Spira Gira plc have been making wooden childrens toys for five years. The founders of the company were two friends from university Mork and Mindy. Mork studied industrial design and Mindy business so when they graduated they decide to set up a business that could use both of their talents. They decided to focus on wooden toys after undertaking some market research. This research revealed that there was a significant gap in the toy market for safe, well-made and educational toys.
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When they set up the business they set some basic principles to guide their development. The first was that all the products they developed and made had to be environmentally sustainable. The second was that they would never use imported wood as much of this comes from rainforest areas. They located their factory near their homes in a rural area on the border between Wales and England. At the time this area had high local unemployment due to the reduction in the farming industry. Recently however new organic food businesses have set up in the area and there is competition for skilled workers.
Over the five years that they have been operating their business has grown quite quickly. They now employ 120 people in their UK factory as well as a sales team of three people, two accountants and 5 administrators. Mork and Mindy still make all the business strategy decisions, do all the product development and much of the day to day running of the business.
5 Year Financial History (figures in Millions)
Indicator
2003
2004
2005
2006
2007
Sales Income
1.2
1.8
2.1
2.6
3.4
Cost of Sales
(1)
(1.4)
(1.6)
(1.9)
(2.3)
Gross Profit
0.2
0.4
0.5
0.7
1.1
Operating Expenses
(0.2)
(0.3)
(0.4)
(0.3)
(0.3)
Operating Profit
0
0.1
0.1
0.4
0.8
Return on Capital Employed
0%
4%
2%
7%
10%
Gearing
20%
15%
18%
24%
30%
They have two product ranges. “Wooden Tops” are toys for very young children based on farm and wild animals. “Brain Trees” are puzzle toys for older children and adults. These products are sold mainly through independent ‘quality’ toy shops in the UK. The only products they export are Brain Trees which are sold in a shop at the German Design Museum in Berlin. Both product ranges have won awards from trade associations and educational charities for their design, quality and innovative characteristics. Wooden Tops were voted ‘educational toy of the year’ by the British Child Development Society in 2006. The selling prices of the products are quite high compared to the average price of toys in the shops.
The products are made using very traditional methods. Wood is bought in from local suppliers and shaped into the components for each toy on machines. The toys are then assembled and painted by hand. Some of these processes could be automated but Mork and Mindy feel that customers value the individuality that the hand made processes give their products. In 2007 total sales were 125,000 units (75,000 Wooden Tops and 50,000 Brain Trees).
The cost breakdown of a typical product from each range is shown in the table below:
Wooden Tops
Brain Trees
Direct Materials
4.50
5.00
Direct Labour
5.50
6.80
Production Overheads
2.00
1.50
Sales Price
25
30
Contribution
13
16.70
Allocated Overheads
8
8
Distribution and Delivery
1.5
1.5
The company’s main competitor is the Swedish toy manufacturer Brio. Brio are most famous for their wooden train toys but also make a range of other toys – not all of them made from wood. Brio are a large international company who sell their products all over the world in toy shops and department stores as well as through online retailers. Brio’s toys are well made but are very traditional in design. None of their toys are hand made nor do they guarantee the sustainability of the materials they use. Other toy manufacturer’s products tend to be made from plastic and Mork and Mindy do not see them as direct competitors. These plastic toys tend to be more modern in design but are not sustainable in the same way as Spira Gira’s products.
Mork and Mindy think their company is at a turning point and they need to decide on a strategy that will allow them to develop further. They doubt whether it is possible for the business to grow much further using their present strategy and retail outlets.
At a recent industry conference Mork was approached by the purchasing manager for a large, international toy retailer. Toys4U operate in 15 countries worldwide and are the largest retailer of toys in the world. In the countries in which they operate they typically have a 30% market share. Attracted by the excellent design of Spira Gira’s products, Toys4U have suggested they stock the products in their 24 UK stores and if this is successful that they be stocked worldwide. Their estimate is that during the UK trial they would require around 150,000 units per annum rising to 400,000 units if the products were to be stocked in all their stores worldwide. Toys4U would expect to be able to purchase the units for 15% less than the prices Spira Gira charge their current customers. They would collect the units from Spira Gira’s factory and distributed them using their own transport.
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Mork has undertaken some analysis of the Toys4U offer. This suggests that to fulfill the demand for the full 400,000 units would require an investment of £6,000,000 in buildings and machinery. In addition to produce at this level the painting and assembly of the toys would need to be automated and additional sources of wood would need to be found.
In addition an analysis of the costs of supplying products to Toys4U and their usual retail outlets has been prepared by the accountant
Toys4U
Retailer
Average order value (before any discounts)
39,000
1,500
Average products per order
15
5
Warehouse collection cost per product
£1.50
£2.50
Frequency of orders
monthly
3 monthly
Average discounts granted
15%
0
Cost per order processed
£1200
£100
Delivery cost per order
£500
£250
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