Case Problem


[Page 770 ( continued )]

D IAMANT F OODS C OMPANY

Diamant Foods Company produces a variety of food products, including a line of candies. One of its most popular candy items is Divine Diamonds, a bag of a dozen individually wrapped, diamond-shaped candies made primarily from a blend of dark and milk chocolates, macadamia nuts, and a blend of heavy cream fillings. The item is relatively expensive, so Diamant Foods produces it only for its eastern market, encompassing urban areas such as New York, Atlanta, Philadelphia, and Boston. The item is not sold in grocery or discount stores but mainly in specialty shops and specialty groceries, candy stores, and department stores. Diamant Foods supplies the candy to a single food distributor, which has several warehouses on the East Coast. The candy is shipped in cases of 60 bags of the candy per case. Diamonds sell well, despite the fact that they are expensive, at $9.85 per bag (wholesale). Diamant uses high-quality , fresh ingredients and does not store large stocks of the candy in inventory for very long periods of time.

Diamant's distributor believes that demand for the candy follows a seasonal pattern. It has collected demand data (i.e., cases sold) for Diamonds from its warehouses and the stores it supplies for the past 3 years , as follows:


[Page 771]
 

Demand (cases)

Month

Year 1

Year 2

Year 3

January

192

212

228

February

210

223

231

March

205

216

226

April

260

252

293

May

228

235

246

June

172

220

229

July

160

209

217

August

147

231

226

September

256

263

302

October

342

370

410

November

261

260

279

December

273

277

293


The distributor must hold the candy inventory in climate-controlled warehouses and be careful in handling it. The annual carrying cost is $116 per case. Diamonds must be shipped a long distance from the manufacturer to the distributor, and in order to keep the candy as fresh as possible, trucks must be air-conditioned, shipments must be direct, and shipments are often less than truck-load. As a result, the ordering cost is $4,700.

Diamant Foods makes Diamonds from three primary ingredients it orders from different suppliers: dark and milk chocolate, macadamia nuts, and a special heavy cream filling. Except for its unique shape, a Diamond is almost like a chocolate truffle. Each Diamond weighs 1.2 ounces and requires 0.70 ounce of blended chocolates, 0.50 ounce of macadamia nuts, and 0.40 ounce of filling to produce (including spillage and waste). Diamant Foods orders chocolate, nuts, and filling from its suppliers by the pound. The annual ordering cost is $5,700 for chocolate, and the annual carrying cost is $0.45 per pound. The ordering cost for macadamia nuts is $6,300, and the annual carrying cost is $0.63 per pound. The ordering cost for filling is $4,500, and the annual carrying cost is $0.55 per pound .

Each of the suppliers offers the candy manufacturer a quantity discount price schedule for the ingredients, as follows:

Chocolate

 

Macadamia Nuts

 

Filling

Price

Quantity (lb.)

 

Price

Quantity (lb.)

 

Price

Quantity (lb.)

$3.05

050,000

 

$6.50

030,000

 

$1.50

040,000

2.90

50,001100,000

 

6.25

30,00170,000

 

1.35

40,00180,000

2.75

100,001150,000

 

5.95

70,000+

 

1.25

80,000+

2.60

150,000+

           

Determine the inventory order quantity for Diamant's distributor. Compare the optimal order quantity with a seasonally adjusted forecast for demand. Does the order quantity seem adequate to meet the seasonal demand pattern for Diamonds (i.e., is it likely that shortages or excessive inventories will occur)? Can you identify the causes of the seasonal demand pattern for Diamonds? Determine the inventory order quantity for each of the three primary ingredients that Diamant Foods orders from its suppliers.




Introduction to Management Science
Introduction to Management Science (10th Edition)
ISBN: 0136064361
EAN: 2147483647
Year: 2006
Pages: 358

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