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.

MidgetMighty Midget

Breeze Queen

Breeze King Islander

Estimated FY 1980 Sales 46500 11000 41000 8000 5000Inventory Sepetember 1, 1979 0 1420 2165 0 2604Estimated FY 1979 Production Requirements 46500 9500 39000 8000 2500Production Rate (Units/Day) 550 550 325 325 275No.of days required 85 17 120 25 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 100,000Cost per changeover $ 6,000.00Inventory carrying cost per unit per year $ 30.00Optimal production run 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 $125.70 $ per unit

Inventory holding cost $2.50 $ per unit per month

Marginal cost of stockout $20.00 $ per unit per month

Hiring and training cost $284.50 $ per worker

Layoff cost $81.00 $ per worker

Labor hours required per unit 2.0 $ per unit

Regular Time labor cost $6.00 $ per hour

Overtime cost $9.00 $ per hour

Normal Working hours per day 8.0 hours per shift

Exhibit 6: Calculation of Labor hrs. per unit

Units to be produced 111500Avg daily production 436Total hours in a day 896 (112 workers x 8 hrs a day)Avg hrs per unit 2