eoq model

Supply Chain Management Assignment Group-1 Toffee Inc.: Demand Planning For Chocolate Bars

Submitted to: Dr. Sarabjit Singh

Submitted By:Kushagra Rastogi 201601327 Anirudh Nair 201601143 Abhinav Dhananjay 201601346 Ketan Nigam 201611320 Rinku Kundu 201611317 Mangesh Bhautkar 201601133

Case Summary Toffee Inc. was a confectionery company working out of the Maharashtra Industrial Development Corporation (MIDC), Amgaon, Maharashtra which started their operations in 1990. Their core competitiveness was to adaptability to customer’s taste and preferences. The owner of this firm, Hansmukhlal Jadhwani who started small wholesale trading business of confectionary and bakery items with his two brothers and as their business grow up to manufacturing unit from trading one. Sales and distribution network of Toffee Inc. which operated from Nagpur and had six depots consisting of 50 authorized dealers with sales force of 85 people and reached to various towns and cities. Problems arises when they produced the most expensive and popular chocolate bar branded Seven Star which packaged in bags of 20 bars and further into cartons of 100 bags each. So in order to maintain high quality they had to take care of not having large inventory. But due to impactful seasonal variations distributors faced problems in sales and distribution. As the Lead Time 15 days and due to nature of product it require careful handling and it takes to Ordering Cost was Rs.8000 per order and the monthly Carrying Cost of cartons was 2.5% of cost of goods and the cost for each carton was Rs.1200. According to the project of TOFFEE INC., the main tasks include a comprehensive forecasting and inventory management plan with a view to minimize the cost of managing the supply chain. Specifically, the demand (production) of chocolate bar should be forecasted according to the old data from 2006 to 2010, and according to the quantitative relation between chocolate bar and four ingredients (dark chocolate, cocoa butter, cocoa powder, dry fruits and nuts) Now their main goal was to minimize the annual cost of purchase by selecting right quantity satisfying all needs of firm. Also they have to answered questions like what were the short term and long term implications of these quantitative decisions on inventory management and other aspects of effectiveness.

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Quantitative Analysis  All calculations like EOQ, Total Cost, Reorder point, no. of order etc. are done by using Excel  Formulas used in excel are as follows : 

EOQ = SQRT (2*D*S/h)



Ordering Cost = (demand/Q)*Unit Cost



Holding Cost = ½*Q*Cost(%)*Unit Cost



Total Cost = O.C + H.C + demand*Price



Reorder Point = (demand/working days)*lead time



No Of orders = Demand/Q

Forecasted Demand

Demand Year

2006

2007

2008

2009

2010

2011

Jan

742

741

869

951

1030

866.6

Feb

697

700

793

861

1032

816.6

Mar

776

774

885

938

1126

899.8

Apr

898

932

1055

1109

1285

1055.8

May

1030

1099

1204

1274

1468

1215

Jun

1107

1223

1326

1422

1637

1343

Jul

1165

1290

1303

1486

1611

1371

Aug

1216

1349

1436

1555

1608

1432.8

Sep

1208

1341

1473

1604

1528

1430.8

Oct

1131

1296

1453

1600

1420

1380

Nov

971

1066

1170

1403

1119

1145.8

Dec

783

901

1023

1209

1013

985.8

 The monthly demand for the year is forecasted using moving average. Again it is visible that the demand is high in the months where there is vacations. The demand is the highest in the August and September hence the bulk order during that period will be the highest.  Since there is a constraint of the inventory holding period. The raw materials can’t be kept for a long period of time which will affect the quality of raw materials that can cause a fall in the sales. Hence we find the EOQ on monthly basis depending on the demand. 3|Page

 Cocoa Powder:No. of bars

Kg

Coco powder

EOQ powder

At 120.2

At 120.10

At 120.0

1733200

51996

2651.796

332.1259609

15968.6162

20024.2999

26039.46909

1633200

48996

2498.796

322.4023282

15501.10394 20154.06393 26351.04503

1799600

53988

2753.388

338.428147

16271.62531

2111600

63348

3230.748

366.5931202

17625.79722 19719.57407 25167.88196

2430000

72900

3717.9

393.2616713

18908.02116 19620.03284 24697.83994

2686000

80580

4109.58

413.4580842

19879.06469 19608.18124 24437.16179

2742000

82260

4195.26

417.7459123

20085.22346 19611.84903 24391.09333

2865600

85968

4384.368

427.0574161

20532.92056 19626.68279 24301.35267

2861600

85848

4378.248

426.759254

20518.58493 19626.06657 24304.01441

2760000

82800

4222.8

419.1148267

20151.04087 19613.44799 24377.02763

2291600

68748

3506.148

381.8984454

18361.67726 19649.80785 24879.16423

1971600

59148

3016.548

354.2320794

17031.47838 19803.50962 25442.44102

Sum

836580

42665.58

19951.3468

25854.25218

 The number of bars is calculated from the monthly demand of cartons forecasted multiplied by the number of bars in one carton, i.e. 2000.  The number of bars multiplied by 30 would give the weight of bars.  That weight multiplied by 0.0051 would give us the demand for the cocoa powder.  The EOQ is found out for individual month.  We can deduce the bulk amount that should be ordered on a monthly basis differs due to the variation of demand.  The numbers that are in bold are the total cost of that will be involved every month. The cost of ordering varies from 120.2 to 120.

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 Coco Butter:Kg

Coco Butter

EOQ Butter

A maximum lot size of >3000

51996

3223.752

598.410558

6464.629257

48996

3037.752

580.890926

6275.364677

53988

3347.256

609.765571

6587.297464

63348

3927.576

660.512033

7135.511491

72900

4519.8

708.562304

7654.598571

80580

4995.96

744.95135

8047.709429

82260

5100.12

752.676978

8131.169389

85968

5330.016

769.454053

8312.41213

85848

5322.576

768.916837

8306.608588

82800

5133.6

755.14343

8157.814472

68748

4262.376

688.088523

7433.420311

59148

3667.176

638.24043

6894.91137

836580

51867.96

 Here we can see that it is better to order the maximum lot size of 3000 every month.  This value would give us the most optimum total cost.

 Dark Chocolate:Kg

Dark Chocolate

EOQ Dark Chocolate

Above 3750

51996

4055.688

419.8076692

15457.31838

48996

3821.688

407.5169841

15004.77536

53988

4211.064

427.7736409

15750.62546

63348

4941.144

463.3742057

17061.43825

72900

5686.2

497.0832907

18302.60677

80580

6285.24

522.6115843

19242.55853

82260

6416.28

528.0314049

19442.11633

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85968

6705.504

539.8011584

19875.47865

85848

6696.144

539.4242812

19861.60203

82800

6458.4

529.7617145

19505.82633

68748

5362.344

482.7201577

17773.75621

59148

4613.544

447.7498332

16486.14886

836580

65253.24

 In the case of dark chocolate we order at 3750 since it gives the minimum cost.

 Dry fruits:Kg

Dry Fruits

EOQ Dry Fruits

At EOQ

At 90.2

At 90.15

At 90.1

51996

2079.84

623.0865

14019.45

14035.02

14031.13

14027.24

48996

1959.84

604.8444

13609

13624.12

13620.34

13616.56

53988

2159.52

634.9098

14285.47

14301.34

14297.37

14293.41

63348

2533.92

686.9859

15491.53

15491.53

72900

2916

736.9621

16618.49

16618.49

80580

3223.2

774.8096

17471.96

17471.96

82260

3290.4

782.8449

17653.15

17653.15

85968

3438.72

800.2944

18046.64

18046.64

85848

3433.92

799.7357

18034.04

18034.04

82800

3312

785.4102

17711

17711

68748

2749.92

715.6677

16138.31

16138.31

59148

2365.92

663.8216

14952.58

14969.18

14965.03

14960.88

836580

33463.2

 In the case of dry fruits we can see that we have to order different bulk quantities over the period of time.

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 The bold numbers show at what price range every month it should be ordered to find the right quantity.  This helps in reducing the cost.

Conclusion  For short term implications of these quantitative decisions: This kind of plan can reduce the total cost because of the optimal order size, order quantity and reorder point, resulting in saving of investment on useless inventory.  For long term implications of these quantitative decisions: This kind of plan can be time consuming. And because we don’t have the lead-time of four ingredients, so we cannot calculate the MRP. And since real business have more factors should be take into account, so in long term some calculations and cost should be added into the plan.

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