KAR foods

1. KARwas a large Brazilianfoodprocessingcompany,headquarteredinSaoPaulo,which producedfreshandprocessed
meats.Startingas a slaughterhouse,the companyhadbecome amajorglobal playerafterseveral acquisitionsacross the
world.The company soldits products to several supermarketchainswithinBrazil.Asthe companygrew,itbecame clear
that supply chainoperationsrequiredsignificantimprovementtocompete withothermultinationalsthatwere entering
the Brazilianmarket.The newsupplychainheadquicklyrealizedthatthe inflexibilityof the currentdistributionsystem
resultedinthe highcostof 4,000 real to process, load,and delivereachorder.He changedprocessesandinvestedin
technologytoincrease flexibilityandmake itcheapertohandle mixedloads.He alsobroughtinroutingsoftware that made
it easiertoplandeliveriestomultiplecustomersona single truck.Thishelpedreducethefixedcostpercustomerorder
downto400 real. Havingmade suchpromisingimprovements, hehopedthatthese wouldsignificantlyreduce lotsizesand
thusinventory.
1. What do you think of the discounting scheme that KAR had used historically? Do you thinkit was justified
given the circumstances?
Withno discountscheme:
 Annual Order(D) = 12*10,000 = 120,000 kg
 S (Fixed OrderCost / lot) = 100 real C (UnitCost/kg) =4 real
 Holdingcost/ year (asa fractionof unitcost),h = 0.2
Optimal ordersize for the supermarket = Q* = Sqrt [2DS/hC]
= sqrt{(2*120,000*100)/(0.2*4)} = 5477.23 kgs ≈ 5478 kg
Withdiscountscheme:
Annual Order(D) = 120,000 kg
S (Fixed OrderCost / lot) = 100 real
C (UnitCost/kg) =3.92
Holdingcost/ year (asa fractionof unitcost),h = 0.2 Optimal ordersize forthe supermarket= Q* = Sqrt[2DS/hC]
= sqrt{(2*120,000*100)/(0.2*3.92)} = 5532.83 kgs ≈ 5533 kg

2. As,the EOQ obtainedinbothschemesislessthan27,500 kg,it isnot entitledforthe reducedprice (Sincediscountis
offeredbeyond lotsizegreaterthan27,500 Kg).So, the supermarketcandidate solutionforthe supermarketwill be anylot
size of 27,500 kg or greater.
No Discount Scheme Discount Scheme
Revenue 480,000 470,000
Annual Material Cost (Real) 300,000 300,000
Annual Holding Cost (Real) 1,370 6,875
Annual Order Cost (Real) 87,623 17,455
Profit (Real) 91,007 146,070
With discounted scheme at lot sizes of 27,500 Kg, KAR foods have better profits (Difference = 55,063 real).
2. Once KAR has reduced its fixed cost per order to 400 real, what are the downsides toleaving the
discounting scheme unchanged?
No Discount Scheme Discount Scheme
Revenue 480,000 470,000
Annual Material Cost (Real) 300,000 300,000
Annual Holding Cost (Real) 1,370 6,875
Annual Order Cost (Real) 8,762 1,745
Profit (Real) 169,868 161,780
With the new fixed cost, the discount scheme predicts deteriorating figures as compared to thenon-
discounted (Difference = 8088 real). Hence, KAR food should immediately review their discount
policies to get profitable. Cancel discounts, if necessary.
With the new fixed cost of 400 real, the following would be the downsides to leave the discountscheme
unchanged;
1. The customers would still order higher quantities in order to avail the discounting scheme, and KARfoods
would incur 20% holding cost on those orders. So, the total cost would not come down as anticipated.
2. The company would be losing 2% on every orderof 27,500 kg or more and also pay 20% holding cost
on them.
3. The routing software which allows them to plan deliveries to multiple customers on a single truck
would not be fully utilized.
3. What would Carlos suggest to Vanessa at the upcoming meeting? What are the potential gains for KAR from
this suggestion?
During his meeting with Vanessa, Carlos should recommend that KARfoods re-evaluate and change their
discounting scheme as follows:

3. • Reduce discount value from 0.08 Real per kg to somewhere between0.01 and 0.02 Realperkg
• Reduce discounting volume to kick in at 9,608 kg per order (instead of 27,500 kg perorder)
• If there is a risk that retailers may not take up this offer (due to their relatively lowsavingsfrom
optimization), thenmandate an MOQ of 9600 kg perorder
• Considervolume discounts(insteadof lot sizeddiscounts) – howeverthismay needfurtheranalysis.