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 Breeze Breeze

Midget Midget Queen King Islander
Estimated FY 1980 Sales 46500 11000 41000 8000 5000
Inventory Sepetember 1, 1979 0 1420 2165 0 2604
Estimated FY 1979 Production
Requirements 46500 9500 39000 8000 2500
Production Rate (Units/Day) 550 550 325 325 275
No.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 100,000

Cost per changeover $ 6,000.00
Inventory carrying cost per unit per
year $ 30.00
Optimal 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 111500

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