Managing Business Operations

Case Analysis: Blanchard Importing and Distributing Co. Inc. (HBS Case 9 - 673 - 033)

Submitted by: Tushar Kothavale (130) NMIMS, FT MBA 2009-2011

1) Correct the Economic Order Quantity (EOQ) and Reorder point (ROP) quantities for each of the five items mentioned in the case. We first predict the annual demand for the year 1972 based on trend for 4 months of 1972 based on corresponding months of 1971.Calculations for Annual demand (R):The assumption made here is that the same trend for sales as that for the four months of 1972 would be followed for the rest of the months of the 1972.

Sales prediction for annual demand for year 1972

  Feb Mar Apr May

Total Sales

Percentage Change over

1971

Annual Demand

Vodka              1971 128 136 233 219 716   24551972 210 303 275 463 1251 74.72 4289

Gin              1971 51 52 74 157 334   14211972 166 142 133 213 654 95.81 2782

Scotch              1971 79 82 151 66 378   8001972 82 68 66 38 254 -32.80 538

Whiskey              1971 163 180 198 183 724   30961972 177 163 162 256 758 4.70 3241

Rum              1971 10 34 44 26 114   4491972 11 28 61 55 155 35.96 610

Calculations for Setup cost (S):

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Size changeover cost = (cost of resetting all machinery for change in bottle size/ avg. no. of different items of given size processed between size changeover)= 23000 / (52X7X10)= $6.3186 per changeover

Label changeover cost = Labour cost incurred while label changeover process= (23000X0.5X8*)/(52X7) + 5X2.5X0.5= $10.2 per labour changeover

*Assumption each working day is of 8 hrs.

Order Processing cost = 18000/ 350= $51.43 per order.

All figures in $Blending Setup

Cost

Size changeover cost

Labour changeover cost

Order processing cost

Total setup cost (S)

Blanchard's 80 proof Vodka

1.15 6.32 10.2 51.43 69.10

Blanchard's 80 proof Gin

1.08 6.32 10.2 51.43 69.03

MacCoy & MacCoy 86 proof Scotch

3.24 6.32 10.2 51.43 71.19

Triple 7 86 proof Blended Whiskey

2.62 6.32 10.2 51.43 70.57

Blanchard's 80 proof Ron Cores Rum

2.33 6.32 10.2 51.43 70.28

Calculations for Unit cost (C):Fixed overhead allocation = total company fixed overhead for the year/ no. of cases sold

per yr.We calculate total fixed overhead as per data given for 1969.Total fixed overhead = 1.31X(2455+1421+800+3096+449) = $ 10769.51Since fixed overhead remains constant from year to year

Now for year 1972,Fixed overhead allocation = 10769.51 / 11461

2

= $ 0.9396

All figures in $

Blanchard's 80

Blanchard's 80

MacCoy &

MacCoy

Triple 7 86

Blanchard's 80

Proof Vodka

Proof Gin

86 Proof

Scotch

Proof Blende

d Whiske

y

Proof Ron

Cores Rum

Materials—beverage

0.93 1.08 4.46 2.52 2.74

Materials—packaging

1.27 1.27 1.27 1.27 1.27

Total Material cost 2.2 2.35 5.73 3.79 4.01Bottling labour 0.1 0.1 0.1 0.1 0.1

Fixed overhead allocation

0.94 0.94 0.94 0.94 0.94

Variable overhead 0.5 0.5 0.5 0.5 0.5

Customs duty     1.55    

Federal distilled spirits tax

25.2 25.2 27.09 27.09 25.2

Federal rectification tax

      0.76  

Total Unit Cost (C ) 31.14 31.44 41.64 36.97 34.76

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EOQ & ROP Calculations:

ProductAnnual Demand (R )

Setup cost (S )

Unit Cost (C )

Carrying cost percentage (K )

New EOQ

New ROP

EOQ as per 1969

ROP as per 1969

Blanchard's 80 proof Vodka

4289 69.10 31.14 11.5 407 289 327 165

Blanchard's 80 proof Gin

2782 69.03 31.44 11.5 326 187 248 96

MacCoy & MacCoy 86 proof Scotch

538 71.19 41.64 11.5 126 36 170 54

Triple 7 86 proof Blended Whiskey

3241 70.57 36.97 11.5 328 218 346 208

Blanchard's 80 proof Ron Cores Rum

610 70.28 34.76 11.5 146 41 137 30

2) What are the advantages / disadvantages of the EOQ/ ROP system and the system used at Blanchard? Which system do you prefer?

EOQ/ ROP system:

Advantage- 1) The system achieves the balance between two costs ordering cost and the carrying

cost.2) The system keeps track of removals from inventory on a continuous basis, so the

system can provide information on the current level of inventory for each item 3) The system helps meet the anticipated customer demand.

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CK

RS2R

.

52

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4) The system keeps buffers between successive operations to maintain continuity of production (reducing the variability in demand at various stages).

Disadvantage- 1) EOQ/ROP system is essentially a reactive approach; this approach gives only an

order quantity, it does not suggest ways to reduce the inventory.2) For implementation of EOQ a perpetual inventory counting system needs to be in

place, this implies substantial investments which might not be feasible for some.3) Even if EOQ system is in place there is necessity to physically count the

inventory periodically in order to ascertain the accuracy of the system.4) EOQ/ ROP is a static system that is, it does not change automatically with the

change in demand. For every period a new EOQ/ ROP needs to be established.5) It is valid for a single product and not a basket of products. (Assumption made

while deriving the EOQ/ ROP.)6) It does not take into account the other production factors such as times required

for production run (as in this case, all one size items are produced in one go rather than changing the sizes and hence a sufficient quantity of other sizes need to be at hand in order to reduce the stock out situations.)

System used at Blanchard:

Advantages-

1) At Blanchard finished case inventory storage area is not a constraint (as actual finished goods inventory had never occupied more than 50% of the reserved space) hence carrying cost is fixed (i.e. security, heating, cooling etc.) regardless of the volume of the finished goods inventory. Hence Blanchard importing & distributing co. can focus on reduction of other costs.

2) The substantial cost incurred at Blanchard is that of setting up cost in which the size changeover takes one complete day. Hence it is necessary to reduce this time by reducing the size changeover. Bob and Hank are exactly doing the same.

3) Bob and Hank are not following the EOQ/ ROP set as per 1969 as it is now obsolete, the basis on which these values were based was with the certain pattern of demand for items as per 1969 data. Also it did not account for the pattern of production (i.e. all items of same size in one batch). Usage of latest data for predicting demand and accounting for the pattern of production ensures that the setting up costs are low and service level is high.

Disadvantages-

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1) Due to the patter of production of batch wise production based on size as well as to maintain high level of service a higher level of finished goods inventory is being produced, this is tying down the capital in form of inventory.

2) Since substantial amount of funds are locked in the form of the inventory the company’s growth is hindered in terms of expanding business by means of wine merchandising.

We prefer the EOQ/ ROP system as gains from reducing the order/ production size (gains in terms of less value of inventory being produced) which though lead to increase in setup cost far outweigh the gains from Blanchard’s current system (gains in terms of reduction of setup cost) while, costs are that of the value of inventory being produced.

3) What should Hank Hatch recommend to his boss Toby Tyler?

1) The company should install perpetual systems (on-line systems) so that the transactions such as stacked cartons list is updated immediately which can aid in transfer of control stock on real time basis. The advantage of on-line systems is that they are always up-to-date.

2) The company can explore the possibilities of reducing the product range in terms of sizes based on profitability of each item as per size.

3) The company should explore the possibility of installing RFID systems that scan the bottle tags and link it to central databases for size and label, blended whiskey combination, ratio of ingredients. This will reduce the need for manual scanning.

4) Exploring the possibility of implementing JIT (Just in Time) system that can reduce the finished goods inventory at substantial level.

5) Follow EOQ/ ROP system and discontinue the practice of production in batches based on item size.

6) The EOQ/ ROP system should be fed the point of sale (here point of dispatch) data in order to make the system more dynamic, the system should be able to forecast the sales and then determine the EOQ/ ROP values automatically.

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