Reference no: EM131995048

Blacksheep is a small beer producer with sales representing about 5% Turkish beer market. The company, which is located in Manisa, sells its product in bottles and cans, and on draught in clubs and public houses.

In the financial year 2015/2 the company achieved excellent results. The value of sales increased by 28% to 6 million TL and pre-tax profits of 0.6 million TL represented and increase of 55% on the previous year. Much of the company's success was based on sales of draught beer. The number of outlets selling the product had increased substantially over recent years and the upward trend in sales had been accelerating.

The growth in draught beer sales had, however, created some problems for the company's managers. In particular, there was concern that in August, when sales reached a seasonal peak, there might not be enough kegs available to meet demand. Kegs are 11 gallon, stainless steel containers in which draught beer is supplied to customers. After use, empty kegs are returned to the beer mill where they are inspected for damage, cleaned and refilled. In 2016, BlackSheep owned about 100,000 kegs, but in view of the expansion of sales, it was felt by some managers that this stock should be increased.

In June 2016, the recently formed Keq Steering Committee met to consider the position for the coming summer. This committee consisted of managers from the Operations, Computing, Accounting, Sales and Marketing departments. Günes Sensoy, the Operations Manager, put forward a proposal that 8000 new kegs should be ordered immediately from the manufacturer in Manisa so that they would be available in time for the peak summer demand (the manufacturer would only supply in batches of 1000 kegs).

Zeynep Doguslu, the accountant was less sure. At 4 TL per keg this would amount to expenditure of 32,000 TL and there was no certainty that all these kegs would be needed. Günes pointed out that, even if they were not needed this year, the kegs might be required in the following year.

'In that case," retorted Zeynep, "we'll have tied up 32,000 TL for a year unnecessarily. Given a 10% rate of interest, that would cost us 3,200 TL."

At this point Tugba Sungur, the Data Processing Manager, intervened. "Surely there are intermediate positions. We could presumably order any number of batches from 0 to 8. What we need is some estimate of the likely levels of demand in August and the consequences of having given number of kegs available to meet these levels of demand."

Elit Iscan, the Sales Manager, pointed out that the sales forecasts were really only reliable one month ahead, partly because this was linked to the long-range weather forecast. In hot, dry summers, sales rocketed. "Perhaps we should delay our decision until July when we'll get the August forecast," she said.

"If we do that," replied Günes, "it may well be too late. Other brewers might be placing orders with the keg manufacturers and I reckon there'd only be an 80% chance that they could get the kegs produced for us in time for August. Surely you must have some idea of what sales are likely to do. After all, your reps are constantly touring the country, talking to people in the trade."

Elit was silent for a few moments. "Well, if you really twist my arm, the best I can say is this. I reckon there's about a 60% chance that sales in August this year will be at least 10% up on August last year, a 30% chance that increase by less than this amount and a 10% chance that we will see no increase. But remember, these are only rough guestimates."

Tugba turned to Zeynep. "OK, can we do some calculations on what the consequences are of having different numbers of kegs available for August assuming first no increase in sales, secondly a less than 10% increase and thirdly an increase of at least 10%?"

Zeynep was sceptical, but under pressure she agreed to do some rough calculations. For simplicity, she assumed that:

i) either 0, 4000 or 8000 kegs would be ordered;

ii) if sales increased by more than 10%, all extra kegs purchased would be used during August, while if sales increased by less than this amount, only 4000 extra kegs would be needed.

iii) if it was needed, each new keg would make only one journey in August thereby supplying 11 gallons of beer to customers and earning a contribution of 0.8 TL.

The results of her calculations are shown in the table below. This shows the estimated changes in profit which would result for different decisions and different levels of sales.

(Changes in profit)

                                                   Sales in August 2016

(Changes in profit)

Ilayda Akdogan, from the Marketing department, was quick to point out that these calculations took no account of the customer goodwill which would be lost if the Company was unable to meet demand because of a shortage of available kegs. "In the long run," she said, "we could see customers asking us to remove the pumping equipment we have installed in their bars and that could prove costly!"

"I still think it might be worth delaying our decision until we get the August sales forecast," said Elit,"even if that does mean taking a risk that the kegs will not be available."

"How reliable are these one month ahead forecasts?" asked Tugba.

"They're not bad. If you can give me a couple of days I'll let you have a summary of their recent performance."

After some further discussion, it was agreed to reconvene the committee at the end of the week when Elit's figures could be looked at. A decision would then be made on whether to go ahead and order a specific number of kegs immediately or to delay the purchasing decision until the sales forecast was available. The results which Elit put to the meeting are appended.

Appendix Details of sales forecast performance for past 72 months

For example, in 22 of these months there was no increase in sales over the previous year.

The forecast had correctly predicted this for 12 of the months, but:
- for 6 of the months an increase of less than 10% had been forecast, and
- for 4 of the months an increase of at least 10% had been forecast.

Instructions

1. Apply decision analysis to the decision problem facing the BlackSheep company and advise the managers on their decision problem. Clearly state any assumptions you have made

2. Discuss in detail the strengths and limitations of your analysis