Operations

ZODIAC BROS. TOYS, INC. (B)

Question 1

The main factors under consideration while analyzing the level vs Expansion strategy from quantitative perspective are as follows:

a) Transportation cost of Molded parts to warehouse

b) Transportation cost of Finished Goods to warehouse

c) Cost of leasing space Molded parts

d) Cost of leasing space Finished Goods

e) Cost of Holding inventory

f) Capital investment for land and building new facility

From Exhibit-1, Expansion strategy, we can see that the total cost exclusive of capital investment and additional Fab/Assembly comes out to be 1.4 Million. The inventory holding cost is around 1.06 Million. The next highest cost incurred is for transportation of molded parts inventory to the warehouse. For this we first calculated the area required for holding the inventory which is given in sales million dollars. The calculation is shown in Exhibit-3. We have in-house warehouse space of 631,000 sq. ft to hold molded parts. We calculated monthly no. of pallets which can’t be stored in in-house space and have to be transported to leased warehouse which costs $0.50/pallet/month. The warehouse lease is at minimum for a year so we leased based on the maximum pallets to be stored in the year. We assumed the same warehouse leasing cost/pallet for molded parts as is for finished goods pallets. The maximum molded part inventory is built up in June i.e 16100 pallets. For transportation cost we considered the cost of longer haul which is $0.0115/pallet/mile. To calculate the distance for transportation, we averaged the distance of leased facility from all four production facilities assuming that the new facility is built in Baraboo, located 45 miles from West bend. The average distance is 48.75 miles (195/4 miles i.e Leased Warehouse is 25 miles from West Bend, 35 Miles from Hartford, 65 Miles from Portage and 70 miles from Baraboo). In case of transportation of molded parts, we considered two trips, one going to...