CASE

Blanchard Importing and Distributing Co. Inc.

Production Planning and Control

Prof. Bongju Jeong

Production Planning and Control

Company Overview
Blanchard Importing and Distributing Co. Inc
Distributor and Bottler of alcoholic beverages
Expect 20% of before-tax return on any money which is put into wine merchandizing Inability to hire experienced wine salesman and build up an adequate inventory of wines

A reduction in inventory level is the only substantial source of

fund available
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Prof. Bongju Jeong

Production Planning and Control

Company Overview
A Balance Sheet
Exhibit 1 Assets Current assets Cash A/R (net) Inventory Prepaid expenses Total current assets Fixed assets Plant and equipment net of depreciation Registered trademarks Total fixed assets Total assets Balance Sheet, January 31, 1972 ( $ thousands) Equity Current liabilities Payroll withheld Unsecured notes payable Accounts payable Federal distilled spirits taxes payable Accured taxes Accured expenses Total current liabilities

$24 483 1,050 32 1,589

$1 809 173 337 40 11 1371 64 1,435 100 349 $1,884

287 Long-term debt Total liabilities 8 Stockholders'equity 295 Capital stock Retained earning $1,884 Total equity

Prof. Bongju Jeong

Production Planning and Control

Company Overview
Product line
A full-line alcoholic beverage house that distributed both imported and
domestic goods including wine, beer, spirits, cordials, and premixed cocktails

Blanchard purchased pre-bottled goods (called uncontrolled stock)

Controlled stock, those items that Blanchard bottled and sold under its own brands and private labels 158 products

Size : 25 items in half gallons, 63 items in quarts, 42 items in fifths, 12

items in pints and 16 items in half-pints

Prof. Bongju Jeong

Production Planning and Control

Warehouse Layout

Prof. Bongju Jeong

Production Planning and Control

Cost Factors
Setup Costs (S) : Setup cost per bottle run of an item
S = Blending setup cost + size changeover cost + label changeover cost +
order processing cost Blending set up cost : Actual cost of labor for blending during rectification and is different for each item Size changeover cost : Actual cost of labor to reset all machines for a change in bottle size and is a constant $8.85 for all 158 items Label changeover cost : Average cost of labor to reset labeling machine

for a change in labels and is a constant $11.78 for all 158 items
Order processing cost : Average cost of administrative labor to process an order for a bottling run and is a constant $51.43 for all 158 items
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Prof. Bongju Jeong

Production Planning and Control

Cost Factors
Unit cost (C) : Cost per case of bottles

C = Materials cost + Bottling labor + fixed overhead allocation + variable

overhead + customs duty + federal distilled spirits tax + federal rectification tax
Materials cost : Cost of raw bulk, bottles, caps, and labels
Bottling labor : Cost of part-time bottling line labor per case of bottles produced and is a constant $0.10 per case for all 158 items

Fixed overhead allocation : Total company fixed overhead for the year divided by
the number of cases sold per year and is a constant $ 1.31 per case for 100 158 items
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Prof. Bongju Jeong

Production Planning and Control

Cost Factors
Variable overhead : Total direct expense (other than material and direct labor

costs) resulting from production of one case of an item and is a constant $0.50
per case for all 158 items Customs duty : Charge on imported spirits and varies with the United States and varies with the alcoholic content of the beverage Federal distilled spirits tax : IRS tax on all spirits sold in the united states and varies with the alcoholic content of the beverage Federal rectification tax : IRS tax on certain mixed beverages and varies with the alcoholic content of the item
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Prof. Bongju Jeong

Production Planning and Control

Cost Factors
Carrying cost percentage (K) : annual cost of an item
K = Cost of capital + other carrying costs

Cost of capital : 9% for all items

Other carrying costs (including estimated costs of obsolescence, shrinkage, insurance, and year-end inventory tax) : 2.5% for all items
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Prof. Bongju Jeong

Production Planning and Control

Cost Factors
Exhibit 3 Cost and Price Data summary (dollars per case) MacCoy & Blanchard's8 Blanchard's MacCoy 0 80 Proof Gin 86 Proof Proof Vodka Scotch Wholesale price Materials-beverage Materials-packaging Direct labor State tax Federal distilled spirits tax Federal rectification tax Customs duty Variable overhead Fixed overhead allocation Full unit cost Profit before income tax $43.99 0.93 1.27 0.1 10.08 25.2 $43.99 1.08 1.27 0.1 10.08 25.2 $57.39 4.46 1.27 0.1 10.08 27.09 1.55 0.5 1.31 46.36 11.03 Triple 7 86 Proof Blended Whiskey $49.87 2.52 1.27 0.1 10.08 27.09 0.76 0.5 1.31 43.63 6.24 Blanchard's 80 Proof Ron Cores Rum $47.39 2.74 1.27 0.1 10.08 25.2

0.5 1.31 39.39 4.6

50 1.31 39.54 4.45

0.5 1.31 41.2 6.19

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Prof. Bongju Jeong

Production Planning and Control

Recent Sales
Monthly Sales Data
Exhibit 5 Monthly Sales Data, February 1971-May 1972 Cases of Quart Bottles Feb. Blanchard's 80 proof Vodka 1971 1972 Blanchard's 80 proof Gin 1971 1972 MacCoy & MacCoy 86 proof Scotch 1971 1972 Triple 7 86 proof Blended Whiskey 1971 1972 Blanchard's 80 proof Ron Cores Rum 1971 1972 128 210 51 166 79 82 163 177 10 11 March April May 136 303 52 142 82 68 180 163 34 28 233 275 74 133 151 66 198 162 44 61 219 463 157 213 66 38 183 256 26 55 June 284 July 343 Aug. 368 Sept. 230 Oct. 162 Nov. 246 Dec. 252 Jan. 114 2,715 Year Total

150

257

179

83

72

89

181

42 1,387

127

96

85

61

67

103

131

39 1.087

217

207

186

171

205

266

257

654 2,886

33

35

51

16

15

26

43

22

355

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Prof. Bongju Jeong

Production Planning and Control

EOQ/ROP Calculation
EOQ and ROP
Exhibit 4 EOQ and ROP Calculation Sheet Data EOQ Blending All Other Setup Setup Cost Costs Blanchard's 80 proof Vodka Blanchard's 80 proof Gin MacCoy & MacCoy 86 proof Scotch Triple 7 86 proof Blended Whiskey Blanchard's 80 proof Ron Cores Rum $1.15 $1.08 $3.24 $2.62 $2.33 $72.06 $72.06 $72.06 $72.06 $72.06 Total Annual % Setup Demand Carrying Cost (S) (R) Cost (K) $73.21 $73.14 $73.50 $74.68 $74.39 2455 1421 800 3096 449 11.50% 11.50% 11.50% 11.50% 11.50% Unit Cost C $29.31 $29.46 $36.28 $33.55 $31.12
2 RS CK

ROP
3 .5 R 52

327 248 170 346 137

165 96 54 208 30

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What is the role of Hank Hatch?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

Where should Hank start?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What is the purpose of the formal system?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

Do you think that the costs are relevant?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What happens to EOQ with the corrected costs?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What are Bob and Eliot currently doing?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

Why are they ignoring the formal system?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What are the weaknesses of an EOQ system in Blanchard situation?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What are the problems of the current system used by Bob and Eliot?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What are the impacts of seasonality at Blanchard?

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Prof. Bongju Jeong

Production Planning and Control

Discussion

What are your recommendations to Toby Tyler?

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Prof. Bongju Jeong

Production Planning and Control

Wrap-up

EOQ System vs. Fixed-Interval Ordering System

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Prof. Bongju Jeong