Exotic Extracts

Topics: Inventory, Financial ratio, Balance sheet Pages: 23 (7604 words) Published: March 24, 2013

Exotic Extracts, Inc.
Manufacturing and Logistics Simulation Game*
You and your management team have just acquired Exotic Extracts, a maker of chemical extracts that are used as coloring additives in consumer products (i.e., food coloring and cosmetic products). Your company competes with several other firms that supply these additives. At the present time, each competing firm in this market has identical assets, sources of financing, market potential and production capability. In accord with contract terms, your management team has raised the funds necessary to purchase full equity in Exotic Extracts at book value ($5,544,198), and to assume the outstanding debt ($1,450,802). Because bank officials (that provide the open credit line for this debt) are not as optimistic as you about the firm’s prospects, you and your management team have been required to commit personal collateral to cover a substantially larger loan amount than Exotic currently owes. You are keenly aware of the personal and professional risks that you and your management team have assumed in the recent acquisition of Exotic. Despite the risks, however, you decided to proceed with the acquisition because of significant positive attributes about the markets and business. The market has steady, if not growing, product demands and stable product prices. The business has an experienced labor force, ample supply of labor, stable wage rates, stable raw material prices and sufficient raw material availability. In addition, Exotic has a comprehensive manufacturing planning and control (MPC) information system. Prior management was in the process of implementing a financial module that, in conjunction with the MPC system, will comprise much of what is commonly known as an enterprise resource planning (ERP) system. This state-of-the-art ERP system should offer your new management team significant competitive advantages; the information you need to make profitable manufacturing decisions.

The Manufacturing Process
Your company makes two types of finished goods: food coloring additives (Product One) and cosmetic additives (Product Two). Figure 1 depicts the general manufacturing process, where each period represents one month. In order to make the finished products, raw materials are withdrawn from inventory and processed by four machines, each in one of four centers. Through chemical processes (acid baths, chemical mixing, and drying cycles), machines in a processing center break down metals into finished good extracts. There are three types of raw materials, which are types of scrap metals, and each is received into raw materials inventory one period after purchase. Each type of finished product requires a different set of processing centers, and a specific time of operation at a machine within a processing center. Workers set up and operate the centers. When completed, the extracts are moved into finished goods inventory where they await customer demands. Should the end product demand exceed available finished goods inventory, your firm loses the unfulfilled demand and any corresponding contribution to your profit for that period. This will not affect future demand in subsequent periods.

Overview of the Decision-Making Process

Operations management at Exotic Extracts requires scheduling two or more periods into the future. Finished goods production requires one period. Raw material purchases and machine acquisition require another period. The effects of workforce changes may cover several periods. [pic]

Issues and Tradeoffs
As Exotic’s management team, you and your team face the challenge of running a profitable operation. Here are some of the factors your team must consider: 1. Demand Forecasting: Your predictions of finished product demands form the basis for raw material, production and investment decisions. How can historical demand for each type of finished product be used to forecast...
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