Problem: Otis Toy Trains Explores the Supply Chain

Otis Toy Trains of Minneapolis, Minnesota, was a landmark company in the toy business. Since the 1900s, it had been responsible for building electrical and steam-driven toy trains. Since the 1950s, Otis trains had developed a major presence on children's television shows. Every person (especially boys) knew about Otis toy trains and nearly everyone wanted one. For many kids growing up in the 1960s to the 1980s, waking up on Christmas day and finding an Otis toy train set under the tree was a dream come true. However, the 1990s had not been good to Otis Toy Trains. The preferences of many children had changed. Instead of toys, what many children wanted was a game playing system (like Sony's PS2 or Microsoft Xbox or Nintindo's GameBoy Advanced). After a lot of investigation and assessment, the management at Otis had decided to reorient the product and the market. Consequently, it decided to target the adult male customer in the 30 to 50 year age bracket. This market was selected for several reasons. First, they had grown up with Otis toy trains and, as a result, Otis had excellent brand recognition among these buyers. Second, since Otis had decided to maintain the bulk of its production facilities in the areas around Minneapolis (the major production facility was located in Rochester, Minnesota), it needed a buyer who was willing to pay the premium now demanded by Otis Toy Trains for its products.

Adult males in the 30 to 50 year age bracket typically had the income that supported luxury buys such as the Otis toy trains. Finally, the new target market was attractive because they tended to buy more than one system and they tended to buy a large number of accessories with their toy train purchases. To sell to this new market, Otis introduced in 1995 the Otis Premium Trains of the Past series. This was a line of highly detailed, highly accurate trains drawn from critical points in North American history. The first launch consisted of the De Witt Clinton Rocket (the first train operated in the United States), the Abraham Lincoln train (a train model based on the train coaches that were used to transport the body of the recently assassinated President Lincoln from Washington, DC, to Springfield, IL, for final burial), the Zephyr (the famous streamlined train that ran between Chicago and Denver during the 1930s), and the Orange Blossom Special. Launched in limited numbers, this first series was an unqualified success. Subsequent launches were almost as successful.

Over this time, the designers at Otis Toy Trains developed and refined the skill of identifying attractive train series and of designing products that were detailed, attractive, accurate, and highly evocative of past times. By 2010, however, Otis Toy Trains found itself faced by the challenge of dealing with increasing labor costs. It was during this time period that the Joyous Luck Prosperity Toy Company (JLPTC) of China approached the management of the Otis Toy Train Company with a proposal that had already secured the support of Otis corporate accountants. They proposed to work closely with the designers of the Otis Toy Train Company with the goal of taking over the bulk of production of the Otis Premium Trains of the Past series. What JLPTC offered Otis was a landed price per unit that was between 40 and 60 percent lower than current manufacturing costs. This was a price that was too good to pass up.

QUESTIONS

1. Assume that you are hired as a consultant to help Otis Toy Trains. What recommendations would you give to the management of Otis regarding the attractiveness of this proposal?

2. Assume that Otis decided to accept this proposal. Identify and discuss the most appropriate relationship that you would recommend for Otis and JLPTC. What risks are present in this proposal? How could Otis protect itself from these risks?