A major soft drink company recently decided to introduce a new product, Lightening Soda. Lightening Soda is an energy drink like many on the market. The company believes it can succeed by selling the drink through its existing distribution channels, primarily vending machines on high school and university campuses and gyms.

The company is aware that demand for the product is concentrated among males aged 16-18 and that use of energy drinks is associated with sports and high energy activities. The marketing campaign planned for the rollout of Lightening Soda focuses on major sporting events. The first push will be the 2020 Tokyo summer Olympic games. Germany will be the first target market. The marketing catch phrase is “Catch lightening in a bottle!”

The company has done considerable market research. As a result, they are estimating demand for the product, which will only be sold in cans, at 6 million cans per year in Germany. However, the company is expecting that demand will start off low and build rather quickly throughout the year. At the same time, the effect of advertising during the Olympic games cannot be accurately forecast and the forecast is thought to be off by as much as 60%.

The company is making the final decisions regarding manufacturing. There are two canning systems under consideration. The first system is similar to others the company already uses and requires 3 personnel to operate. The second system is entirely automated and does not require anyone to run it. The operating costs of the two systems follow:

System	Fixed Cost	Variable Cost per Can
Traditional	130,000 euros	0.18 euros
Automated	500,000 euros	0.12 euros

The expected contribution margin for Lightening soda is 35%. Demand is expected to be highly variable and focus around major sporting events when sales are likely to spike. In addition to the decision for the type of canning line, the company has to decide where the product will be canned. The numbers above represent manufacturing cost if the product is made in Germany. The company also has a facility in southern Greece where it could produce Lightening Soda. Producing the soda in Greece would increase the lead time by 7 days. The company would incur inventory costs during the additional lead time that would not be encountered if production occurred in Germany. The costs for this facility follow:

System	Fixed Cost	Variable Cost per Can
Traditional	130,000 euros	0.16 euros
Automated	500,000 euros	0.11 euros

Bernard, the COO of the company, an efficiency guru from the printing industry, suggested looking for ways to reduce costs. He recommends the company outsource the mixing of the syrup which forms the basis of the drink. This cost is not included in the costs mentioned above. Outsourcing this function would reduce the cost of mixing the syrup by 3% but would increase the lead time to receive the syrup by 200% (three days rather than one day).

1. Which of the four options for canning would you suggest? Traditional in Germany or in Greece, automated in Germany or in Greece. Justify your answer mathematically (show your work) AND based on what you know about the product.

2. What do you say about Bernard’s suggestion? Do you agree or disagree? Justify your answer.

3. Based on what you know about this product how do you feel about the company’s decision to enter into the energy drink market? Do you agree or disagree? Justify your answer.

Answer rating: 100% (QA)

Solution 1 Suggested Canning Option Automated in Germany Mathematical Calculations for suggesting ca... View the full answer