Touchstone 2: Make Inventory Recommendations

OVERVIEW: In this Touchstone, you will demonstrate your ability to make decisions about inventory based on supply chain factors and demand predictions.

BACKGROUND: Old Towne Root Beer (OTRB) is a private family-owned business in Maine that produces only root beer and one of the few companies making the beverage with the traditional sassafras root. Although the process involves fermentation, the drink is nonalcoholic.

OTRB sells most of their product as 42-gallon barrels throughout New England to various vendors like restaurants and poolside concessions. Wholesale, these cost $450 each. OTRB sells 300-800 barrels per month, lagging in winter and peaking in the summer. They sell 6,800 barrels a year in this manner.

To avoid ever delaying an order, they produce slightly more than expected orders and end up with a surplus of inventory at the end of every summer, when their busy season is winding down and they have to make room for new supplies. To remedy this, they sell $3 growlers (half-gallon bottles) on-site in a 2-week annual sale; these sales are extremely popular and serve their purpose in dumping inventory, but OTRB loses money. The sale earns about $50,000 against $70,000 to produce that amount of root beer and another $30,000 in additional labor to run the event.

There is no template for this assignment. Please include all of the assignment components in a single .doc or .docx file. Remember to include your name, date, and the name of the class in the document.

A. Assignment

STEP 1: Analyze the problem.

You are hired specifically to advise OTRB on inventory issues. At present, there are four primary ingredients in the root beer and the finished product. Each item has unique inventory considerations.

Item	Inventory Issues
Water	OTRB uses filtered tap water and does not need to keep inventory.
Extract	OTRB is one of few companies in North America that still makes root beer with sassafras root, the historic recipe for root beer. The root beer company outsources to another local company, Oronoco Growers, for the sassafras extract. The root is native to Southwest Maine, and the root can be stored for up to 1 year if refrigerated. Oronoco Growers delivers 5,000 gallons of extract per year, and OTRB is their only customer for that product. At $60 a gallon, this is OTRB’s biggest annual cost other than labor. It costs $2,400 in labor to order the stock, make room for it, unpack the truck, store it safely, and do quality checks throughout the year. OTRB’s refrigeration unit costs an average of $100 a month for energy costs, and another $200 a month must be set aside for repairs and eventual replacement of the unit, adding up to $3,600 a year. OTRB insures the extract as a special rider on their business insurance because of the catastrophic losses to the company if the refrigerator were to break down. This costs $14,000 a year. OTRB uses about 90% of the sassafras extract; they always over-order “just in case.” They freeze the surplus but have not used it. They are concerned a plant blight or other problem could make the extract Note: Full answer to this question is available after purchase. cost skyrocket or even make it unavailable, in which case they would use the frozen extract, but also know that root beer will have a noticeable drop in quality if they use frozen extract. For now, 10% of the value, or $30,000, can be described as shrinkage. OTRB has considered making other products, like cream soda or ginger ale, but their commitment to using fresh, natural ingredients and the space needed for the extract prevents them from taking this move. However, with their restaurant partnerships and brand recognition, even a conservative estimate would put the opportunity cost for not branching out at $50,000 a year. hint You should calculate the holding costs using this information. Total the costs like labor, refrigeration, and storage; divide this by the total value of the extract.
Molasses	The root beer is sweetened with molasses. They use 2,600-2,700 gallons per year at $10/gallon. It is sold in crates of 24 gallons and can be delivered any time. Molasses is kept at room temperature and has a shelf life of 18 months, but OTRB staff notice crystallization after 3 months. This is still usable but takes extra time to prepare. Although they do use FIFO, they have no real system for ordering; they simply stock up and restock when supplies run low. Holding costs can be calculated at 10%.
Yeast	A small amount of yeast is added to the molasses to cause fermentation; this is enough to cause natural carbonation but not enough to make the beverage alcoholic. Although yeast requires special treatment, it takes up very little space. Better yet, since OTRB can grow yeast from other cultures it already has, it does not require ordering and only requires the small labor costs to grow it in-house.
Finished Product	As detailed above, another inventory issue is the finished root beer, which is overstocked and sold at a loss each year. Although holding costs are typically a modest 15% of the value of stock at any time, this loss of product makes overall holding costs 20%.

STEP 2: Make recommendations.

Your assignment is to write a short paper and make recommendations on the inventory issues for Old Towne Root Beer described above. The structure of the paper will be:

Introduction
Extract
Molasses
Finished Goods
Conclusion

Your task as consultant is to propose and defend an inventory management system for the root beer company by answering the following questions:

Each description will:

Summarize the problem you are trying to solve.
Describe one or more inventory processes OTRB should be using for that item. Each item may use a different method.
Explain why this inventory method is the best to mitigate the challenges OTRB faces, both within the business itself and the effects of their decisions up and down the supply chain.
Recommend order amounts that are appropriate to that inventory method.
Explain how you reached the methods and figures for ordering.

hint: You may need to use formulas like Holding Costs, Economic Order Quantity, or Total Cost Formula; these are explained (and a tool provided to help calculate them) in the tutorial for inventory management techniques; the link is below.

Read; Touchstone 4: Write a Quality Improvement Plan (QIP)

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