Case 1: Italia Ltd (50%)
Italia Ltd is a company that produces pasta sauce and other food products for Italian fast-foods
restaurants in the United Kingdom. It operates a plant in Cookham, which is in the Royal borough
of Windsor and Maidenhead. The pasta sauce is prepared (manufactured) using an authentic 100-
year-old family recipe, which requires, peppers, tomato paste and mushrooms that Italia
purchases from various suppliers. Once prepared the sauce is poured into sterile 1-litre glass
bottles and sent to fast food restaurants. The plant operates 365 days a year and Italia uses an
annual holding cost rate of 15%.
Peppers
Italia uses an estimated 1,050 Kg of peppers daily. The peppers cost £0.35 per Kg. Order cost,
including transportation, is £1,500. Lead-time is normally two weeks but may vary somewhat.
Because of this variability, the company estimates that the lead-time demand for peppers follows
approximately a normal distribution with mean of 18,100 Kg and a standard deviation of 200kg.
Italia management wants to determine the optimal ordering policy for peppers to meet a desired
service level of 99%.
Tomato Paste
Buyers at Italia Ltd purchase the tomato paste from Organic Farms. The company requires 2,540
litres of concentrate per day to manufacture the pasta sauce. Organic Farms offers customers
the following all units price discount schedule:
Number of Litres Ordered Price per Litre (£)
1-9,999 2.24
10,000 – 49,999 2.16
50,000 – 124,999 2.04
125,000 – 249,999 2.00
250,000 or more 1.95
The shelf life of the concentrate is 70 days and the ordering cost is £750. Orders must be placed in
1200-litres increments. The lead-time for delivery is 10 days. Italia Management wishes to
determine the optimal ordering policy for the Tomato paste.
Mushrooms
In the recipe the weight of mushrooms required weekly followed a normal distribution with mean
16,210 Kg and standard deviation 4,100 Kg. Mushrooms cost £1.25 per Kg. If any remain at the end
of the week, they are unusable and thrown away. If the chefs at Italia Ltd finds themselves running
short of mushrooms, they would need to make an emergency purchase from a local supermarket.
They would have to pay the retail cost of mushroom at £2.50 per Kg. Management wants to
determine the optimal order policy for ordering mushrooms.
Glass Bottles
Italia Ltd’s packaging department packages the sauce in 1litre glass bottles. These are bought
from Maidenhead Glass works at £0.10 per unit. The ordering cost is £130. Italia is considering
leasing a machine to make the bottles. The yearly lease cost of the machine is £45,000, and the
production setup cost of the machine is £250. The machine can produce 1.1 million bottles per
day at a cost per unit of £0.005 (excluding leasing, inventory holding and production setup costs).
The company estimates that it requires 453,000 bottles per day. Management wants to
determine whether it should continue purchasing bottles from Maidenhead Glass works or begin
in-house production and what the optimal policy should be.
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Case 2: Aspen Estate Agency (50%)
Having run a successful estate agency in Aspen, Oxford, David King has decided to open a branch in
Cambridge. David must decide where to locate his office and which and how many employees to
hire.
David has narrowed his choice of office to two locations. The one on Bond Street is a large office
with space for virtually any number of employees and customers. David estimates that the agency
can attract an average of 12 customers per day at this location. Rent for this office is £1,200 per
month. Utilities, insurance and other expenses should average an additional £520 per month.
The second choice for an office is on James Street, approximately two Kilometres from Bond Street.
This is a much smaller office that can effectively only hold one worker and at most four customers
(including the one being served). It rents for£400 per month. Utilities, insurance, and other expenses
should average an additional £200 per month. The location would reduce the number of potential
customers by 20% and any arriving customer finding the office full will presumably take his or her
business to the other estate agency in Oxford.
David has decided that if he opens the Bond Street office, he will hire one or more local employees
to staff the office. If he opens the James Street office, however, he will hire either Windy Day, an
experienced estate agent form the Cambridge area, or a local employee to staff the office. David
would have to pay Windy a monthly salary (including benefits) of £2,100, whereas she could hire
local employees for £1,200 per month (including benefits). Because of her experience, Windy’s
average, customer service time is approximately 20 minutes, compared to 48 minutes for local
employees.
David estimates that each customer served by the Aspen Estate Agency will result in an average
commission of £35. He also estimates a goodwill cost to the firm of £15 per hour for the time a
customer spends waiting in the office for service to begin. In addition, goodwill costs of £50 are
associated with any customers who find the James Street location full and leave to go to another
estate agency.
The estate agency will be open an average of 20 days per month, eight hours each day. Customers
arrive according to a Poisson process, and customer service times follow an exponential distribution.
Determine the most cost effective option for Aspen Estate Agency.
