Blanchard Importing and Distributing Co., Inc.

(1) Do you think, EOQ and ROP were incorrect? If yes, how will you correct it for each of the
five items mentioned in the case?

As initial calculation of EOQ and ROP was performed in 1969, Hank’s first assignment was to
update the EOQ and ROP.

Setup cost error

(a) Bob Young, Eliot Wallace, and two other paperwork administrators are paid yearly
salary. Little changes in setup is not going to alter the wages of these salaried employees.
Such costs can be considered as cost of capacity.
(b) Only relevant setup costs are part-time wages (=$6.25 (refer to the class slide number 4))
paid to the five temporary labors during the half hour that the line is shut down for a label
change.

Carrying cost
True cost of capital is the opportunity cost of funds (by investing in wine merchandising) that
can be released by reduction in inventory. So, the corrected carrying cost is 22 ½% (Refer to the
class slide number 5).

Unit cost
(a) It should only reflect cash flows resulting from withdrawal, rectification, and bottling of
spirits. Error in EOQ caused due to inclusion of fixed cost in the total unit cost.
(b) In the unit cost, the federal distilled spirits tax and state tax should not have included as
these costs are not realized until after sale.
(c) Fixed overhead allocation should not have included in the unit cost as this cost is not
related to specific (or every bottle) bottling runs.
(d) Refer to slide 6 for final unit cost calculation.

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 Change in EOQ after revising setup cost, carrying cost and unit cost:
(a) For Vodka, refer to the slide 7.
327×2.80×0.225 2715×6.25
TCOld = HC + OC = + = 103.005 + 51.892 = 154.897
2 327
232×2.80×0.225 2715×6.25
TCNew = HC + OC = + = 73.08 + 73.14 = 146.22
2 232

(b) For Rum,

137×4.61×0.225 355×6.25
TCOld = HC + OC = + = 71.05 + 16.20 = 87.25
2 137
65×4.61×0.225 355×6.25
TCNew = HC + OC = + = 33.71 + 34.13 = 67.84
2 65

Rum
EOQ S R K C TC HC OC
Old figure 137 74.39 449 11.50% 31.12 87.24688 71.05163 16.19526
New figure 65 6.25 355 22.50% 4.61 67.84524 33.71063 34.13462

(2) How do the corrected figures compare with the quantities calculated in 1969?
Do the comparison, i.e., percentage increase and decrease (as on the slide 7), and how it may
impact the company.

(2) What are the disadvantages of the formal EOQ/ROP system and the actual system used for
scheduling bottling runs at Blanchard? Which system do you prefer? What improvements do
you suggest?

The followings two reasons make use of EOQ/ROP system undesirable:

(i) Lack of production flexibility: EOQ system requires production system is always
available whenever inventory reached at ROP level. If production system is not available
at right time, EOQ system can’t be executed. As 158 different products compete for use
of a single bottling line, mostly the production system is not available when inventory
reaches at ROP level. Though available capacity is adequate, the bottling line operates
only at 30% capacity as equipment is inflexible and it takes one full day to adjust the
machinery for a change in bottle size. It allows grouping of several items of a given size
for a single size-run causing delay in production of some items. So, it becomes

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 impossible to respond to the requirements of items packaged in five different sizes which
in turn leads to shortage of some items.

In the Table on Slide 3, class 12 shows variation in average depletion time (Q/D = Time
between two consecutive orders/production) and runs per year (D/Q, i.e., number of
orders/production to be placed/carried) for the five items discussed in the case. The Table
shows that average depletion time varies between 3.17 and 9.52 weeks. Thus, EOQ
production leads to different and random ROP for 158 items and 5 sizes preventing
effective and timely production of items for single-size runs.

(ii) Demand is not constant: One of the assumptions of EOQ/ROP is demand is stable and
predictable. At Blanchard, demand is not stable, and demand of some items displays
seasonality. As discussed on slide 7 to 10 (class 12), its nature varies from one item to
another. As ROP level is set to 3.5 weeks of average demand, the actual lead time will
vary inversely with the seasonality index (3.5/seasonal index, as shown on slide 11).

A solution to fluctuating demand can be considered as a simple adjustment in EOQ and

ROP can be made by multiplying EOQ and ROP by monthly seasonal index.

(4) What should Hank Hatch recommend to his boss, Toby Tyler?
Please refer to slide 12 of class 12.

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