Pharr Foods Company
Pharr Foods Company produces a variety of food products including a line of candies. One of its most popular candy items is “Far Stars,” a bag of a dozen, individually wrapped, star-shaped candies made primarily from a blend of dark and milk chocolates, macadamia nuts, and a blend of heavy cream fillings. The item is relatively expen- sive, so Pharr Foods only produces it for its eastern mar- ket encompassing urban areas such as New York, Atlanta, Philadelphia, and Boston. The item is not sold in grocery or discount stores but mainly in specialty shops and spe- cialty groceries, candy stores, and department stores. Pharr Foods supplies the candy to a single food distribu- tor which has several warehouses on the East Coast. The candy is shipped in cases with 60 bags of the candy per case. Far Stars sell well despite the fact that they are ex- pensive at $9.85 per bag (wholesale). Pharr uses high- quality, fresh ingredients and does not store large stocks of the candy in inventory for very long periods of time.
Pharr’s distributor believes that demand for the candy follows a seasonal pattern. It has collected demand data (i.e., cases sold) for Far Stars from its warehouses and the stores it supplies for the past three years, as follows.
July August September October November December
160 147 256 342 261 273
Demand (cases) Year 2
217 226 302 410 279 293
January February March April May June
192 210 205 260 228 172
Demand (cases) Year 2
228 231 226 293 246 229
The distributor must hold the candy inventory in climate- controlled warehouses and be careful in handling it. The annual carrying cost is $116 per case. The item must be shipped a long distance from the manufacturer to the dis- tributor. In order to keep the candy as fresh as possible, trucks must be air-conditioned and shipments must be direct, and are often less-than-truckload. As a result, ordering cost is $4700.
Pharr Foods makes Far Stars from three primary ingre- dients it orders from different suppliers: dark and milk chocolate, macadamia nuts, and, a special heavy cream filling. Except for its unique star shape, a Far Star is almost like a chocolate truffle. Each Far Star weighs 1.2 ounces and requires 0.70 ounce of blended chocolates, 0.50 ounce of macadamia nuts, and 0.40 ounce of filling to produce (including spillage and waste). Pharr Foods or- ders chocolate, nuts, and filling from its suppliers by the pound. The annual ordering cost is $5700 for chocolate, and the carrying cost is $0.45 per pound. The ordering cost for macadamia nuts is $6300, and the annual carrying cost is $0.63 per pound. The ordering cost for filling is $4500, and the annual average carrying cost is $0.55 per pound.
Chapter 13 • Inventory Management 589
Each of the suppliers offers the candy manufacturer a quantity-discount price schedule for the ingredients as follows:
Determine the inventory order quantity for Pharr’s dis- tributor. Compare the optimal order quantity with a sea- sonally adjusted forecast for demand. Does the order quantity seem adequate to meet the seasonal demand pattern for Far Stars? That is, is it likely that shortages or excessive inventories will occur? Can you identify the causes of the seasonal demand pattern for Far Stars? Determine the inventory order quantity for each of the three primary ingredients that Pharr Foods orders from its suppliers. Discuss the possible impact of the order policies of the food distributor and Pharr Foods on quality management and supply chain management.