Assignment Task Five – Product sourcing and inventory management
Caffeine coffee supplies
Caffeine is a well patronised speciality coffee bar within the Riverside Mall. It offers the expected range of beverages, soft drinks, cakes and pastries and is popular with patrons from all age groups.
Caffeine currently purchases its coffee beans from the Weald Tea and Coffee Company, who roast and blend coffee beans to Caffeine’s specific requirements.
The coffee bar market is very competitive, especially for a niche player who has to compete with national and international brands. Profit margins are very tight.
Caffeine trades whenever the Mall is open and during 2020 consumed on average 76 vacuum packed containers of coffee every 14 days.
Each container costs £15.75, with an annual holding cost per container of £9.00 and an order processing/delivery cost of £38 per order.
Orders are placed on an “as required” basis and the coffee bar occasionally runs out of supplies. In 2020 Caffeine’s Finance Director says that they spent a total of £36,645 on coffee supplies inclusive of delivery and holding costs.
Caffeine’s Food and Beverage Manager, Simba Oluwatudimu, wants to open a second outlet within the Centre, which is expected to double the volume of coffee required, and recognises that there is a need for a more structured way of purchasing coffee and also an opportunity to seek volume discounts from Weald Tea and Coffee with higher purchase volumes.
Initial negotiations with the coffee supplier has resulted in an offer to supply the Caffeine blend at £14.00 per container for 2021, subject to a minimum order value of 200 units.
Consultancy guidance
1. Estimate the total cost of coffee for the current coffee bar in 2020 based on the data given adopting an ‘Economic Order Quantity’ approach. This should include the purchase (unit) cost, order costs and holdings costs.
2. Determine what the revised ‘Economic Order Quantity’ for coffee orders would be if two coffee bars were trading in the Riverside Mall throughout 2021. Estimate the total annual cost of coffee to the business including the purchase (unit) cost, order costs and holdings costs.
3. Determine if the suggested discount from the coffee supplier is worthwhile (if two shops are open) and make a recommendation as to how Caffeine should proceed
