Scenario
TourneSol Canada, Ltd. is a producer of high quality sunflower
oil. The company buys raw sunflower seeds directly from large
agricultural companies, and refines the seeds into sunflower oil
that it sells in the wholesale market. As a by-product, the company
also produces sunflower mash (a paste made from the remains of
crushed sunflower seeds) that it sells into the market as base
product for animal feed.
The company has a maximum input capacity of 150 short tons of
raw sunflower seeds every day (or 54,750 short tons per year). Of
course the company cannot run at full capacity every day as it is
required to shut down or reduce capacity for maintenance periods
every year, and it experiences the occasional mechanical problem.
The facility is expected to run at 90% capacity over the year (or
on average 150 x 90% = 135 short tons per day).
TourneSol is planning to purchase its supply of raw sunflower
seeds from three primary growers, Supplier A, Supplier B, and
Supplier C. Purchase prices will not set until the orders are
actually placed so TourneSol will have to forecast purchase prices
for the raw material and sales prices for the refined sunflower oil
and mash. The contract is written such that TourneSol is only
required to commit to 70% of total capacity up front. Any amounts
over that can be purchased only as required for the same price.
Historical prices for the last 15 years are in the table below
(note that year 15 is the most current year).
Historical Price Data
Marketing Year
Seed
Average Price Index
$/short ton
Oil
Average Price Index
$/short ton
Mash
Average Price Index
$/short ton
1
125.7
307.8
63
2
192.4
465
80
3
242
652.2
109
4
240
664.2
111
5
284
791.3
114
6
242
732
100
7
270
921
134
8
347.2
1123
133
9
436
1297.3
193
10
432.8
1312
187
11
461
1396
193
12
572
1664
207
13
498
1217.4
242
14
438
1072.4
107
15
434
1304.4
200
Sunflower oil contains a number of fatty acids, some which are
desirable in food products and others that are not. One desirable
fatty acid is oleic acid. TourneSol produces high oleic oil for the
wholesale market, and requires that the oleic acid content be a
minimum of 78%. Sunflower oil also contains trace amounts of
iodine. The market requires that that iodine content be a minimum
of 0.77% and maximum of 0.88%
The oleic acid and iodine content for the sunflower seeds from
the three suppliers is given in the table below.
Supplier
Oleic Acid
Iodine
A
65%
0.85%
B
70%
0.73%
C
80%
0.92%
Because the oleic acid and iodine content varies across the
three suppliers, so does the price. It is expected that the cost of
supply from the suppliers will be a percentage of the market
average price of seeds.
Supplier
Cost as % of Average Market Price of Seed
A
88%
B
95%
C
92%
The company faces an additional variable production cost of
$10/short ton and an estimated fixed cost of $1,750,000 over the
upcoming production period.
The company is asking you to provide a recommendation on the
amount of raw material it should purchase from each supplier to
minimize its cost of feedstock.
Management is also looking for an analysis on the profitability
of the company in the next production cycle
Prepare a written management report that includes, at a minimum,
the following sections:
Purpose of the Report
Description of the Problem
Methodology (which would include the model formulation)
Findings or Results
Recommendations or Conclusions
Be sure to address all relevant points, discuss any assumptions
you are making, justify any modeling choices you have made (for
example, the choice of time series forecast model), and highlight
the following items in your report:
a forecast of the next production period’s average price index
for raw sunflower seeds, sunflower oil, and sunflower mash,
a recommendation for the optimal purchasing strategy from the
various suppliers,
a cost-volume-profit analysis using for the recommended
purchase strategy and the forecasted sunflower oil and mash sales
price,
a discussion of the risks and uncertainties that are faced by
the company, and
an analysis and opinion on the profitability of the company in
the next production period (accounting for the expected profit or
loss and the inherent risks/uncertainties.
Remember that you are writing the report from the point of view
of a consultant with senior management of TourneSol Canada, Ltd. as
the intended audience.