Running head: Three Jays 1

Three Jays Case Study

Juan M. Carracedo

Anderson University, SC
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Abstract

Three Jays (3Js) corporation focuses on producing organic jams and jellies under its own label

and for specialty stores and small food chains (Paul Marshal, 2014). Brodie is in between the

first and second year of his MBA and currently interning for the firm; his first task is to study the

current EOQ and ROP to later evaluate if these are correct, or due to the recent growth of the

firm, it needs to be adjusted.

The company has identified a growing demand for organic foods and decided they want to

launch a marketing campaign to increase their demand and take advantage of this situation. To

afford this, they believe that by reducing inventory they will save enough to afford a the new

marketing campaign.
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1)

EOQ is the result of the square root of 2 multiplied by annual demand in units multiplied

by the ordering costs, and later divided by annual holding cost per unit. For each of the five

SKUs (Appendix A) the annual demand for the year 2012 are:

 Strawberry Jam: 3869 units

 Raspberry Jelly: 3006 units

 Peach Jam: 1970 units

 Blueberry Jam: 1211 units

 Apple/Mint Jelly: 832 units

The annual demand increased based on appendix A by 29.27%, 28.74%, 32.04%,

36.68%, 33.12% respectively.

Once the annual demand is calculated, the next step is to find the set-up cost found in

appendix A which is $63.7 for each SKU. Finally, the carrying cost is 9% of the unit cost, which

is made up of 6% from cost of capital and 3% from cost of capital amounted (Paul Marshal,

2014). The unit cost is displayed in appendix A.

Once calculated the carrying and set-up costs, finding the new EOQ’s is feasible using

the information above, the results are:

 Strawberry Jam: 440 units

 Raspberry Jelly: 373 units

 Peach Jam: 322 units

 Blueberry Jam: 243 units

 Apple/Mint Jelly: 212 units

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Previous EOQ’s were: 387, 329, 280, 208, and 212 respectively. These show an increase

of 13.69%, 13.37%, 15.00%, 16.83%, 15.85% each respectively.

The ROP (Reorder point) can be calculated by multiplying the demand by the lead time,

which is the time it takes the order to arrive, in this case is 3 weeks (Paul Marshal, 2014). By

knowing annual demand, it is possible to divide each answer by 52 weeks and get weekly

demand. The answers respectively: 223, 173, 114, 70, and 48 for each of the five SKU’s

adjusting for 2012 demand. These reorder points are lower than the ones in the past, achieving

the goal of less inventory.

After analyzing the relationship between demand and EOQ, its clear that they are

positively correlated since if one increases the other will as well. Therefore, by using the rule of

three, if demand increases by 50% EOQ will increase by 23% approximately.

2)

The only changes needed to for determining more accurate EOQ’s are to adjust the set-up

costs and include the cost of part time workers when idle, these are at the factory, so they need to

be paid. Another change would be the storage costs, these costs should be added, since there is

an opportunity cost of not using it, which could be rented out if needed (this amount is unknown,

so for reasons of accuracy won’t be included on this paper).

The new set up costs therefore will be: 63.7+(12.5*.5*3) which equals $98.95. The part-

time rate is multiplied by half an hour by three employees.

With the new set up costs the new EOQ’s are as follow (using the annual demand showed

previously, and the carrying and unit costs shown in appendix A):

 Strawberry Jam: 548 units

 Raspberry Jelly: 466 units

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 Peach Jam: 402 units

 Blueberry Jam: 303 units

 Apple/Mint Jelly: 264 units

(The equation for the results above is: =SQRT((2*832*98.95)/(0.09*26.32)) for Apple/Mint, for each product the

demand and unit cost should be changed)

3)

The EOQ has increased after adjusting the setup costs. This happened since is logical that

if the cost rises, the more units that are ordered at a time means the less often orders will need to

be placed.

Jake and Josh were using the Delphi method for forecasting. These were using they

“expertise” to make decisions. This method is based on the experience of experts at the time to

make decisions (Twin, 2019). As mentioned in the paper they were not using the EOQ system,

based on their expertise they their calculations were based on “the demand from previous month.

Then they adjusted this figure by adding a safety factor based on last year’s monthly sales to

offset any difference between sales in May and July” (Paul Marshal, 2014).

The reason behind the change in forecasting method was because they “discovered” that

changing each production line took them about half an hour to adjust it, therefore they reduced

the amount of times this happened. The more they changed the production lines, the higher the

risk “the jars will hang up and shut the line down” (Paul Marshal, 2014).

This method caused higher inventory, since they produced each size of jar every four

weeks, they had to build a two-week safety stock to make sure they didn’t run out of stock

between one production to the other.

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4)

If the goal is to save money by reducing inventory, then neither the EOQ model or Jake’s

and Josh’s system would work. A combination from both, the EOQ system and Jake’s method

would be the best approach. The path to reduce the safety stock would be by improving

forecasting methods and providing Jake and Josh’s with better resources and developing a new

production line system. By improving this process, there will be less need for safety stock. Jake

mentioned there is currently very little stock outs, so their system proves to be working.
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Appendices

Appendix A

Exhibit EOQ and ROP Calculations using Existing Method

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Appendix B

Exhibit 5- Monthly Sales Data- Cases of 12-ounce Jars per Month

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References

Paul Marshal, M. D. (2014, August 26). Three Jays Corporation. Three Jays Corporation.

Harvard Business School.

Twin, A. (2019, June 25). Investopedia. Retrieved from Delphi Method:

https://www.investopedia.com/terms/d/delphi-method.asp