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 TIAs marketing division. They are then sold to retailers through TIAs distributors in several large cities. A group of key people at the division are meeting to decide the forecast for ecast and production plan for fiscal year 1980, 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 th e 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 l ead to a loss of reputation for the company, and therefore a loss of future sales.
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, u p 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
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.
Estimated FY 1980 Sales Inventory Sepetember 1, 1979
Midget 46500 0
Mighty Midget 11000 1420
Breeze Breeze Queen King 41000 8000 2165 0
Islander 5000 2604
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 companys 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 divisions 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
Exhibit 1: Exact
Mont hly Production Wit h Varying Workforce
Exhibit 2:
Constant Workforce, Varying Inventory and Stockout
Exhibit 3:
Optimized Production Plan Using Linear Programming
Exhibit 4:
Exhibit 5:
Aggregate Production Planning Relevant Data
Various costs associated wit h 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:
Units to be produced Avg daily production Total hours in a day Avg hrs per unit
Calculation of Labor hrs. per unit
111500 436 896 (112 workers x 8 hrs a day) 2
