Rationalizing Supply and Demand of Happy Bakery Bread

Rajesh had reason to worry about Happy Bakery sales results from the previous season. While
some of the products had run out of stock well before the season end, others had to be sold out
at Cheaper prices. As the manager of procurement, he was looking for options to better balance
supply and demand. “Famous” supplier had offered to bring a second delivery around the middle
of the season but wanted a 5% increase in purchase price. The trade-off between supply flexibility
and the increase in purchase price was something Rajesh had to evaluate for his Bread sales.

Happy Bakery had four selling seasons of about three months each. Located in
Hyderabad, it has 4 branches in Madhapur, Secunderabad , Koti and Jubilee Hills. company
sourced from low-cost flour suppliers in Vijayawada, Andhra Pradesh. Although these suppliers
provided a low purchase price, they required Happy bakery to place its orders well before the
start of the season in Bulk Quantity. To lower cost, suppliers delivered a single lot of Flour
quantity a few weeks before the start of the season. This put the onus for accurate forecasting
on the purchasing department. The company had traditionally used a combination of historical
sales data, experience and intuition to order quantities from the suppliers. Unfortunately, there
always seemed to be a situation of overstock or understock of Bread Products highlighting the
need to review the company’s procurement strategy.

To simplify his analysis, Rajesh decided to focus on two problematic products:

“Brown bread” is famous across 3 out of 4 outlets of “Happy Bakery”. Anticipating high volume
sales on this category, the purchasing department had ordered 600 units in the previous season.
Unfortunately, 150 of those units were still unsold at the end of the season.
“White bread” is still in a growing category. The company ran out of stock on “White bread”,
having ordered 1100 units and estimated that it could have sold another 100 units if stock had
been available.

“Famous” supplier in the nearby Rangareddy had proposed fulfilling

Happy Bakery’s orders in two deliveries. The first delivery would arrive before the start of the
season to cover about a half-season of sales. The second delivery would arrive around the middle
of the season, but the timing and quantity could be adjusted to account for the sales in the first
half. In essence, the second delivery allowed Happy Bakery to reactively Control its orders. The
“Famous” supplier demanded 5 percent increase in purchase price compared to the low-cost
supplier. Rajesh felt that with a mid-season delivery, any customers who could not find product
during the first half of the season would return for the second half and purchase the item. Thus,
there would be no lost sales during the first half of the season. Based on his findings, he collated
the Demand and cost data.

For the low-cost supplier from Vijayawada, the seasonal demand and costing data is as
follows. For the “Brown Bread Category” the sales price, sourcing cost, mean demand and
variance are ₹60, ₹24,400 and 62500 respectively and cost of selling the remaining breads at the
end of the quarter is ₹12. For the “Whitebread” category the sales price, sourcing cost, mean
demand and variance are ₹30, ₹18, 1000 and 62500 respectively and cost of selling the remaining
breads at the end of the quarter is ₹12. Half season Demand and Sourcing Cost from Responsive
Supplier Data is as follows. For the “Brown Bread Category” the sales price, sourcing cost, mean
demand and variance are ₹60, ₹25.2, 200 and 31329 respectively and resale value at the quarter
end is ₹12. For the “Whitebread” category the sales price, sourcing cost, mean demand and
variance are ₹30, ₹18.9,500 and 19881 respectively with resale value at quarter end is ₹12.

Rajesh had to decide whether the responsiveness of the Famous supplier was worth the
additional 5 percent in unit cost.