JUST BAKED INVENTORY MANAGEMENT

Executive summary:
Just Baked™ is an upscale, specialty cupcake bakery headquartered in Livonia, Michigan. Just Baked
got its start in founder Pam Turkin’s kitchen when she began to make cupcakes for her children. Word
of mouth spread the news and she began to supply cupcakes for office events. As she experimented
with more and more flavours of gourmet jumbo cupcakes, she realized there was significant unmet
market demand for premium cupcakes in the Detroit area. Just Baked grew from one retail store in
2009 to thirteen stores in early 2013. Most stores are owned and operated by franchisees, though a
few are company-owned.

Demand for cupcakes exhibits patterns based on seasons, store location, day of the week, and time
of day. The “freshness promise” implicit in the name Just Baked™ had to be supported by the daily
baking and topping of thousands of cupcakes at the Livonia bakery as well as early-morning delivery
of cupcakes to each store.

1. Best Service Level at each Just Baked Store

a) Cost of Understocking

Franchisees:

For franchisees, running out of cupcakes before the end of the day imposes an immediate
opportunity cost of sales equal to the difference between their cost of $1.25 and the selling price of
$2.75. Therefore, Cost of Understocking for franchisees is $1.50.

Company owned stores:

For company owned stores, the understocking costs is equal to the difference between their variable
cost of $0.50 and the selling price of $2.75. Making the cost of understocking $2.25 for company
owned stores.

b) Cost of Overstocking

Franchisees:

For franchisees, cupcakes left over at the end of the day cost them the difference between the price
they pay - $1.25 and the credit from Just Baked corporate - $0.75 which is $0.50.

Company owned stores:

For company owned stores, cupcakes left over cost them only the Just Baked variable cost, which is
$0.50.

c) Franchisee Best Service Level Computation

=Cost of Understocking/ (Cost of Understocking + Cost of overstocking)

=1.50/1.50+0.50

= 0.75 = 75%
d) Company owned store Best Service Level Computation

=Cost of Understocking/(Cost of Understocking + Cost of overstocking)

=2.25/(2.25+0.5)

= 0.81 = 81%

e) Referring to the above two answers, we can infer that Best Service Level Computation is higher
for company owned stores than franchisees. This is because of the higher cost of understocking
for company owned stores.

2. Exposure Period, Cake Mix for Baking

Review Period: A physical count of items in inventory is made at periodic, fixed intervals to decide
how much of each item to order. Review period essentially refers to the time between successive
evaluations of inventory status to determine whether to reorder.

Lead Time: It is the time that is required from the time an order is placed to the time that it is
received by the customer. Lead time is the time that elapses between the placing of an order (either
a purchase order or a production order issued to the shop or the factory floor) and actually receiving
the goods ordered.

Exposure Period: It is the sum total of the time after which an order is reviewed to check for
replenishment and the elapsed time between the placing of an order and actually receiving the
goods ordered.

Example: A firm’s stocks are ordered in the 1st week and they are delivered on the 7th week. New
stock is ordered in the 2nd week, which arrives in the 8th week. Thus, the review period is 1 week,
lead time is 6 weeks and Exposure period is 7 weeks

a)Review period= 7 days/1 week (Inventory planning was done on weekly basis)

b)Lead Time = 3 Days (Given that cake mix was delivered 3 days after placements)

c)Exposure Period= Lead Time + Review Period

Exposure Period= 3 + 7

= 10 Days

3. Stockout and Holding Costs, Cake mix for baking.

a)Stockout costs

The basic scenario for a stockout is when an item that is to be used for a customer order or for a
production order is not in stock when required.
In this case, the when the grocery store chain is not able to supply cake mix, JB has to procure it
themselves through retail stores which involves extra cost-This will be the extra cost here.

$20 per hour and 15 hrs of employee’s extra time= $300

Extra cost per cake mix=$300

Total cost = $600

a) Holding costs

Holding costs are those associated with storing inventory that remains unsold. These costs are one
component of total inventory costs, along with ordering and shortage costs. A firm’s holding costs
include the price of goods damaged or spoiled, as well as that of storage space, labour, and
insurance.

Here , it is given that the annual cost is 12% of the cost of a pallet of cake mix=0.12x$1000=$120

c)Cost of overstocking through review period.

Here, the review period is 1 week.

Annual holding cost is $120

Therefore, weekly holding cost = $120/52 = $2.31

d)Best Service Level for Cake Mix

Best service level for cake mix = Cu/(Cu+Co)

$300/($300+$120) = 0.71

4. Target Stock and Ordering Decisions, Cake Mix for Baking

a)Target Stock Level Computation

• to satisfy the SL* of 0.71 we need to have a minimum of three pallets on hand

• Therefore Target stock level for vanilla cake mix is three 3 pallets

Pallets of Cake Mix Cumulative Cumulative

Target Stock Level
Demanded Probability > SL*?
Probability ID(OUTL)

Fewer than 2 0.1 0.1 FALSE  

2 0.3 0.4 FALSE  

3 0.55 0.95 TRUE  

4 0.4 0.99 TRUE  

5 0.007 0.997 TRUE  

6 0.003 1 TRUE  
Sum 1      

• Also known as Order Up To Level, OUTL.

b)Order Quantity Computation

• Suppose it has 2 pallets on hand then it must order one pallet. As just baked should order
the difference between the target stock level and the number of pallets on hand

Order quantity computation, Q*=OUTL- on hand inventory

Q*= 3 – 2 = 1

5. Ordering Eggs

a) Economic Order Quantity Computation:

It identifies the optimal order quantity by minimizing the sum of certain annual costs that vary with
order size and order frequency. It takes into consideration the annual demand, average demand and
holding cost of the inventory.

Average demand of eggs: 1600 Holding Cost: $0.02/egg Ordering Cost: $40.00

EOQ = where D is the average demand, S is ordering cost and H is the holding cost.

On calculating, we reach to a value of 2529.82, rounding off to 2530.

Therefore, the order should be of 2530 eggs.

b) Safety Stock:

It is the amount of stock a company maintains to meet the unexpected changes in demand or supply
or both. It takes into consideration the lead time, and the service level, indicating how well the
company is able to meet its demands. To compute the safety stock of eggs at 99.87% service level,
under the assumption that daily average of eggs is normally distributed, we would need to use the
Z-Table.

Referring to Z Table, we get z = 3.00, for p(z) = 0.9987

Safety Stock Computation: Z x Standard Deviation x Square Root of Lead Time Z = 3.00 Standard
Deviation = 400 Lead Time = 1 Square Root of Lead Time = 1

Therefore, Safety Stock = 3.00 * 400 * 1

= 1200 eggs

c) Reorder Point:
It needs to be determined once the company finalizes on the safety stock. And considering both
safety stock and the average demand of the product, the reordering point should be defined, so
there are no backlogs or overstocking.

Reordering Point = Expected Demand in Lead Time + Safety Stock Average Demand = 400 Lead Time
= 1 Day Safety Stock = 1200 Eggs

Reordering Point = (400*1)+1200

= 1600 eggs

Therefore, the company should order eggs as soon as the inventory level reaches 1600.

d) Days of Supply as expression of Reordering Point:

It is the ratio between Reordering Point and standard deviation.

= 1600/400

= 4 Days

e) Average eggs on hand:

It considers the Economic Order Quantity and the safety stock to reach the number.

To compute Average eggs on hand, we take the average of Economic Order Quantity and add Safety
Stock to it.

= (EOQ/2) + Safety Stock

= (2530/2)+1200

= 2464.91 eggs

Therefore, we will have roughly have 2465 eggs on hand in the inventory.

In terms of Days of Supply, it means that how many days the current inventory would last given the
current rate of demand.

To compute it, we take into consideration the average eggs in hand and the average daily demand.

= 2465/1600

= 1.54

Therefore, it means that we have enough stock to supply for 1.5 days of the demand arising.

f)Days of supply Coefficient Variation:

The days of supply coefficient variation needs to be calculated on a 2-sigma level of meeting the
demand 97.7% of the times.

For that we need to consider the variance and the standard deviation.

= 2465/400

= 6.16 days

Which implies that with the average stock in hand, we can meet the demand for 6.16 days.