Marketing perspectives for dairy processing firm
From the YO-gurt case, which of the models, the EOQ, the EPL or the Wagner-Within appears to be the most appropriate for managing daily inventory levels in the supermarket cooler. Be specific/explain your answer.
YO-gurt Etc. is a dairy company that among its products has a certain type of flavored yogurt. This yogurt sells for $2/unit and each unit cost $.5 to make. Each plastic container in which the yogurt is sold cost $.1. The maximum shelf-life is 10 days and the containers are date-stamped
with date of manufacturing and the sell-by date. Yogurt that remains unsold by the sell-by date is destroyed. YO-gurt Etc. is trying to come up with a production schedule.
Several issues are nagging the people at YO-gurt Etc. First, experience tells them that as soon as new yogurt is put on the shelves in stores, older units already on the shelves for all practical purposes expires. Virtually no units from an older batch are sold after new arrivals no matter
how creatively store clerks are trying to hide the new ones behind the oldest.
The problem with such “de facto expiration” lead some members of the marketing team to argue in favor of not introducing new units prematurely as that would create negative image that the company is willfully throwing away good yogurt. The down side of this proposal is of course
that the stores would have had to maintain a relatively larger average inventory and as the yogurt inventory has to always be kept in coolers, keeping inventory is not without cost. Indeed they estimate that the average storage cost per day for one unit is about 5 cents.
Other members of the marketing team have suggested that only producing every 10 days would on average make the yogurt in stores 5 days old and compromise YO-gurt Etc’s image for freshness. Avoiding this problem calls for having very small and very frequent batches.
However, while this would also save on the inventory cost, this strategy is not without cost of its own either. YO-gurt Etc. makes a number of different products and before starting a batch of any size and of any product, equipment must be thoroughly cleaned and calibrated for the mix and the unit sizes, there is an estimated $200 set-up cost associated with each and every batch produced.
From experience YO-gurt Etc. knows that demand patterns depend on the production schedule because consumers seem to adjust their purchase decisions based on how frequent new units arrive in stores. However, while demand patterns vary, YO-gurt Etc. also knows that aggregate
expected demand for the flavored yogurt over a 10-day window actually is independent of the frequency of production.
Specifically, based on prior observations YO-gurt Etc. estimates that when the product is made daily, daily demand can vary from 0 to 1,500 and is more or less following a uniform distribution. If the product is made every other day they estimate demand is uniformly distributed between 0 and 3,000 over the two days between production runs, 0 to 4,500 for a three day window all the way up to between 0 and 15,000 for a ten day production cycle.
On the surface both marketing perspectives appear reasonable. To break the deadlock, management is therefore seeking input on what a reasonable production schedule looks like from an operational perspective. This includes estimates of the various costs involved and ultimately
the expected profit margin for their flavored yogurt.
