Anadolu Efes has dominated the Turkish beer market in the last two decades as a result of careful planning and successful strategies in distribution, pricing and marketing. Consequently, Efes has become synonymous with beer in Turkey and has reached an impressive 78% market share. The company has also extended its business line by buying the right to bottle Coca-Cola in Turkey, and has been transforming into a multinational identity by building up international brewing operations mostly in Eastern Europe, Russia and Central Asia. The two main challenges faced by the company are to succeed in its business diversification efforts and to maintain its market position in its core Turkish brewing business. Emre Yaman, who was hired as the Chief Executive Officer of Efes nearly one year ago, has a couple of major issues in mind as he shapes the business plan of the company for the years to come. In terms of domestic operations, an immediate issue is that the anticipated increase in beer demand will surpass Efes total production capacity in a couple of years. A capacity expansion plan has to be prepared carefully to address this problem. Such a plan will also prove useful to deter any foreign entries to the attractive Turkish beer market. In fact, increasing competition is the other major issue in CEOs agenda. He has already seen the first signs of pressure when Efes main competitor Turk Tuborg was acquired by the Danish Carlsberg Breweries in and subsequently launched the Carlsberg branded beer against Efes own Miller Genuine Draft. Although Emre knows that Efes long-time brand Efes Pilsen has a very loyal customer base, he believes that the strength of Efes production-distribution network will play a key role in the competition. Emre mentions some of his concerns to Ali, the Vice President for Logistics and Defne, the Vice President for Marketing over a game of golf by the Bosphorus. Emre (CEO): The latest figures in the annual activity report show that our distribution costs constitute about 25% of our cost of goods sold. I wonder if we can do better. Ali (Vice President for Logistics): I have also been looking into this recently and assigned our new employee Selin to analyze our distribution system. She thinks that there is room for cost reduction if we optimize our malt and beer shipment plan. Defne (Vice President for Marketing): If we aim to lower costs, we may have to compromise from the efficiency of our supply chain. Our breweries may be reluctant to damage the loyalties that they have worked hard to develop. Ankara brewery has been supplying all the beer for the distributor in Bursa and Istanbul brewery has been supplying all the demand of the distributor in Antalya for a long time. Both of these breweries and distributors have built strong relationships and would prefer to keep the existing relationships. Emre: Why dont we first look into the potential savings and decide later whether it is worth making any changes.

2 Ali: Actually, we already have most of the data to make this analysis. We have estimates of the costs of malt and beer shipments between various locations. We know all malt plant and brewery capacities and can obtain projected beer demand figures for the next year. Emre: That sounds great. Once you obtain the results of the analysis, we can meet and decide on how to proceed. Part I: Improving the Current Production and Distribution System Beer is produced by malting barley, brewing, distilling and bottling. Efes has two malt plants, both located close to main barley regions in Konya and Afyon (Figure 1). Malt produced at these plants, or imported at the Izmir harbor is transported to Efes breweries in Istanbul and Ankara. Efes ships beer produced at the breweries to its main distribution centers in Istanbul, Izmir, Antalya, Bursa, Kayseri and to the Izmir harbor for export. The estimates on the transportation costs between the malt plants and the breweries; and between the breweries and the distribution centers are given in Exhibit 1. Exhibit 2 contains the beer demand forecast at the distribution centers for the next three years and Exhibit 3 shows the current malt and beer production capacities as well as the malt yield. Exhibit 4 summarizes the current distribution plan prepared for the next year. Having solved a linear programming model to optimize the production and distribution system, Selin explains the results to her supervisor Ali. I used the model to figure out how many tons of malt to ship from each malt plant to each brewery and how much beer to ship from each brewery to each distributor. I also made sure that none of the capacities of the malt plants or breweries is exceeded, and all the beer demand of the distributors is satisfied. The shipment plan that minimizes total costs is quite different from the current plan but we can save around 10% in our transportation costs. Ali is content with the results. Great, for such sizeable savings we may convince Defne

3 and Emre that it is worth the effort for changing a few of the established relations in the distribution network. Selin is excited about the upcoming meeting where she presents the results of her analysis of the distribution system. Emre: Im impressed by Selins findings on the distribution plan, but to what extent can we implement them? Defne: We will need to work proactively with the distributors. We need to explain them how all parties in the supply chain will eventually benefit from pulling the costs down. We should also go in the direction of streamlining the information flow electronically to enable stronger supply chain collaboration. When we first begin to implement the changes, we may launch a promotion campaign to keep the distributors happy. Emre: Let us aim to implement the optimal distribution plan, and resolve the initial problems within three months. Part II: Capacity Expansion Decisions Emre has a bigger project in his agenda: opening new breweries. Emre: At this point we need to focus on keeping our market share in response to demand growth. Our demand forecasts indicate we will need more brewing capacity soon. We cannot expand the current breweries anymore and will have to open a new brewery after the next year. The Manufacturing Department has done some research on this. The new brewery will use the latest technology and will have an initial capacity of 70 million liters per year. We can expand the capacity at the new brewery to 120 million liters per year any time quite inexpensively. We will most likely borrow money for all the investments. I expect this to cost us around 10% in interest annually. Selin: Do you have possible locations in mind? The location of the new brewery may make a huge difference in terms of our transportation costs. Emre: Youre right. Our technical staff looked at several factors to determine possible locations. The primary factor was to have a good quality water source. They have also considered beer demand concentrations and proximity to malt plants. They suggested Izmir, Sakarya and Adana, and estimated the costs of building and expanding plants in each of these locations (Exhibit 5). Selin: Great, we can use these cost figures to build a mathematical model and find the decisions that yield the minimum cost. We may then do some what-if analysis to see if the results are sensitive to the cost estimates. Emre: You managed to optimize the distribution plan very quickly. Would it be possible to find a minimum-cost solution to this problem as well? Selin: In this case we have a fundamentally different aspect that makes the problem more complex. We need to decide whether or not to open a new brewery in each of the locations and whether or not to expand each. It will be interesting to work on this.

4 Ali: We may decide also when to open the new brewery. I understand that we cannot delay opening it more than two years if we dont want to lose our market share, but is it an option to open the brewery next year? Similarly, we can consider early expansion. Defne: Why would we want to open it a year in advance of our need? We would be tying up millions of dollars. Selin: By opening a new brewery, we may start saving in transportation costs. Emre: Then, the question is whether the savings in transportation costs offset our cost of opening the brewery early. As much as I would like to continue this discussion, I need to go prepare for my TV interview. I will be expecting the results of your analysis. As Selin and Ali walk back to the Logistics Department, they start planning their next assignment. When Selin points out that the fixed costs of opening and expanding the breweries are one-time costs and the benefits of these are realized over the years in reduced transportation costs, Ali responds We can add up the present value of all costs over the next 20 years in the objective function. As the future costs are discounted, any benefits from reduced transportation costs beyond 20 years will be insignificant. Selin suggests to optimize the shipment and new brewery location/expansion decisions for the next three years, and to use the third year distribution plan to estimate the future shipment costs. Ali: I dont think we could go much farther than 3 years for detailed planning anyway. There would be too much uncertainty in the cost and demand estimates. Selin: Lets keep in mind our assumptions and the implications of under/over-estimating the costs. I guess we will also assume that we will carry no inventory at the end of each year. I expect to refine these ideas when we actually start working on the model. Selin continues to describe the model to Ali while the two sip their afternoon tea at the Logistics Department: The decision variables will comprise the 0-1 variables and the transportation variables. For each location and year combination, there will be a 0-1 variable showing whether a brewery is opened, and another 0-1 variable showing whether a brewery is expanded. We also need malt and beer transportation variables just like in the previous model, but this time we will define one set of such variables for each year. The model will have the regular supply-demand restrictions between the malt plants, breweries and distributors. The only trick here is in defining the capacity of the new brewery at the potential sites. We should make sure that the model incurs the fixed cost in the objective function if it wants to use the capacity. Ali: This will teach the model that there is no free lunch! Selin: We should also write constraints to account for the relation between a new brewery and its expansion. We need to make sure that the model solution will not expand a brewery that has not been opened yet. Ali: Without those constraints, I would imagine the model would keep expanding non-existing breweries as the expansion capacities are much cheaper. There really seems to be a lot of work but you also seem to have everything under control. Lets get to work!