Bay Area Bakery Company Case Study EMIS 7300 February 24, 2006

1. Bay Area Bakery Company Case Study EMIS 7300 February 24, 2006 Nancy Anderson Bill Holladay Jeanna Roti Alice D. Walker

2. Question 1 • As a manager of transportation and customer service for Bay Area Bakery Company, should you agree with the proposal to build a new baking facility in San Jose?

3. Formulation • Variables • Let Xij represent the Major Market Area i (i= 1-11) and the Bakery Plant Locations j (j=1-7)

4. Formulation cont. • Minimize Total Costs = Production Costs + Baking Costs + Transportation Costs Model 1 – Without San Jose

5. Formulation cont. Model 1 – Without San Jose

6. Formulation cont. • Minimize Total Costs = Production Costs + Baking Costs + Transportation Costs Model 2 – With San Jose

7. Formulation cont. Model 2 – With San Jose

8. Solution • No. We do not agree to the proposal to build a new baking facility in San Jose. • Optimal solution with San Jose is $99,108/day. • Optimal solution without San Jose is $99,770/day. • The company only saves $662/day if the new San Jose plant is built. ($241,630 a year). • It would take the company approximately 16.5 years to pay off the $4 million it costs to build the San Jose plant not including interest.

9. Solution cont. • Production costs are included after all other costs have been considered. • Inflation is not considered. • Future building costs may be considered if a new San Jose facility is built.

10. Question 2 • If you do not agree with the proposal, what action would you recommend for consideration by other members of the company’s top management group? • Is the current distribution pattern optimal?

11. Solution • We do not agree with the proposal, since the current distribution is not optimal. Without the new San Jose facility, the optimal solution is $99,770. • Currently, the company is spending a total of $103,270 in daily costs ($95,700 in production costs and $7,570 in transportation costs). • If the company restructures the transportation and production system, they can save $3,500 per day. (Difference between $103,270 and $99,770).

12. Question 3 • If we project similar market growth for 10 years, what effect will this have on the decision about whether and when to build a new plant?

13. Market Growth *Assumes Linear Growth

14. Formulation • Using the demand forecasted in the previous table, we substituted it in the demand constraint in LINDO for each of the 10 years to determine whether / when it would be feasible to build a new plant

15. 10 Year Output

16. 10 Year Delta

17. Solution • We find these numbers using the growth rates in the previous table. • Analyzing the chart found on the previous slide, it appears that a new plant should be built in the year 2011 to satisfy the company’s demand. • It will take the company approximately 5.68 years to recover the total cost to build the San Jose plant.

18. Question 4 • What additional factors would have to be taken into consideration before reaching a final decision in this matter?

19. Solution • Additional factors to consider: • Maintenance Costs • Land Costs • Construction Costs • Labor Costs • Equipment Costs • Property Taxes