Operations Management
A microbrewery in Colorado is growing rapidly. There is a long lead time for the purchase of new equipment, so management must make a demand forecast for the next couple of years in order to ensure that it has the capacity it needs to continue expansion. There are constraints, however, in particular with respect to access to key inputs. This casts uncertainty on the demand forecasts, such that simple extrapolation of current growth rates is going to be insufficient. A decision tree is used to help with the demand forecasting, taking into account different scenarios with respect to the growth patterns and the growth constraints.
This paper is based on a real world situation. The situation at hand is that of a small microbrewery, operating in Colorado. The microbrewery is five years old and has expanded annually since its inception. The brewery produces five beers regularly, and these are available bottled for the packaged trade and in kegs for the hospitality trade. Several products are produced seasonally and these are only packaged in kegs. The company's sales have now increased to 10,000 barrels annually. The most popular product, the India Pale Ale (IPA), accounts for 50% of total sales by volume. The IPA accounts for roughly 40% of profits, because it has higher ingredient costs than some of the other products. The brewery uses a single brand for its different products, which are extensions of that brand. The IPA, because of its popularity, has been subject to further extensions in the seasonal range.
The signature ingredient of an IPA is hops, which are the flower of a vine. They are relatively difficult to grow, requiring specific conditions. They thrive only at certain latitudes in temperate regions. They are cultivated in all great brewing nations, their presence being a critical requirement for the development of beer-drinking culture in the Middle Ages. New world nations like the United States, New Zealand and Australia have cultivated the hop as well. The hop is relatively delicate, and can be susceptible to disease, in particular if growing conditions are wetter than expected. There are different types of hop, and each strain will produce flowers with different characteristics that impact the character of the end product (the beer).
Most hops used by the microbrewery are domestic varieties, produced in Washington State, with some from Oregon and Idaho as well. Hops available to microbreweries tend to come from a handful of major wholesalers, who source globally. They process the hops, usually into a pelletized form, for longer storage and easier distribution. Only the largest companies, like Anheuser-Busch, are vertically integrated to the point where they produce their own. Thus, almost the entire industry relies on these wholesalers, who dominate the North American trade.
The Operational Problem
The operational problem at hand occurred, when a confluence of factors resulted in a dramatic hop shortage across North America (Morgan, 2013; Welch, 2007). Adverse weather conditions resulted in poor harvests in two sequential years, reducing supply. Moreover, the growing popularity of microbreweries, and the hop-intensive IPA style in particular, resulted in rapidly increasing demand. The conditions of the wholesale industry favored larger breweries, who were locked into long-term contracts with the wholesalers. These breweries were allocated their hop needs. Smaller breweries, like ours, who tended to purchase hops on an ad hoc basis, found that their orders could not be fulfilled. Orders would either be unfilled entirely, or filled on a partial basis.
For the brewery, this represented a significant challenge. It had limited supplies of hops on hand -- for some varieties as little as 2 months' supply. It had growing demand for a flagship product that consumed 65% of total hop usage. With hop prices escalating due to supply issues, and in some cases supply being unavailable at any price, the brewery was faced with a challenge of forecasting. The supply chain disruption was going to require changes at the marketing end. Even if the brewery could maintain IPA production, it might be forced to lower production of other products as it would lack raw materials to make them. Marketing was going to have to reduce dependence on IPA for growth, and that meant new product introductions. However, marketing was also facing a tide of consumer demand that was not going to accept mildly-hopped beer, which for drinkers of microbrews is often equated with blandness.
Worse, the brewery needed to order equipment to facilitate its expanding business. If access to ingredients were not a problem, forecasting future demand would be relatively easy. However, since the brewery needs to order equipment now for delivery anywhere from six months to a year in the future, it needs to have a good quality forecast of sales, including the possibility that it will not be able to produce enough...
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