Easy-Brew Coffee Inc.

Easy-Brew Coffee Inc. is an e-tailer, shipping from a single Vancouver-based warehouse, which sells single-brew coffee machines exclusively in the Canadian market. (Easy-Brew competes directly with Keurig and Tassimo.) The industry is fast-moving in that models with new features and/or cosmetics are released every 12-18 months.

In order to keep manufacturing costs low, Easy-Brew negotiated a lease with an Asian manufacturer to provide adequate production for the foreseeable future. Also in the spirit of managing costs, Easy-Brew transports product from Asia to Vancouver by ocean transport in TEU containers. One TEU container can hold up to 1,000 coffee machines. The lead-time from when Easy-Brew places an order with its Asian supplier, until the product arrives at the DC, is eight weeks. Orders are shipped to individual customers using the services of Canada Post.

The math geek sales analyst has determined that the monthly (by monthly we mean a four week period) demand follows a normal distribution with mean of 1,000 units and standard deviation of 250 units. December, where demand randomly falls between 1,500 2,500 units, is an exception.

The daughter of the Easy-Brew CEO recently attended an introductory workshop on supply chain management. At Thanksgiving dinner she suggested that she had some ideas that might be useful for Easy-Brew to pursue.

Proposal #1:

Purchase a demand forecasting software package. Using a sample of historical Easy-Brew demand data, it was determined that a decent package will be able to predict monthly demand with the following accuracy:

• within 200 units eight weeks into the future.

Proposal #2:

Switch from ocean transport to air-shipping in LD6 containers (which can hold up to 250 units). This will reduce the order-to-delivery lead-time from eight weeks down to two weeks.

NEW INFORMATION provided by the Finance Department:

• INCO terms on supplier purchases are EXW (Ex-Works). It takes one week for the supplier to process the order and to make it available for pick-up/shipping. (Hint: the transfer of ownership takes place one week after the order has been placed.)
• The company assumes an inventory holding cost of 18% p.a.
• The cost of shipping by ocean is $1.00 per unit. The cost of shipping by air is $2.80 per unit.

Financial statement information: (all values in $thousand)

Income Statement information

Sales	2,000
Cost of Sales	1,200
Gross Profit	800
Operating Expenses (incl. SG&A)	400
Operating Profit	400
Non-operating expenses	100
Pre-tax Profit	300
Taxes (25% rate)	75
Net Profit	225

Balance Sheet information

Assets
Cash	100
Accounts Receivable	200
Inventories	180
Total Current Assets	480
Total Assets	815
Liabilities
Accounts Payable	50
Total Current Liabilities	100
Long-Term Debt	30
Total Liabilities	180

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TASK

Use the SCOR framework in your response.

• Provide an analysis (operational and financial) of each of the two proposals. Quantify your analysis when possible.
• Based on your analysis (including operational and financial implications), recommend either: Proposal #1 or Proposal #2. Make sure your arguments are well grounded in the analysis.

Hints:

1. Assume EZ-Brew currently has a 90% service level. They also dont have a formal safety stock policy.
2. Make sure you calculate the increase in revenue which would result from your safety stock decisions.
3. Assume the COGS will increase proportionally with the increase in revenue.
4. Account for the change in Inventory Holding costs (assume EZ-Brew accounts treats holding costs as Operating Expenses)
5. Make sure you show the key financial ratios.