Question

The Glades Company is a small manufacturer. It has produced and marketed a number of different toys and appliances that have done very well in the marketplace. Late last year, the product designer at the company, Tom Berringer, told the president, Paula Glades, that he had invented a small, cuddly, talking bear that might have a great deal of appeal. The bear is made of fluffy brown material that simulates fur, and it has a tape inside that contains 50 messages.

The Glades Company decided to find out exactly how much market appeal the bear would have. Fifty of the bears were produced and placed in kindergartens and nurseries around town. The results were better than the firm had hoped. One of the nurseries reported: “The bear was so popular that most of the children wanted to take it home for an evening.” Another said the bear was the most popular toy in the school.

Based on these data, the company decided to manufacture and market 1,000 of the bears. At the same time, a catchy marketing slogan was formulated: “A Friend for Life.” The bear was marketed as a product a child could play with for years and years. The first batch of 1,000 bears sold out within a week. The company then scheduled another production run, this time for 25,000 bears. Last week, in the middle of the production run, a problem was uncovered. The process of making the bear fur was much more expensive than anticipated. The company is now faced with two options: It can absorb the extra cost and have the simulated fur produced, or it can use a substitute fur that will not last as long. Specifically, the original simulated fur will last for up to seven years of normal use; the less-expensive simulated fur will last for only eight months.

Some of the managers at Glades believe that most children are not interested in playing with the same toy for more than eight months; therefore, substituting the less-expensive simulated fur for the more-expensive fur should be no problem. Others believe that the company will damage its reputation if it opts for the substitute fur. “We are going to have complaints within eight months, and we are going to rue the day we agreed to a cheaper substitute,” the production manager argues. The sales manager disagrees, contending that “the market is ready for this product, and we ought to provide it.” In the middle of this crisis, the accounting department issued its cost analysis of the venture. If the company goes with the more-expensive simulated fur, it will lose $5.75 per bear. If it chooses the less-expensive simulated fur, it will make a profit of $14.98 per bear.

The final decision on the matter rests with Paula Glades. People on both sides of the issue have given her their opinion. One of the last to speak was the vice president of manufacturing, who said, “If you opt for the less-expensive fur, think of what this is going to do to your marketing campaign of ‘A Friend for Life.’ Are you going to change this slogan to ‘A Friend for Eight Months’?” But the marketing vice president urged a different course of action: “We have a fortune tied up in this bear. If you stop production now or go to the more-expensive substitute, we’ll lose our shirts. We aren’t doing anything illegal by substituting the fur. The bear looks the same. Who’s to know?”

QUESTIONS

1. If you were advising Paula, what would you recommend?

Answer 1

The company should have worked on its financials before going ahead with costing decisions for the bear. Since the things can not be reversed as they are now, the decision is whether to go for the new substandard raw material or continue with the existing one. The fats are as they follow

(i) The company can not make losses for long, and will have to be profitable. This calls for either an increase in the selling price or adopt economies of scale by producing more bears to be sustainable.

(ii) The company's reputation is built on the basis of its product quality that is not only durable but also attractive for the customers. It would be wring to say that children would discrds the toy. If it is good, it might be used by younger siblings as well or simply displayed in the children's room for all to see. In this way, use of poor quality material is not going to do any good fir the company.

(iii) Breach of customer trust is something that can doon the prospects of the company. If the people find out that the first lot was better while the later are not worth the price, the sales may dwindle off soon and company would start making losses even after using poor quality material.

It is therefore advisable to continue with the old material even if the company makes losses. Once the product gains it stronghold in the market, the selling price can be revised, and the cost per unit can be brought down with more units being made.The losses made right now can be compensated with gains later. In the meantime the company shouls also keep looking for an intermediate quality raw material, that is cheaper than the existing one so as to make the company break even, but not of poor quality as the other one. It will have little effect on the sales as a quality difference would not be that much visible and palpable, as with poor stuff.