TexMex Foods
TexMex Foods operates a plant in Irving, Texas, for manufacturing taco sauce used in fast-food restaurants. The sauce, which is packaged in plastic containers, is made from a special recipe that includes tomato concentrate, onions, and chile peppers that TexMex purchases from various suppliers. The plant operates 365 days a year, and TexMex uses an annual holding cost rate of 18%.
Toma to Concentrate
TexMex Foods purchases its tomato concentrate from Hunt Farms. The company requires 2500 gallons of concentrate per day to manufacture this sauce. Hunt Farms offers customers the following all units price discount schedule:
The shelf life of the concentrate is 80 days, and the ordering cost is $750. Orders must be placed in 1000-gallon increments. The company desires a safety stock of 10,000 gallons, and the lead time for delivery is 10 days. Management wishes to determine the optimal order quantity for the concentrate as well as the reorder point.
Onions
In the cooking process, TexMex requires 6000 pounds of onions daily. Onions cost the company $0.15 per pound, and the ordering cost is $180. Lead time for delivery is three days, and the company desires a safety stock equal to one day’s usage. Management wants to determine the optimal order quantity for onions as well as the reorder point.
Chile Peppers
TexMex also needs an estimated 2000 pounds of chile peppers daily. The peppers cost TexMex $0.37 per pound. Order cost, including transportation, is $1500. Lead time is normally two weeks but may vary somewhat. Because of this variability, the company estimates that the lead time demand for chile peppers follows approximately a normal distribution, with a mean of 28,000 pounds and a standard deviation of 4000 pounds. Management wants to determine the optimal order quantity, reorder point, and safety stock for chile peppers to meet a desired cycle service level of 99.5%.
Plastic Containers
TexMex packages the sauce in one-ounce plastic containers it buys from Union Chemical at $0,003 per unit. The ordering cost is $120. TexMex is contemplating leasing a machine to make the containers. The yearly lease cost of the machine is $45,000, and the production setup cost is $260. The machine can produce 1 million containers per day at a per unit cost of $0.0027 (excluding leasing, inventory holding, and production setup costs). The company estimates that it requires 450,000 containers per day. Management wants to determine whether it should continue purchasing containers from Union Chemical or begin in-house production and what the optimal order quantity or production lot size should be. Prepare a detailed management report addressing each of the concerns facing TexMex Foods. Include in your report supporting graphs and charts as well as appropriate “what-if” analyses.