CASE ANALYSIS

SECTION 2

Toffee Inc.

COURSE: OPERATIONS MANAGEMENT (TOD 221)

GROUP 6

Sr. NAME ROLL NO PROGRAMME

No
1 Harshvardhan AU1811105 B.B.A
Jadwani
2 Harshika Dhiliwal AU1811370 B.B.A
3 Antima Mittal AU1711290 B.B.A
4 Mohit Parekh AU1711109 B.B.A
5 Jay Patel AU1712135 B.COM
Q1 Forecast the demand expected by Toffee Inc for the year 2011. Break it down into quarterly
forecasts and see if that gives you a better picture of the expected demand.

A1. Demand given to us below:

year 2006 2007 2008 2009 2010

jan 742 741 896 951 1030
feb 697 700 793 861 1032
mar 776 774 885 938 1126
apr 898 932 1055 1109 1285
may 1030 1099 1204 1274 1468
jun 1107 1223 1326 1422 1637
jul 1165 1290 1303 1486 1611
aug 1216 1349 1436 1555 1608
sep 1208 1341 1473 1604 1528
oct 1131 1296 1453 1600 1420
nov 971 1066 1170 1403 1119
dec 783 901 1023 1209 1013

• Quarterly demand forecasted

year 2006 2007 2008 2009 2010 2011

q1(j,f,m) 2215 2215 2574 2750 3188 3440
q2(a,m,j) 3035 3254 3585 3805 4390 4737
q3(j,a,s) 3589 3980 4212 4645 4747 5123
q4(o,n,d) 2885 3263 3646 4212 3552 3833
total 11724 12712 14017 15412 15877 17134
Growth
rate 108.4272 110.2659 109.9522 103.0171
Growth
rate (%) 8.42% 10.27% 9.95% 3.02% 7.92%

To actually have a forecast of the demand of 2011 we had to look at the overall growth rate on
the year on year basis to get a true idea of whether it is in increasing trends or decreasing trends.
So as mentioned in the question the demand was then divided into quarters and then after
calculation of the growth rate of preceding 5 years, we were able to average the growth.

The maximum growth out of all the years being almost 10% and lowest being 3%, it was to be
considered that the 2011 growth rate would be under this range and so it is assumed to be 7.92 %
after taking the average of the growth rate of those preceding years.
After having the forecasted demand, we can say that it is based on a seasonality factor and much
of the changes are faced in 2nd and the 3rd quarter. It should be known that most of the festivals
around the nation are celebrated during those 2 quarters only, so that keeping that deduction at
place it is seen that there is a steady growth in all the years.

Q2 Using the expected demand forecasted, calculate the EOQ for each of the raw materials
required. Using this EOQ value, calculate the frequency of purchase and the expected total cost
incurred in purchasing inventory for the year 2011.

Annual demand 17134

Bags Cartons
100 1
1713400 17134

Bags Bars
1 20
1713400 34268000

Dark Dry fruits

Cocoa butter Cocoa powder (in
Bars chocolate (in and nuts
(in gms) gms)
gms) (in gms)
1 7.8 6.2 5.1 4
34268000 267290400 212461600 174766800 137072000

ANNUAL
REQUIREMENT OF
267290 212462 174767 137072
BASIC PRODUCTS (IN
KGS)
O 800 1200 1000 2100
k 35% 30% 40% 25%
c- a 105.3 72.06 120.3 90
c- b 105.3 72.05 120.2 90.2
C- c 105.25 72.03 120.1 90.15
C- d 105.2 72.02 120 90.1
EOQ
a 3406.461336 4856.664334 2695.142023 5058.337013
b 3406.461336 4857.001357 2696.262897 5052.725988
 c 3407.270376 4857.675612 2697.385171 5054.126994
d 3408.079992 4858.012846 2698.508847 5055.529165
Holding Cost
a 62772.56628 52495.68479 64845.11707 56906.29139
b 62772.56628 52492.04216 64818.16005 56969.48552
c 62757.66124 52484.75615 64791.19181 56953.69356
d 62742.75266 52481.11277 64764.21234 56937.89722
Ordering Cost
a 62772.56628 52495.68479 64845.11707 56906.29139
b 62772.56628 52492.04216 64818.16005 56969.48552
c 62757.66124 52484.75615 64791.19181 56953.69356
d 62742.75266 52481.11277 64764.21234 56937.89722
Purchase Price 28145679.12 15309982.9 21024446.04 12336480

Total INVENTORY COST 28271164.63 15414945.12 21153974.46 12450355.79

FREQUENCY OF PURCHASE
R/EOQ 78.42844082 43.73426064 64.76421234 27.11328439

So through the above calculations, we can see that the EOQ or the ideal quantity is different to
each of the raw materials and specifically there is a different total inventory cost which is
highlighted yellow. The total inventory cost for the whole bar that is the whole product would be
the summation of all these separate inventory costs, which
=28271164.63+15414945.12+21153974.46+12450355.79= 77290440.01 RS.

The formulas are as follows:

K= carrying cost;
R= Annual requirement
S(O)= Ordering Cost.
C=holding cost
a, b, c, d are the different situations that at different quantities that are ordered the price is going
to be different.
The EOQ that is considered here is highlighted in blue that is the d situation in the calculation.
The reason for choosing this was that in this EOQ the holding cost and the ordering cost was the
same as the other ones but also they were comparatively the lowest.
Holding cost= KC*Q/2
Purchase price= RC
Ordering Cost=R/Q*S
The purchase frequency or the number of orders = R/EOQ.

Q3 Given the range of discounts available on bulk buying,

should Toffee INC stay with the EOQ order or should it try to take advantage
of the bulk buying discount.

It can be seen that through the bulk buying of the products, indeed the discounts are more but
sticking to the EOQ would not be a feasible idea as one would not get the appropriate discount
and the quantity ordered would be lesser than the bulk buying and as the quantity would be lesser
the more amount of orders would have to be done to meet with the expected demand. So,
keeping that in mind as the no. of orders would increase, so would the ordering cost.

They should see that their demand is also a base that is affected greatly by seasonal factors.
They should also consider the lead time that it takes as well which is almost 15 days. So, as it
takes a lot amount of time for the shipments to arrive so in that sense ordering a lot or bulk
buying at the time of ordering would be feasible for them. As the demand is expected to increase
at least b a rough percentage every month of the coming year it is expected for them to stick with
bulk buying.

Q4. On the basis of your calculations and your common sense, comment on
what is the best approach for Toffee Inc. towards its demand planning.
Well on the basis of the calculations it can be seen that whenever the firm tries to bulk buy there
is an obvious reduction in the cost of per unit, but at the same time one should know that buying
in bulk would have an increase at the holding cost of the firm. At bulk buying is something that
any firm does when it knows the demand is at peak which is seen in the earlier demands and the
expected demands as well.
So, the decision that the company should take would be to actually have a collaboration or a mix
of both the approaches. As seen in the earlier stages they can reduce their bulk buying to EOQ
which would first keep pace with the low demand in the first quarter and when the demand has a
peak then they could resort to their bulk buying which can also keep pace with the high demand
as experienced in the season.
So having a mix approach that takes care of the igh and low demand at various quarters would
the best approach for Toffee. Inc to work on their demand planning.