Operations Management and Management Science Case Study Capacity Planning New Balance Athletic Shoes Summary James Davis is the president and general manager of New Balance Athletic Shoes. The Boston, Massachusetts based company began producing corrective shoes and arch supports in 1906. New Balance garnered a reputation for quality specialty footwear when in the 1950’s it began producing running shoes for men. It is the beginning of 1978 and Mr. Davis has a number of important decisions to make regarding the future of his growing company. In recent years the demand for running shoes has experienced explosive growth.
The increasing popularity of the sport of running requires James Davis to carefully evaluate the accuracy of the company’s sales forecast. Mr. Davis knows that precise forecasting is the key to providing good-quality service by meeting customer demand. Another effect of increasing demand on New Balance is the necessity for expansion. Mr. Davis must evaluate a number of options for expanding production capacity in order to meet increased demand for his company’s 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 Balance’s sales representative network. Analysis: Upon reviewing New Balance’s 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 1977’s sales, are truly warranted. Although Davis knows that demand for running shoes is skyrocketing, he should also know that that does not guarantee sales. The maturing preferences of the shoe consumer have been evident in the ever changing ratings of Runner’s World magazine’s top ten shoes.
Upon reviewing the lists of top ten shoes we realized that product development is not only a key to New Balance’s 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 Runner’s World magazine’s rankings proves that product development is going to be one of the biggest keys to New Balance’s future success. While New Balance has a reputation for producing quality footwear, we must urge Mr. Davis to insure that his company remains on the leading edge of running shoe development. In the past, New Balance has been able to distinguish itself by offering 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, working in unison with a world-class distance runner, found that a built up heel wedge and midsole 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 runner’s level of fatigue associated with their footwear. These are the innovations that New Balance must continue to excel 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 can 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, smaller 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 heavy 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 Balance’s demand forecast is flawed. The forecast’s short term reliance on current products in the company’s shoe line is an error that may cause New Balance sales. As evidenced by the average two year appearance in Runner’s World ratings, the life span of a running shoe is short.
We do not believe that New Balance can 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 both industry leaders to put the company in a position to capture additional market share. In addition to believing that New Balance’s product mix has been forecasted incorrectly, we also contend that it has been somewhat overestimated. 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 Balance’s sales representative network and its relationship to the company’s production facility location. The most important aspects to note concerning New Balance’s distribution, is the over representation in the northeast, and the under 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 company’s 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 helped 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 Balance’s various options for capacity expansion.
In addition to running a second shift, 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 financial aspects associated with each expansion option. Beginning with the option of starting a second 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 lower 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, keeping 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 labor 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 international 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 appeal to New Balance. The Lawrence site is the largest of the company’s 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 site’s 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.
Although there are some negative aspects in regards to Texas, such as higher materials and 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 Balance’s 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 company’s ability to fulfill the previously mentioned lack of western regional market share.