caseblani

Blanchard Importing and Distributing II1

After his first year at the Harvard Business School, Hank Hatch accepted summer employment with Blanchard Importing and Distributing, a Boston firm that dealt in the processing and wholesaling of alcoholic beverages. Early in June 1972 Hank met with Toby Tyler, the company's general manager, who was a recent graduate of the Harvard Business School. Toby described the initial tasks that he wanted Hank to perform:

Hank, during your first few days at Blanchard, I'd like you to become familiar with the general scope of operations of the firm. As you investigate our various product lines, I think you will find that the most rapidly expanding demand for alcoholic beverages is in the wine market. At the present time we estimate that we can earn a before-tax return of 20% on any money we put into wine merchandising. However, to date, Carmen Petrillo, our Wine Division manager, and Dave Rubin, the Sales Department manager, have been unable to exploit this trend due to lack of funds needed to hire experienced wine salesmen and build up an adequate inventory of wines. Here is a recent balance sheet which shows that we have just about reached the limit of our borrowing capability [see Exhibit 1]. It appears that a reduction in inventory level is the only substantial source of funds available to us. That's where you come in.

After you've become acquainted with our operations, I'd like you to spend some time analyzing the inventory situation and recommend ways in which we can economize in that area. Initially, you can look into the method we use in scheduling production runs of those beverages which we bottle ourselves. The current scheduling system, which was initiated in October 1969, calls for bottling of an Economic Order Quantity (EOQ) of an item when the stock level of that item falls below a fixed Reorder Point (ROP). This Reorder Point trigger level is equal to 3½ weeks' worth of the average weekly demand throughout the year ending October 31, 1969. I suspect that many of the EOQ and ROP quantities calculated in 1969 should be recalculated based on changes in annual demand over the past 2½ years. As a first assignment you can update the EOQ and ROP figures. While you're at it, keep thinking about ways in which we can reduce expenses and cut back on unnecessarily high stock levels — any cash which can be made available for wine merchandising will be greatly appreciated by Carmen and Dave.

Product LinesDuring the first week of June, Hank learned that Blanchard was a full-line alcoholic beverage house that distributed both imported and domestic goods including wine, beer, distilled spirits, cordials, and premixed cocktails. Blanchard purchased prebottled goods (called

1 Source: Harvard Business School case 9-673-033. Used with permission.

uncontrolled stock) for resale to retail outlets at wholesale prices. Uncontrolled stock accounted for 45% of the firm's annual sales. The remaining 55% of Blanchard's revenue was attributed to sale of controlled stock, those items that Blanchard bottled and sold under its own brands and private labels.

In June 1972 controlled stock consisted of 158 products that Blanchard processed in its own bottling facility. These 158 items were differentiated by bottle size, type and proof of beverage, and brand label. Blanchard produced 25 items in half gallons, 63 in quarts, 42 in fifths, 12 in pints, and 16 in half-pints.

Company HistoryThe Blanchard name was originally established as a chain of retail liquor stores, the first of which was opened in 1938 by John D. Corey. In 1957 Corey became interested in wholesaling alcoholic beverages and began distributing case goods to retail outlets. To devote his full efforts to this new venture, Corey transferred ownership of the chain of Blanchard retail outlets to other members of his family. In 1964 the present warehouse and office facility was completed, and in 1966, equipment was installed to permit the conversion of raw bulk spirits to bottled goods for sale under the firm's own brands and private labels. When Corey died in 1968, his son, John D. Corey, Jr., assumed responsibilities as president and treasurer of the company. In June 1972, the firm's annual revenue was $4 million, of which $3 million represented sales to the seven Blanchard retail stores owned by other members of the Corey family.

Warehouse LayoutFigure A depicts the layout of the Blanchard warehouse. Most of the warehouse space was set aside for stocks of bottled case goods. These areas included a large margin for future growth; actual finished goods inventories had never occupied more than 50% of the reserved space. In addition to the areas set aside for storage of finished case goods, space was occupied by two U.S. bonded warehouses and the rectification and bottling equipment used for processing controlled stock. The government required that all products imported by Blanchard, including both prebottled goods and raw bulk spirits, enter the Blanchard facility by way of the Customs bonded warehouse. In addition, all the raw bulk spirits that Blanchard purchased for processing in its bottling operation were required to pass through the IRS bonded warehouse prior to rectification. The flow of goods into and out of the two bonded warehouses was closely monitored by federal officials to insure that the required tax and customs duty obligations were met by the company.

Competitive Advantage from Operations Professor Juran2

Converting Raw Bulk Spirits into Bottled GoodsIn preparation for his first assignment, Hank made a thorough study of the method used by Blanchard to process controlled stock. Hank learned that two salaried employees, Bob Young and Eliot Wallace, were in charge of this operation. Bob Young, a skilled machinery operator, had worked for Blanchard since 1969, and Eliot Wallace, a chemistry expert with a degree in food technology, had worked for Blanchard for seven years. The combined annual wages of these two employees amounted to $23,000. Bob and Eliot explained that the conversion process followed three steps: (1) withdrawal of raw spirits from bulk storage, (2) rectification of the spirits, and (3) bottling the finished product.

Withdrawal from Bulk StorageRaw bulk was purchased by the barrel and stored either in the Customs warehouse or the IRS warehouse depending on whether the spirits were imported or domestic. When a bottling run called for use of a particular type of raw bulk, Bob and Eliot withdrew the spirits from one of the two bonded warehouses and pumped it into mixing tanks for rectification; imports were withdrawn from the Customs warehouse via the IRS warehouse, incurring both a customs duty and federal distilled spirits tax liability, while domestic spirits incurred only the federal distilled spirits tax liability upon withdrawal from IRS warehouse storage.


RectificationRectification of withdrawn bulk consisted of diluting the spirits with distilled water to attain the desired proof, mixing several different types of spirits to form combinations such as blended whiskey, and adding nonalcoholic ingredients to yield cocktails such as screwdrivers and whiskey sours. Eliot Wallace was responsible for performing chemical tests on each rectified beverage to verify that the appropriate ratio of ingredients had been established before releasing the beverage to the bottling line.

BottlingThe bottling operation utilized a fully automated conveyorized line of equipment including machines that filled each bottle, screwed on a cap, attached a brand label, and affixed the government seal protecting the consuming public against unauthorized opening of a container following bottling. Since 1966 the demand for controlled stock items had required operation of the bottling line less than one out of every three available working days. Bob Young was responsible for maintenance and repair of this equipment and verified the setup of each machine prior to initiating a bottling run.

Bob Young and Eliot Wallace worked together in completing all preparations for a bottling run, including the withdrawal and


rectification of spirits and the setup of the bottling equipment for each size and label combination. When preparations were complete, Bob and Eliot were joined by five part-time workers drawn from the local area who were each paid $2.50 per hour. While Bob and Eliot supervised overall operations of the bottling line, these five laborers packed filled bottles into cartons, labeled and stamped each carton with appropriate information, and stacked the cartons on pallets for transfer to the controlled stock case goods storage area. The five temporary laborers were paid soon after completion of the bottling run.

Tax and Customs Duty ConsiderationsIt was the practice at Blanchard to delay withdrawal of bulk spirits from storage in the two bonded warehouses until just before the start of a bottling run to avoid incurring tax and custom duty liabilities earlier than necessary. Consequently, the length of time between withdrawal of bulk spirits from storage and transfer of the bottled product to finished case goods storage never exceeded one week.

In addition to the federal distilled spirits tax and customs duty charge, two other taxes were levied against alcoholic beverages: a federal rectification tax was incurred during blending of certain items, depending on the mixing process, and a state tax was incurred upon sale of the finished product by Blanchard. Federal and state regulations required the company to pay the customs duty charge, federal rectification tax, and state tax within a few days after these liabilities were incurred. Payment of the federal distilled spirits tax, however, was not required until one month after sale.

EOQ-ROP Scheduling SystemBefore making corrections to the EOQ and ROP figures for each of the 158 items bottled by Blanchard, Hank located the documents showing how the formal scheduling system was developed in 1969. These records, which are reproduced in Exhibit 2, indicate the general method used to determine EOQ and ROP quantities for each Blanchard product. During his review of the system, Hank made the following observations about the inputs to the EOQ calculations.

Setup Costs, SBlending setup cost was based on the annual salaries of Bob Young and Eliot Wallace and the length of time required for these men to withdraw the appropriate spirits from bulk storage and complete rectification for a given item.

Size changeover cost equaled the cost of resetting all machinery for a change in bottle size divided by the average number of different items of a given size processed between size changeovers. The cost of


resetting all machines for a change in bottle size was based on the annual salaries of Bob and Eliot and the fact that it took these two men one full day to complete all the machinery adjustments required for a size changeover. In a typical year, Blanchard operated the bottling line for 77 days during the year. The bottling equipment was adjusted approximately 35 times during the year for a change in bottle size; however, an average of 10 different items of a given bottle size were processed between size changeovers, resulting in about 350 separate item-bottling runs during the year.

Label changeover cost was based on the average length of time that the bottling line was shut down to change from one label to another label of a same bottle size. This idle time was assumed to be 30 minutes, consisting of 20 minutes to reset the labeling machine and 10 minutes to restore the labeling machine to continuous error-free operation following the change in labels. Since the part-time bottling laborers remained idle during the label changeover, the cost of this 30 minutes of down-time was based on both the hourly wage rate of these five workers and the annual salaries of Bob and Eliot.

Order-processing cost equaled the yearly cost of two office workers who earned a combined annual salary of $18,000 divided by the total number of separate item-bottling runs per year. These two clerks worked full-time processing the customs duty forms, federal tax forms, state tax forms, and other paperwork required to support the bottling operation.

Unit Cost, CBlanchard used a standard form titled Cost and Price Data to determine the wholesale price per case of each item. This price was based on a full unit cost figure that included all direct expenses incurred in producing and selling an item plus an allocation of the company's total fixed expenses. Since the state tax liability was not incurred until sale of the finished product, the unit cost used in the EOQ formula was determined by deducting the state tax from the full unit cost figure shown on the Cost and Price Data form.

Carrying Cost Percentage, KThe only substantial component of the inventory carrying cost was the cost of capital. Equity was not considered as a source of funds since all common stock was privately held by John D. Corey, Jr., who wished to maintain full control of the company. As a result, the cost of capital was assumed to be 9%, the prevailing interest rate for debt available to Blanchard. Components of the carrying cost percentage other than cost of capital were small and amounted to only 2.5%.


Scheduling System UsedHank decided to make his first corrections to EOQ and ROP figures for the items to be produced during an upcoming bottling run. He learned that Bob and Eliot planned to bottle the items described in Table A during the last week in June.Hank then located the Cost and Price Data forms and the original EOQ and ROP calculation sheets for these five items and summarized the data in tabular form (see Exhibits 3 and 4). Hank compared the annual demand for the year ending October 31, 1969 (see Exhibit 4) with the monthly sales summary report for the fiscal year ending January 31, 1972 (see Exhibit 5) and noted significant shifts in demand between the years ending October 1969 and January 1972, especially for the MacCoy & MacCoy Scotch and Ron Cores Rum products.

Number of CasesItem (in quarts) On Hand as of June 20,

1972To be

BottledBlanchard's 80 proof Vodka 144 1,000Blanchard's 80 proof Gin 55 600MacCoy & MacCoy 86 proof Scotch

54 60

Triple 7 86 proof Blended Whiskey

301 120

Blanchard's 80 proof Ron Cores Rum

45 50

Table A

On June 21 Hank finished recalculating the EOQ and ROP figures and decided to find out how the schedule for the upcoming bottling run had actually been determined. He found Bob and Eliot in the blending area, where they were withdrawing corn spirits from the IRS warehouse prior to rectification of Triple 7 Blended Whiskey, and questioned them about the schedule.

Hank: How did you decide on these particular items for next week's run, Bob?

Bob: Well, every week the computerized inventory control system issues us a card for each item that has dropped below the 3½-week ROP stock level. As of yesterday, we had several half-gallon and quart items which have dropped below their ROP levels, including the vodka and gin quart products scheduled for bottling next week.

Hank: Why don't you bottle both the half-gallon and quart items next week?

Bob: It takes Eliot and me just about one full day to make all the adjustments to the bottling equipment required for a size change. Consequently, we limit each bottling run to a single size and process several combinations of beverages and labels in that size during the run. Since quarts are our most popular size, we plan to bottle only quarts next week. We'll try to make a run of


half-gallons in three weeks. Hopefully, the 3½-week advance notice will keep us from stocking-out of any half-gallon items.

Hank: What about the rum, whiskey, and Scotch quart products; how did they get added to the schedule?

Eliot: After we decided to bottle quarts based on the low gin and vodka inventories, we checked the stock level for each of the remaining 61 quart items. We're going to try to make a run of quarts every four weeks for the next two months. So the June 20 stock level of any quart item which we don't schedule for bottling next week has to last at least six weeks until the following run is completed at the end of July. The stocks of MacCoy Scotch, Triple 7 Whiskey, and Ron Cores Rum were all below the six-week level when we checked yesterday, so we added them to the list.

Hank: How do you minimize the length of time that the line is idle when you shift from one item to another?

Eliot: We process the lighter beverages first so that we can switch from one item to the next with only a few bottles of distilled water in between to rinse the bottling machine. As a result, the bottling machine is ready after about only eight minutes of rinsing. We have sixteen tanks for storing rectified beverages prior to bottling with a combined volume equivalent to 10,000 cases of half-gallons, quarts, pints, or half-pints. This is more than enough storage capacity for all items scheduled for a single bottling run. Since Bob and I finish rectification of all beverages during the week before a scheduled bottling run, all items are ready when the schedule calls for bottling to begin. No adjustment for bottle shape is necessary since we only run one size at a time and each size has a standard shape. That leaves label changeover as the controlling item — right, Bob?

Bob: Yes, every time we shift from one item to the next, I have to adjust the labeling machine and load in a stack of labels for the new item. This takes about 20 minutes, and during that time, the five part-time workers are idle. Once in a while the labels for two items in a row are the same shape, which permits me to make the change in about three minutes. At any rate, Eliot usually finishes purging the bottling machine and completes the shift to the new blending storage tank well before I have the labeling machine ready to resume bottling.

Hank: Once you have decided on the items you intend to bottle and the order in which you intend to bottle them, how did you determine the number of cases of each item to process? Did you use the EOQ figure that was calculated in 1969 when the scheduling system was originally developed?


Bob: Not exactly, Hank. Since we'll probably be bottling quarts every four weeks for a while, we tried to predict what the demand for each item will be between runs; then we took into account the inventory on hand and scheduled production of enough cases to last until the next scheduled bottling run for quarts.

Hank: How did you go about predicting what the demand for each item will be?

Bob: We used the data from the monthly sales summary [see Exhibit 5] to see what the demand was last month. Then we adjusted this May 1972 sales figure by adding a safety factor to offset any difference between sales in May and July.

Hank: Then the planned production volume for each of the five items scheduled for bottling next week represents your predicted demand for July, with an adjustment made for the current inventory on hand?

Bob: Yes, except for the gin and vodka. We're finding it difficult to predict accurately demand for these two items because sales are up substantially from last year. So we've decided to bottle enough gin and vodka to last us two months, through the end of August. If our predicted sales volumes for gin and vodka are correct, we can omit production of these products during the July bottling run of quarts and save the cost of blending and label changeover for these two items. However, if demand continues to spiral and exceeds our prediction, we can add these items to the July schedule and avoid a stock-out.

The day after Hank's discussion with Bob Young and Eliot Wallace, Toby Tyler asked Hank to report on what he had accomplished on his first assignment and to recommend appropriate action based on his findings. Hank realized that the scheduling system in use bore little resemblance to the formal EOQ-ROP system developed in 1969. In preparation for his meeting with Toby, Hank decided to evaluate the disadvantages of both the original scheduling system and the system developed by Bob and Eliot. Based on this analysis, Hank thought that he could determine if improvements could be made that would warrant adoption of one of the two systems on a permanent basis.

Exhibit 1 Balance Sheet January 31, 1972 ($ thousands)

Assets EquityCurrent assets Current liabilitiesCash $24 Payroll withheld $1A/R (net) 483 Unsecured notes payable 809Inventorya 1,050 Accounts payable 173Prepaid expenses 32 Federal distilled spirits taxes

payable337


Total current assets 1,589 Accrued taxes 40Accrued expenses 11

Fixed assets Total current liabilities 1,371Plant and equipment net of depreciation

287

Registered trademarks 8 Long-term debt 64 Total fixed assets 295 Total liabilities 1,435

Stockholders' equityCapital stock 100 Retained earnings 349

Total assets $1,884

Total equity $1,884

a. Inventory was subdivided into the following categories (in cases): Finished case goods (uncontrolled stock) 311Finished case goods (controlled stock) 362Customs bond (raw bulk and uncontrolled finished case goods stock)

171

IRS bond (raw bulk) 175Miscellaneous (bottles, cartons, labels, flavors, etc.) 31


Exhibit 2 EOQ and ROP Calculations

Where:

Annual demand, R:

Demand for an item for year ending October 31, 1969, in cases of bottles

Setup cost, S:

Setup cost per bottle run of an item

S = Blending setup cost + size change cost + label change cost + order processing cost

Blending setup 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

Unit cost, C:

Cost per case of bottles of an item after bottling and packaging

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 all 158 items

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 alcoholic content

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

Carrying cost percentage, K:

Percent of average inventory value which represents annual cost of carrying inventory 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


Exhibit 3 Cost and Price Data Summary (dollars per case)

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

Wholesale price $43.99 $43.99 $57.39 $49.87 $47.39Materials—beverage .93 1.08 4.46 2.52 2.74Materials—packaging 1.27 1.27 1.27 1.27 1.27Direct labor .10 .10 .10 .10 .10State tax 10.08 10.08 10.08 10.08 10.08Federal distilled spirits tax

25.20 25.20 27.09 27.09 25.20

Federal rectification tax .76Customs duty 1.55Variable overhead .50 .50 .50 .50 .50Fixed overhead allocation

1.31 1.31 1.31 1.31 1.31

Full unit cost 39.39 39.54 46.36 43.63 41.20Profit before income tax 4.60 4.45 11.03 6.24 6.19

Exhibit 4 EOQ and ROP Calculation Sheet Data

EOQ ROP

BlendingSetup Cost

All OtherSetup Costs

Total Setup

Cost (S)

AnnualDemand

(R)% Carrying

Cost (K)Unit

Cost Ca

Blanchard's 80 proof Vodka $1.15 $72.06 $73.21 2,455 11.5% $29.31 327 165Blanchard's 80 proof Gin 1.08 72.06 73.14 1,421 11.5 29.46 248 96MacCoy & MacCoy 86 proof Scotch 3.24 72.06 75.30 800 11.5 36.28 170 54Triple 7 86 proof Blended Whiskey 2.62 72.06 74.68 3,096 11.5 33.55 346 208Blanchard's 80 proof Ron Cores Rum 2.33 72.06 74.39 449 11.5 31.12 137 30

a. Unit cost (C) = Full unit cost (see Exhibit 3) minus state tax (see Exhibit 3)


Exhibit 5: Monthly Sales Data, February 1971 - May 1972Cases of Quart Bottles

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec JanYearTotal

Vodka1971 128 136 233 219 284 343 368 230 162 246 252 114 2,7151972 210 303 275 463Gin1971 51 52 74 157 150 257 179 83 72 89 181 42 1,3871972 166 142 133 213Scotch1971 79 82 151 66 127 96 85 61 67 103 131 39 1,0871972 82 68 66 38Whiskey1971 163 180 198 183 217 207 186 171 205 266 257 654 2,8871972 177 163 162 256Rum1971 10 34 44 26 33 35 51 16 15 26 43 22 3551972 11 28 61 55


Assignment:Read, analyze and be prepared to discuss the Blanchard Company case using the following study guide questions:

1. Determine which costs should be included to perform the EOQ/ROP calculations.

2. What are the assumptions of the EOQ/ROP model that Blanchard has?

3. Briefly describe the inventory system designed by Bob and Elliot.

4. Evaluate this system by identifying the major advantages and disadvantages.

5. What are Blanchard's shortage costs for its products?

6. Can you offer any suggestions for improving Blanchard's operations?

Question 1: EOQ/ROP Calculations

Multi period Inventory System: Fixed-Order Quantity Model (EOQ/ROP)

Assumptions:

Ð’â€¢ Demand for products is constant, however safety stock added as precaution to stock outs.

Ð’â€¢ Probability of not stocking out is 95%

Ð’â€¢ Lead time is constant

Ð’â€¢ Price per unit is constant

Ð’â€¢ Inventory holding cost is based on average inventory and storage costs for safety stock

Ð’â€¢ Setup costs are constant

Ð’â€¢ All demands for product will be satisfied

Setup Costs: Consists of combination of blending costs and other various setup costs. Blending costs include withdrawing spirits from storage and complete rectification of item. The other various setup costs consist of size changeovers, label changeovers, and


order processing costs. The original 1969 figures were also used for the adjusted 1972 figures.

Blending/Withdraw spirits from storage/Complete rectification Varies

Size changeover $8.85

Label changeover $11.78

Order processing cost $51.43

Total $72.06

Annual Demand: Based on Fiscal Year Ending January 1972 sales, located in Exhibit 5. Determined average weekly demand based on the 1971 sales over 52 week period.

Annual Holding Cost (H): We agree with the 1969 figure of 11.5% total. This includes 9% Cost of Capital and 2.5% other holding costs, which include estimated costs of obsolescence, shrinkage, insurance and year-end inventory tax. This figure also takes into consideration the potential for additional costs due to storage costs for the safety stock we have added to our ROP. However, based on current warehouse capacity, the reserved space for finished goods is only used a maximum of 50% at any given time. This allows for plenty additional storage space for the additional inventory and does not affect the annual holding cost percentage of 11.5%. The total annual holding cost will vary based on number of units in inventory for the year. This figure is computed in the accompanying chart by dividing the lead time (3.5 weeks) into 52 weeks and multiplying that by the amount of safety stock units used during that time period. This is then added to annual demand and multiplied by the per unit cost.

Lead Time: 3.5 weeks

Unit Cost: We used the 1969 unit cost figures for our computations.

Number of Standard Deviations: Based on 95% probability of not stocking out.

Our corrected figures for EOQ are very similar to those figures calculated in 1969. Some of the products our order is slightly larger, where others are slightly smaller, but they are very close and follow similar trends. The difference is our ROP figures, when compared to their 1969 figures. One reason for the significant difference is that we felt it is necessary for Blanchard Importing & Distributing to begin carrying safety stock. They seemed concerned with the possibility of running out of stock, so our figures include a 3.5 week lead time of safety stock to help minimize this risk.

Question 2: What are the disadvantages of the formal EOQ/ROP system and the actual system used for scheduling bottling runs at Blanchard? Which system do you prefer? What improvements can be made?

The disadvantages of the Fixed Order Process (Q-Model) and the Fixed Time Process (P-Model) are the criteria that Hank should use to validate each one's usefulness and application. While each model affords certain benefits and might allow for different


operational strategies, an analysis of the two models and a related comparison of the five products in question can reveal which may best serve the company.

The Fix-order quantity models are designed to be event triggered, where inventory is ordered at the ROP or reorder point. It is a perpetual system, which requires constant inventory monitoring for each product, with every withdrawal and addition. With more expensive products, this system is found to be more favorable as it keeps inventory lower, therefore, controlling cost of goods expenses and other costs. A fixed amount is ordered each time and the time to maintain the inventory is more because of the constant record keeping. It offers greater inventory control of high priced items.

The EOQ model requires a number of assumptions in order to complete the system. The models assumes that demand will be approximately uniform and constant, while lead time remains constant as well. It also assumes that ordering costs and holding costs will remain the same. The model also calls for safety stock, in case demand rises above the assumed level.

The fixed-time period model is limited to ordering goods at the end of a specified period, and so the inventory control system is a periodic assessment. The P-model has a larger average inventory because it must protect against stock The order size at the time of review is not fixed and can vary based upon projected demand and historical demand.

Both multi-period inventory systems have disadvantages and benefits, which can be used to determine which will be applied to each of the five products. The Blanchard Vodka and Gin are both high demand products with reasonable cost. For products that have less demand and are at a lower price, the fixed-time period model (P-Model) would serve best. On further inspection, perhaps some of the products would best be order in a hybrid of the P-Model and the Q-Model.

The reduction of the inventory costs and production costs are necessary to improving the bottom line. Changing over to the Fixed Order Quantity model for the Vodka and Gin products would help reduce inventory costs. Since their blending costs are cheaper than the other three products, timely production on an EOQ schedule would incur less carrying costs that would not be offset by setup costs. Since Bob stated that he and Eliot Wallace had a difficult time predicting demand for gin and vodka, the EOQ system would help them avoid overstock and stock-out costs.

Question 3: What should Hank Hatch recommend to his boss, Toby Tyler?

There are a number of issues facing Blanchard Importing and Distributing CO., Inc. Hank has the responsibility of coming up with the necessary changes needed in order to help Blanchard become more successful at what they do. The two issues Hank has to focus on is reducing expenses and cutting back on unnecessarily high stock levels. We feel Hank should recommend the following solutions to his boss, Toby Tyler:

It appears as if Blanchard is trying to get into the wine merchandising market. They have been unsuccessful so far due to a lack of funds and an inability to build up an adequate inventory level. In order to free up funds to hire experienced wine salesmen, Blanchard needs to let go some of its production managers. Bob Young and Eliot Wallace convert


raw bulk spirits into bottled goods. The total combined annual wages of these two employees totals $23,000. We believe that this process can be managed by one of these men rather than both of them. The case states that both of these employees work together in completing all preparations for a bottling run. If Blanchard feels as if one employee cannot complete these tasks alone, then some part time workers can be hired at a much cheaper hourly wage in order to help with the process. This scenario might seem harsh and inappropriate, but the money saved by having one less salary to pay, can be used to hire 3-4 wine salesman.

Another way to cut back on wages would be to remove the idle time of the part time workers as well as Bob and Eliot. During label changeover cost was based on the average length of time that the bottling line was shut down to change from on label to another. The total idle time here totals 30 minutes. The 30 minuets of idle time can be expensive as there are two supervisors (Bob and Eliot) and five part time workers getting paid to do nothing during this 30 minute changeover between labels. In order to eliminate this idle time, Blanchard could purchase or rent more machinery. This way each product that Blanchard sold could be bottles on its own machine/line. This would completely eliminate the need to change labels thus eliminating the idle time. With the idle time completely eliminated, more funds will be available to hire experienced wine salesmen.

In addition to reducing expenses, Blanchard could further maximize sales/profits by doing a number of things. Blanchard purchases pre-bottled goods called uncontrolled stock. This uncontrolled stock accounts for 45% of he firm's annual sales. Blanchard could increase their purchasing of uncontrolled stock and ultimately increase their percentage of sales this stock. Blanchard should purchase more uncontrolled stock so that their percentage of sales from this stock increases from 45% to 50%. This would then in turn reduce the controlled stock by 5%. Equaling the percentage of sales of both controlled and uncontrolled stock to 50% would help to reduce cost as well. This way, less labor would be needed, which would save on wages. In addition, the machines would be used less which would ultimately reduce blending setup costs, size changeover costs, label changeover costs, order-processing costs, as well as the cost of maintenance and inspection of the machines. These reduced costs should be more than the cost of purchasing additional uncontrolled stock. With the cost savings, more wine salesman can be hired.

We also feel that Hank should let his boss know that Blanchard's name brand is not being utilized as efficiently as it could be. In 1972, the firm's annual revenue was $4,000,000 of which $3,000,000 represented sales to the seven Blanchard retail stores owned by family members. Blanchard needs to realize that they can increase sales and revue by getting their products into more retail stores. If 75% of Blanchard's sales are attributed to selling to family owned retail stores, than obvious potential to spread Blanchard's products exists. Let's say that these seven retail stores were non existent. Blanchard's sales would only be $1,000,000? Blanchard needs to figure out a way to sell more products to more people. By reducing cost as stated above, experienced salesmen could promote our wine as well as our other signature products to a wider variety of stores. This move could in turn double Blanchard's sales/revenue, which would provide a substantial amount of money to bring this business to a whole new level.


With the above changes, Blanchard would not have to reduce inventory levels as a source of funds. In fact, Blanchard would have more revenue to hire experienced wine salesman to promote their products. In addition, the profit generated from the above suggestions would enable Blanchard to build up an adequate inventory of wines. With an experienced sales team and a more than adequate wine inventory, Blanchard will be able to realize their goal and earn a before-tax return of 20 % on any money they put into wine merchandising.


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