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-Brewcompetes 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-Brewnegotiated a lease with an Asian manufacturer to provide adequate production for the foreseeable future. Also, in the spirit of managing costs,Easy-Brewtransports 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 whenEasy-Brewplaces 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 theEasy-BrewCEO recently attended an introductory workshop on supply chain management. At Thanksgiving dinner she suggested that she had some ideas that might be useful forEasy-Brewto pursue.

Proposal #1:

Purchase a demand forecasting software package. Using a sample of historicalEasy-Brewdemand 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.

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. (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.

NEW INFORMATION:

The Executive team wants a minimum service level of 95%.

Financial statement information:

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

TASK

Use the SCOR framework in your response.

Provide an analysis (operationalandfinancial) ofeachof the two proposals. Quantify your analysis when possible.

Based on your analysis (including operationalandfinancial 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 don't 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.