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

Percentage Annual
Total Sales
  Feb Mar Apr May Change over 1971 Demand
Vodka              
1971 128 136 233 219 716   2455
1972 210 303 275 463 1251 74.72 4289
Gin              
1971 51 52 74 157 334   1421
1972 166 142 133 213 654 95.81 2782
Scotch              
1971 79 82 151 66 378   800
1972 82 68 66 38 254 -32.80 538
Whiskey              
1971 163 180 198 183 724   3096
1972 177 163 162 256 758 4.70 3241
Rum              
1971 10 34 44 26 114   449
1972 11 28 61 55 155 35.96 610

Calculations for Setup cost (S):

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)

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 = 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.

Blending Size Labour Order Total

All figures in $ Setup changeover changeover processing setup cost
Cost cost cost cost (S)
Blanchard's 80
1.15 6.32 10.2 51.43 69.10
proof Vodka
Blanchard's 80
1.08 6.32 10.2 51.43 69.03
proof Gin
MacCoy &
MacCoy 86 proof 3.24 6.32 10.2 51.43 71.19
Scotch
Triple 7 86 proof
2.62 6.32 10.2 51.43 70.57
Blended Whiskey
Blanchard's 80
proof Ron Cores 2.33 6.32 10.2 51.43 70.28
Rum

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)
= $ 10769.51
Since fixed overhead remains constant from year to year

Now for year 1972,

Fixed overhead allocation = 10769.51 / 11461
= $ 0.9396

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 MacCoy
Blanchard' Blanchard Triple 7 Blanchard
&
s 80 's 80 86 's 80
MacCoy
All figures in $
Proof Proof Ron
Proof 86 Proof
Proof Gin Blended Cores
Vodka Scotch
Whiskey 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 4.01
Bottling labour 0.1 0.1 0.1 0.1 0.1
Fixed overhead
0.94 0.94 0.94 0.94 0.94
allocation
Variable overhead 0.5 0.5 0.5 0.5 0.5

Customs duty     1.55    

Federal distilled spirits
25.2 25.2 27.09 27.09 25.2
tax
Federal rectification tax       0.76  

Total Unit Cost (C ) 31.14 31.44 41.64 36.97 34.76

EOQ & ROP Calculations:

Product Annual Setup Unit Carrying EOQ ROP

2 RS 3.5
R
3
CK 52
 New New
cost EOQ ROP
Deman as per as per
cost (S ) Cost (C ) percentage
d (R ) 1969 1969
(K )

Blanchard's
80 proof 4289 69.10 31.14 11.5 407 289 327 165
Vodka
Blanchard's
2782 69.03 31.44 11.5 326 187 248 96
80 proof Gin
MacCoy &
MacCoy 86 538 71.19 41.64 11.5 126 36 170 54
proof Scotch
Triple 7 86
proof
3241 70.57 36.97 11.5 328 218 346 208
Blended
Whiskey
Blanchard's
80 proof
610 70.28 34.76 11.5 146 41 137 30
Ron Cores
Rum

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.
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.

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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-

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.

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 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.