Allen County Community College Supply Chain Case Study

Case 5.1 Johnson Toy Company

Located in Biloxi, Mississippi, the Johnson Toy Company is celebrating its seventy-fifth year of business. Amy Johnson, who is president, and Lori Johnson, who is vice president, are sisters and are the third generation of their family to be involved in the toy business. The firm manufactures and sells toys throughout the United States. The toy business is very seasonal, with the majority of sales occurring before Christmas. A smaller peak occurs in the late spring–early summer period, when sales of outdoor items are good.

The firm relies on several basic designs of toys–-which have low profit margins but are steady sellers–-and on new designs of unconventional toys, whose introduction is always risky but promises high profits if the item becomes popular. The firm advertises regularly on Saturday morning television shows for children.

Late last year, just before Christmas, the Johnson Toy Company introduced Jungle Jim the Jogger doll, modeled after a popular television show. Sales skyrocketed, and every retailer’s stock of Jungle Jim the Jogger dolls was sold out in mid-December; the Johnson Company could have sold several million more units if they had been available before Christmas. Based on the sales success of this doll, Amy and Lori made commitments to manufacture 10 million Jungle Jim the Jogger dolls this year and to introduce a wide line of accessory items, which they hoped every doll owner would also want to have. Production was well under way, and many retailers were happy to accept dolls in January and February because they were still a fast-selling item, even though the toy business itself was sluggish during these months.

Unfortunately, in the aftermath of a Valentine’s Day party in Hollywood, the television actor who portrayed Jungle Jim the Jogger became involved in a widely publicized sexual misadventure, the details of which shocked and disgusted many readers and TV viewers, and we would be embarrassed to describe them. Ratings of the television series plummeted, and within a month it had been dropped from the air. On March 1, the Johnson Company had canceled further production of the Jungle Jim the Jogger dolls, although it had to pay penalties to some of its suppliers because of the cancellation. The company had little choice because it was obvious that sales had stopped.

On April 1, a gloomy group assembled in the Johnson Company conference room. Besides Amy and Lori, those present included Carolyn Coggins, the firm’s sales manager; Cheryl Guridi, the logistics manager; Greg Sullivan, the controller; and Kevin Vidal, the plant engineer. Coggins had just reported that she believed there were between 1.5 million and 2 million Jungle Jim the Jogger dolls in retail stores, and Sullivan had indicated there were 2,567,112 complete units in various public warehouses in Biloxi. Vidal said that he was still trying to count all the unassembled component parts, adding that one problem was that they were still being received from suppliers, despite the cancellation.

Amy said, “Let’s wait a few weeks to get a complete count of all the dolls and all the unassembled component parts. Lori, I’m naming you to work with Carolyn and Kevin to develop recommendations as to how we can recycle the Jungle Jim item into something we can sell. Given the numbers involved, I’m willing to turn out some innocuous doll and sell it for a little more than the cost of recycling because we can’t take a complete loss on all these damned Jungle Jim dolls! Greg says we have nearly 2.6 million of them to play with, so let’s think of something.”

“Your 2.6-million figure may be low,” said Coggins. “Don’t forget that there may be nearly 2 million in the hands of the dealers and that they will return them.”

“Return them?” questioned Amy. “They’re not defective. That’s the only reason we accept returns. The retailers made a poor choice. It’s the same as if they ordered sleds and then had a winter with no snow. We are no more responsible for Jungle Jim’s sex life than they are!”

Cheryl Guridi spoke up: “You may be underestimating the problem, Amy. One of our policies is to accept the dealer’s word as to what is defective, and right now there are a lot of dealers out there claiming defects in the Jungle Jim dolls. One reason that Kevin can’t get an accurate count is that returned dolls are showing up on our receiving dock and getting mixed up with our in-stock inventory.”

“How can that happen?” asked Amy, angrily. “We’re not paying the freight, also, are we?”

“So far, no,” responded Guridi. “The retailers are paying the freight just to get rid of them.”

“We’ve received several bills in which the retailer has deducted the costs of the Jungle Jim dolls and of the freight for shipping them back from what he owes us,” said Sullivan. “That was one item I wanted to raise while we were together.”

“We can’t allow that!” exclaimed Amy.

“Don’t be so sure,” responded Sullivan. “The account in question has paid every bill he’s owed us on time for 40 years. Do you want me to tell him we won’t reimburse him?”

“This is worse than I imagined,” said Amy. “Just what are our return policies, Lori?”

“Well, until today, I thought we had only two,” said Lori. “One for our small accounts involves having our salespeople inspect the merchandise when they make a sales call. They can pick it up and give the retailer credit off the next order.”

“Sometimes they pick up more than defective merchandise,” added Coggins. “Often, they’ll take the slow movers out of the retailer’s hands. We have to do that as a sales tool.”

“That’s not quite right,” interjected Vidal. “Sometimes, the returned items are just plain shopworn—scratched, dented, and damaged. That makes it hard for us because we have to inspect every item and decide whether it can be put back into stock. When we think a particular salesperson is accepting too many shopworn items, we tell Carolyn, although it’s not clear to me that the message reaches the salespeople in the field.”

“I wish I had an easy solution,” said Coggins. “We used to let our salespeople give credit for defects and then destroy everything out in the field. Unfortunately, some abused the system and resold the toys to discount stores. At least now we can see everything we’re buying back. I agree we are stuck with some shopworn items, but our salespeople are out there to sell, and nothing would ruin a big sale quicker than for our salespeople to start arguing with the retailer, on an item-by-item basis, as to whether something being returned happens to be shopworn.”

“Is there a limit to what a salesperson is permitted to allow a retailer to return?” asked Amy.

“Well, not until now,” responded Coggins. “But with this Jungle Jim snafu we can expect the issue to occur. In fact, I have several phone queries on my desk concerning this. I thought I’d wait until after this meeting to return them.”

“Well, I think we’d better establish limits–-right now,” said Amy.

“Be careful,” said Lori. “When I was out with the salespeople last year, I gathered the impression that some were able to write bigger orders by implying that we’d take the unsold merchandise back, if need be. If we assume that risk, the retailer is willing to take more of our merchandise.”

“Are there no limits to this policy?” asked Amy.

“Informal ones,” was Coggins’s response. “It depends on the salesperson and the account. I don’t think there is much abuse, although there is some.”

“How do the goods get back to us under these circumstances?” asked Amy.

“The salespeople either keep them and shuffle them about to other customers or–-if it’s a real loser–-they ask us what to do,” replied Coggins.

“Greg,” said Amy, “do our records reflect these returns and transfers?”

“Oh, fairly well,” was his response. “We lose track of individual items and quantities, but if the salesperson is honest–-and I think ours are–-we can follow the dollar amount of the return to the salesperson’s inventory, to another retailer, or back here to us. We do not have good controls on the actual items that are allowed for returns. Kevin and I have difficulty in reconciling the value of returned items that wind up back here. Carolyn’s records say they’re okay for resale, and Kevin says they’re too badly damaged.”

“I insist on the reconciliation before we allow the goods back into our working inventory,” said Guridi. “That way I know exactly what I have here, ready to ship.”

“You know, I’m finding out more information about inventories and returns than I thought existed,” said Amy.

“Too many trips to Paris, dearest,” said Lori, and the others all suppressed smiles.

Amy decided to ignore Lori’s remark, and she looked at Guridi and asked, “Are you satisfied with your control over inventories, Cheryl?”

“I have no problem with the ones here in Biloxi,” was Guridi’s response, “but I have an awful time with the inventories of return items that salespeople carry about with them, waiting to place them with another retailer. I’m not always certain they’re getting us top dollar, and each salesperson knows only his or her own territory. When Carolyn and I are trying to monitor the sales of some new item, we never know whether it’s bombing in some areas and riding around in salespeople’s cars as they try to sell it again.”

“Have you now described our returns policy, such as it is?” asked Amy, looking at everybody in the room.

“No,” was the response murmured by all. Sullivan spoke: “For large accounts we deduct a straight 2 percent off wholesale selling price to cover defectives, and then we never want to hear about the defectives from these accounts at all.”

“That sounds like a better policy,” said Amy. “How well is it working?”

“Up until Jungle Jim jogged where he shouldn’t, it worked fine. Now a number of large accounts are pleading ‘special circumstances’ or threatening to sue if we don’t take back the dolls.”

“They have no grounds for suit,” declared Amy.

“You’re right,” said Coggins, “but several of their buyers are refusing to see our sales staff until the matter is resolved. I just heard about this yesterday and meant to bring it up in today’s meeting. I consider this very serious.”

“Damn it!” shouted Amy, pounding the table with her fist. “I hope that damned jogger dies of jungle rot! We’re going to lose money this year, and now you’re all telling me how the return policy works, or doesn’t work, as the case may be! Why can’t we just have a policy of all sales being final and telling retailers that if there is an honest defect they should send the goods back here to us in good old Biloxi?”

“Most of the small accounts know nothing about shipping,” responded Vidal. “They don’t know how to pack, they don’t know how to prepare shipping documents, and they can’t choose the right carriers. You ought to see the hodgepodge of shipments we receive from them. In more cases than not, they pay more in shipping charges than the products are worth to us. I’d rather see them destroyed in the field.”

Sullivan spoke up. “I’d object to that. We would need some pretty tight controls to make certain the goods were actually destroyed. What if they are truly defective, but improperly disposed of, then fall into the hands of children who play with them and the defect causes an injury? Our name may still be on the product, and the child’s parents will no doubt claim the item was purchased from one of our retailers. Will we be liable? Why can’t we have everything come back here? We have enough volume of some returned items that we could think in terms of recycling parts.”

Vidal responded, “Recycling is a theoretical solution to such a problem, but only in rare instances will it pay. In most instances the volume is too small and the cost of taking toys apart is usually very high. However, the Jungle Jim product involves such a large volume that it is prudent and reasonable to think up another product that utilizes many of the parts. It would even pay to modify some machines for disassembling the Jungle Jim doll.”

“As I listen to this discussion,” said Lori, “one fact becomes obvious: We will never have very good knowledge about volume or patterns of returns until it’s too late. That’s their very nature.”

Guridi asked, “Could we have field representatives who do nothing but deal with this problem? The retailers would be told to hang onto the defectives until our claims reps arrive.”

Coggins replied, “That would be expensive, because most retailers have little storage space for anything and would expect our claims rep to be there immediately. Besides, it might undermine our selling efforts if retailers could no longer use returns to negotiate with as they talked about new orders.”

“That may be,” interjected Amy, “but we cannot continue having each salesperson tailoring a return policy for each retailer. That’s why we’re in such a mess with the jogger doll. We have to get our return policy established, made more uniform, and enforced. We cannot go through another fiasco like Jungle Jim the Jogger for a long time. We’re going to lose money this year, no matter what, and I have already told Kevin that there will be virtually no money available for retooling for next year’s new products.”

Questions

1. From the standpoint of an individual concerned with accounting controls, discuss and evaluate Johnson Toy Company’s present policies for handling returned items.

2. Answer Question 1, but from the standpoint of an individual interested in marketing.

3. Propose a policy for handling returns that should be adopted by the Johnson Toy Company. Be certain to list circumstances under which exceptions would be allowed. Should it apply to the Jungle Jim dolls?

4. Should this policy, if adopted, be printed and distributed to all of the retailers who handle Johnson Toy Company products? Why or why not? If it should not be distributed to them, who should receive copies?