobs

are likely to continue. This will lead to reduced sales and loss of reputation in the long run if no measures are taken to correct these quality issues. The fluctuation of demand, as well as seasonal variations, is completely uncontrollable and will therefore continue to be a problem for Kool King in fiscal year 1980. Analysis of Capacity To analyze the capacity, sales for fiscal year 1979 were considered. According to a case exhibit, the plant was operational for 48 weeks of the year, each consisting of 5 days. There were also 5 holidays during the year, leading to a total of 235 working days. The table below contains the estimated sales for FY 1980, along with opening inventory levels. From this data (and assuming the same production rate as FY 1979), the total number of days required to meet the production plan is 255 (excluding Slimline and Super which will be produced on a separate line in 1980). Therefore, given the current capacity and labor efficiency, there is a capacity shortage equivalent to 40 days of production, and Kool King will not be able to meet its 1980 forecast.
Mighty Midget 11000 1420 9500 550 17 Breeze Queen 41000 2165 39000 325 120 Breeze King 8000 0 8000 325 25

Estimated FY 1980 Sales Inventory Sepetember 1, 1979 Estimated FY 1979 Production Requirements Production Rate (Units/Day) No.of days required

Midget 46500 0 46500 550 85

Islander 5000 2604 2500 275 9

To analyze the changeover policy, we consider the following data. There is a tradeoff between changeover costs and inventory holding costs. With longer runs of a single product, a higher inventory of that product is required. The cost per changeover is $6000. The total inventory cost incurred during the year is $108,with an average inventory carrying cost of $30/unit/year. Given this data, we can use an EOQ model to calculate the optimal batch quantity before a changeover is required. In the EOQ model, the order quantity would represent the production before a changeover is required. The order cost

would be the cost of a changeover, while the inventory costs are equivalent to holding costs. Using the information above, the economic order quantity is calculated to be 6,325.
Total Annual demand Cost per changeover Inventory carrying cost per unit per year Optimal production run 100,000 6,000.00 30.00 6325

$ $

Therefore, the company s policy of producing 10,000 units before each changeover results in much higher inventory costs. The savings in changeover costs are far lower than the resultant increase in inventory holding costs, and therefore the division s policies regarding changeovers are inappropriate. This new quantity of 6,325 units fits in well with the forecasted production for 1980 since there are a number of products with sales lower than 10,000. Aggregate Plans for Fiscal 1980 There are three types of aggregate plans which are described below in detail, along with the cost figures for these plans, given the case data. 1. Demand Chase Plan: Capacity is increased or decreased depending on the demand each month. Minimum amount is held in inventory. The total cost comes to $1,500,000. (Exhibit 1) 2. Level Production: The workforce is held constant, thereby keeping the capacity constant. Inventory levels fluctuate throughout the year and the chance of stockouts is higher. The total cost in this case amounts to $1,694,930. Thirteen days of overtime are required in this case. (Exhibit 2) 3. Hybrid Plan: In this case, the total cost of production is minimized, taking into account variables like hiring cost, lay-off cost, labor wage rate, overtime cost, labor content per unit, etc. The resultant cost in this case is $1,476,365. (Exhibit 3) The costs described in all the cases above exclude material costs. Since material costs remain constant across all plans, they can be neglected for the purposes of this analysis. A detailed analysis is presented in the following exhibits.

Exhibit 1: Exact Monthly Production With Varying Workforce

Exhibit 2: Constant Workforce, Varying Inventory and Stockout

Exhibit 3: Optimized Production Plan Using Linear Programming

Exhibit 4: Aggregate Production Planning Relevant Data

Exhibit 5: Various costs associated with inventory and changing capacity Costs Materials Inventory holding cost Marginal cost of stockout Hiring and training cost Layoff cost Labor hours required per unit Regular Time labor cost Overtime cost Normal Working hours per day

$125.70 $2.50 $20.00 $284.50 $81.00 2.0 $6.00 $9.00 8.0

$ per unit $ per unit per month $ per unit per month $ per worker $ per worker $ per unit $ per hour $ per hour hours per shift

Exhibit 6: Calculation of Labor hrs. per unit

Units to be produced Avg daily production Total hours in a day Avg hrs per unit

111500 436 896 (112 workers x 8 hrs a day) 2