588 CHAPTER 13 Inventory Management 220 160 302 273 Case Problem 13.3 Pharr Foods Company Pharr Foods Company produces a variety of food products, including a line of candies. One of its most popular candy items is "Far Stars a bug of a dozen individually wrapped star-shaped candies made pri marily from a blend of dark and milk chocolate macadamia nuts, and a blend of heavy cream fillings. The item is relatively expensive, o Pharr Foods only produces it 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 Pharr Foods supplies the candy to a single food distributor, which has several warehouses on the East Coast The candy is shipped in cases with 60 bags of the candy per case. Far Stars sell well despite the fact that they are expensive at $9.85 per bag (wholesale). Pharr uses high-quality, fresh ingredients and does not store large stocks of the candy in inventory for very long periods of time. Pharr's distributor believes that demand for the candy follows a seasonal pattern. It has collected demand data (...cases sold) for Fur Stars from its warehouses and the stores it supplies for the past three years, as follows: 229 172 June 217 209 July 147 August 2.26 231 September 256 263 October 342 370 410 November 261 260 279 December 277 The distributor must hold the candy Inventory in climate- controlled warehouses and be careful in handling it. The annual car rying cost is $116 per case. The item must be shipped a long distance from the manufacturer to the distributor. In order to keep the candy as fresh as possible, trucks must be air-conditioned and shipments must be direct, and are often less than a truckload. As a result, ordering cost is $4700 Pharr Foods makes Far Stars from three primary ingredients it orders from different suppliers dark and milk chocolate, macada. mla nuts, and, a special heavy cream filling Except for its unique Mar shape, a Far Star is almost like a chocolate truffe. Each Fur Star 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), Pharr Foods orders chocolate, nuts, and filling from its suppliers by the pound. The annual ordering cost is $5700 for chocolate, and the carrying cost is $0.45 per pound. The ordering cost for macadamia nuts is $6.00, and the annual carrying cost is $0.63 per pound. The ordering cost for filling is $4500, and the annual average 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: Demand (cases) Year 2 Month Year 1 Year 3 192 212 228 210 223 231 205 216 226 January February March April May 252 293 260 228 235 246 Chocolate Macadamia Nuts Price Price Quantity (lb) 0-30,000 Price Filling Quantity (1b) 0-40,000 40,001-80,000 80,001+ $1.50 $6.50 $3.05 Quantity (lb) 0-50.000 50,001-100,000 100,001-150,000 150,001+ 2.90 6.25 1.35 30,001 - 70,000 1.25 70,001+ 2.75 5.95 2.00 Determine the inventory order quantity for Pharr's distributor. Com pare the optimal order quantity with a seasonally adjusted forecast for demand. Does the order quantity seem adequate to meet the seasonal demand pattern for Far Stan That is, is it likely that shortages or excessive inventories will occur? Can you identify the causes of the seasonal demand pattern for Far Stars? Determine the inventory order quantity for each of the three primary ingredients that Pharr Foods orders from its suppliers. Discuss the possible impact of the order pol. icies of the food distributor and Pharr Foods on quality management and supply chain management. 2. Assuming that the forecasted monthly demand for Year 4 is constant and equal to the overall average demand for Year 3, determine the inventory order quantity and minimum total inventory cost for Pharr's distributor in Year 4. State all assumptions made in your inventory model calculations