New Balance Athletic Shoes Case

Operations Management and Management Science Case Study Capacity Planning freshly equalizer athletic Shoes Summary crowd together Davis is the president and general manager of unexampled proportionality Athletic Shoes. The Boston, Massachusetts based bon ton began producing corrective tog and archway supports in 1906. late Balance garnered a reputation for quality specialty footwear when in the 1950s it began producing running shoes for men. It is the beginning of 1978 and Mr. Davis has a number of classical decisions to make regarding the future of his growing company. In unexampled-made years the quest for running shoes has experienced explosive growth.The increasing popularity of the sport of running requires James Davis to c arefully evaluate the accuracy of the companys sales forecast. Mr. Davis knows that precise forecasting is the key to providing good-quality service by meeting customer get hold of. Another effect of increasing demand on New Balance is the nece ssity for expansion. Mr. Davis must evaluate a number of options for expanding returnion capacity in order to meet growthd demand for his companys products. This report will attempt to offer James Davis sound advice in regards to the evaluation of sales forecasts and expansion options. We will also present Mr.Davis with an alternate sales forecast and an evaluation of New Balances sales representative network. Analysis Upon reviewing New Balances 1978-1981 domestic sales forecast, it is decided that James Davis may have reason to be apprehensive. Davis needs to be sure that the forecasted sales increases, which range from 117% to 286% of 1977s sales, are truly warranted. Although Davis knows that demand for running shoes is skyrocketing, he should also know that that does not plight sales. The maturing preferences of the shoe consumer have been evident in the ever changing ratings of Runners World magazines top ten shoes.Upon reviewing the lists of top ten shoes we realized that product victimisation is not only a key to New Balances success, but is also a key to success for a majority of its competitors. While only 2 of the top 10 running shoes of 1975 were introduced within a year of being rated, the following two years of ratings were filled with a majority of newly developed products. The 1976 ratings listed 7 of 10 running shoes which had been introduced within a year of being rated, and the 1977 ratings listed 6 of 10 running shoes which had been introduced within a year of being rated as well as 1 of the 10 that had been substantially redesigned.The achievement of new products in Runners World magazines rankings proves that product development is vent to be one of the biggest keys to New Balances future success. While New Balance has a reputation for producing quality footwear, we must urge Mr. Davis to insure that his company stiff on the leading edge of running shoe development. In the past, New Balance has been able to distinguish itself by of fering its shoes in varying widths. While making varying widths available has set the company apart from its competition in the past, we predict that it will eventually become an industry standard.Much of the recent success of New Balance was due to the rave reviews of the newly developed 320. New Balance product designers, work in unison with a maiden distance runner, found that a built up heel wedge and mid mend greatly improved the comfort of the shoe. The design team also reduced the sole thickness of the 320, which in turn reduced the shoe weight and thus the runners level of fatigue associated with their footwear. These are the innovations that New Balance must continue to jump out in if it wishes to meet its forecasted sales.Development of new shoe designs and the use of new materials will allow New Balance to produce the lighter and more flexible shoes the running public desires. Another product development related recommendation we would like to make to New Balance is in regards to its competition. New Balance ass no longer be content following industry leaders such as Adidas and Nike. Although the two large shoe manufacturers produce nearly 70% of the product available, small companies such as New Balance, Brooks, and Etonic have been able to make enormous headway into the market.Adidas and Nike, being larger more top atrocious corporations, will naturally have longer time periods between research and development and product release. We suggest that New Balance take advantage of its smaller size by releasing the types of new products previously detailed at a faster pace than their larger competitors. It is in this area that we feel New Balances demand forecast is flawed. The forecasts short term reliance on current products in the companys shoe line is an error that may cause New Balance sales. As evidenced by the average two year appearance in Runners World ratings, the life span of a running shoe is short.We do not believe that New Balance c an rely on the 320 to carry sales until their new trainer is available (1yr. ) to gain market share. New Balance needs to rapidly release newly developed, state of the art running shoes prior to twain industry leaders to put the company in a position to capture additional market share. In addition to believing that New Balances product mix has been forecasted incorrectly, we also contend that it has been slenderly everyplaceestimated. The following alternate demand forecast estimates overall market demand, as well as demand estimates for specific consumer categories.Please take note of the assumptions that were made in the creation of the forecast. Next, we look at New Balances sales representative network and its relationship to the companys production initiation location. The most important aspects to note concerning New Balances distribution, is the over representation in the northeast, and the beneath representation in the West. While New Balance has been able to maintain a strong market share in the northeast where a majority of its sales representatives are located, the companys market share is low in the west where the largest portion of the running shoe market is located.Due to this under representation, the western sales region represents a great deal of untapped potential for the company. Although having its production facility located in the northeast has protagonisted New Balance build up its market share in that particular region, the company should consider the advantage of having a more westward located facility to help strengthen its presence in the region. Finally, we are going to address New Balances various options for capacity expansion.In addition to running a second monger, alternate sites for new facilities have been located in Lawrence, Massachusetts, the state of Texas, and the country of Ireland. The following table details the pecuniary aspects associated with each expansion option. Beginning with the option of starting a sec ond shift, you can see that Mr. Davis belief that this option is not viable holds true. On the one hand, a second shift is not the best financial decision for New Balance because of both higher expenses (Labor Cost), and level projected earnings due to lower capacity (1500).On the other hand, a second shift is not the best option from a human relations perspective. Mr. Davis has made mention of various concerns regarding company employees such as finding good stitchers and supervisors, guardianship morale high, and preventing unionization. Mr. Davis has also located an available production facility in Ireland. This site does have the advantage of having a lower delve cost, a lower facility cost, lower equipment costs, and savings from both a tax holiday and available grants. While the Ireland location does have certain benefits, there are a number of critical drawbacks.The negative aspects of the Ireland facility are a slightly lower capacity potential, and very costly internati onal freight costs. Both of these factors greatly reduce Irelands estimated after tax earnings, and are the reasons we are recommending Ireland as the second worst choice for New Balance. The next site to be considered is the Lawrence facility. This location has qualities that should greet to New Balance. The Lawrence site is the largest of the companys options, has local government willing to offer relocation assistance, and is close to the Everett St. ocation and its network of material suppliers. In addition to these qualities it has been found that there are a number of local experienced shoe workers in need of work. Although these factors make Lawrence attractive to the company, they are offset by the sites shortcomings. Lawrence has a higher labor costs, moderate rental costs, a short lease term, and a high state tax liability which makes the site the second best choice for New Balance. Texas remains as the last site evaluated, and is the recommended site for New Balance.Alth ough there are some negative aspects in regards to Texas, such as higher materials and command processing overhead costs as well as higher rental costs, they are outweighed by the sites positive points. While moderate labor costs, the absence of state taxes on corporate income and the availability of skilled workers are all good reasons to recommend Texas, it is its westward location which is the key to Texas potential. As mentioned earlier, New Balances lack of presence in the west is costing the company potential market share in an area highly populated with runners.Having a centrally located production facility will no doubt improve its Texas and west coast market shares. Conclusion From the above analysis, we draw the following conclusions 1. New Balances sales forecast is overestimated and their forecasted product mix is in error. The company should use the alternate forecast provided. Additionally, New Balance should rely less on its current shoe models by working towards more rapid product development. 2. In order to develop an accurate demand forecast, particular attention should be paid to the expected growth of both serious and women runners. . There is an effect on regional market share based on the location of the production facility. If New Balance would like to increase market share in regions other than its own it should seriously consider a more westward production facility. 4. After taking both financial and non-financial aspects into consideration, the opening of a Texas facility is recommended. Another benefit of having an additional production facility located in Texas will be the companys ability to fulfill the previously mentioned lack of western regional market share.