Bay Area Bakery Group Members Kevin Worrell, Asad Khan, Donavan Drewes, Harman Grewal, Sanju Dabi Case study #1

Discussion Questions Question 1 Agree/disagree with construction of new facility in San Jose Formulate and solve mathematical programming model(s) Make all necessary assumptions Question 2 If we disagree - what actions are necessary Is the current distribution optimal Question 3 10 year growth projections Effects on need for new San Jose facility Question 4 Additional factors to consider

Discussion Questions Question 1 Agree/disagree with new facility in San Jose Formulate and solve a mathematical programming model(s) Make all necessary assumptions Question 2 If we disagree - what actions are necessary Is the current distribution optimal Question 3 10 year growth projections Effects on need for new San Jose facility Question 4 Additional factors to consider

Discussion Questions Question 1 Agree/disagree with new facility in San Jose Formulate and solve a mathematical programming model(s) Make all necessary assumptions Question 2 If we disagree - what actions are necessary Is the current distribution optimal Question 3 10 year growth projections Effects on need for new San Jose facility Question 4 Additional factors to consider

Discussion Questions Question 1 Agree/disagree with new facility in San Jose Formulate and solve a mathematical programming model(s) Make all necessary assumptions Question 2 If we disagree - what actions are necessary Is the current distribution optimal Question 3 10 year growth projections Effects on need for new San Jose facility Question 4 Additional factors to consider

Project Assumptions Jan 1, 2006 to Dec 31, 2006 is current operating year with current operating QTY and is the baseline position of the Bakery operation. Assume Jan 1, 2007 is the first day the San Jose Plant can come online. Recognize San Jose plant savings on December 31st of the year Builder has San Jose plant ready for operation and gets paid the $4,000,000 on January 1 of that year. Bakery corporation has $4,000,000 in liquid asset reserves therefore the money is interest free. Current operation cost is flat and production cost includes all the overhead production costs (e.g. equipment maintenance, facilities, wages etc). Roadmap approach with an intention to operate up and beyond 10yrs Products are priced in market such that we make same profit always despite of inflation and increased taxes

Mathematical Model Let’s assume B N is the bakery plant of origin, and D N is the bakery destination for major market areas: Santa Rosa SacramentoRichmondSan Francisco StocktonSanta CruzSan Jose Bakery of OriginB1B2B3B4B5B6B7 Santa Rosa ScrmntoRchmdBrklyOkldSan FranSan Jose Santa Cruz SlnsStcktMdst Major Market Areas D1D2D3D4D5D6D7D8D9D10D11

Mathematical Model (Cont.) Based on the data from Table 3 and Table 1 the minimization equation for LINDO comes out to be as follows: MIN P a1 B1D1 +…+ P a11 B1D11 + P b1 B2D1 + …+ P b11 B2D11 + P c1 B3D1 +…+ P c11 B3D11 + P d1 B4D1 + … + P d11 B4D11 + P e1 B5D1 +…+ P e11 B5D11 + P f1 B6D1 +…+ P f11 B6D11 + {P in B7Dnn} The above equation is shown with San Jose (in bold). Where P in is the total cost associated for delivering products from bakery of origin to major market areas. This total cost is calculated as the sum of baking cost and delivery cost as follows: P in = Baking cost from the bakery of origin + Delivery cost to the major market areas

Mathematical Model (Cont.) The constraint equations for LINDO are as follows: The following equations are derived from the fact that a particular bakery can supply to major market areas with the consideration of capacity (Table 1 and Table 3): B1D1 + …+ B1D11 <= 500 B2D1 + …+ B2D11 <= 1000 B3D1 +…+ B3D11 <= 2700 B4D1 +…+ B4D11 <= 2000 B5D1 +…+ B5D11 <= 500 B6D1 +…+ B6D11 <= 800 {B7D1 +…+ B7D11 <= 1200} The bold equation is added for the construction of San Jose bakery.

Mathematical Model (Cont.) Second set of constraint equations for LINDO are: Following equations are derived by the fact that the bakeries are supplying a major market area with the consideration of demand over N years. Where G x is the demand over N years based on the 10% increase for a particular bakery of origin. B1D1 +…+ B6D1 {+B7D1} >= G a B1D2 +…+ B6D2 {+B7D1} >= G b B1D3 +…+ B6D3 {+B7D1} >= G c B1D4 +…+ B6D4 {+B7D1} >= G d B1D5 +…+ B6D5 {+B7D1} >= G e B1D6 +…+ B6D6 {+B7D1} >= G f B1D7 +…+ B6D7 {+B7D1} >= G g B1D8 +…+ B6D8 {+B7D1} >= G h B1D9 +…+ B6D9 {+B7D1} >= G i B1D10 +…+ B6D10 {+B7D1} >= G j B1D11 +…+ B6D11 {+B7D1} >= G k The bold equation is added for the construction of San Jose bakery.

Mathematical Model (Cont.) The LINDO equations for current year are as follows: MIN 21 B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D11 SUBJECT TO B1D1 +…+ B1D11 <= 500 B2D1 +…+ B2D11 <= 1000 B3D1 +…+ B3D11 <= 2700 B4D1 +…+ B4D11 <= 2000 B5D1 +…+ B5D11 <= 500 B6D1 +…+ B6D11 <= 800 B1D1 +…+ B6D1 >= 300 B1D2 +…+ B6D2 >= 500 B1D3 +…+ B6D3 >= 600 B1D4 +…+ B6D4 >= 400 B1D5 +…+ B6D5 >= 1100 B1D6 +…+ B6D6 >= 1300 B1D7 +…+ B6D7 >= 600 B1D8 +…+ B6D8 >= 100 B1D9 +…+ B6D9 >= 100 B1D10 +…+ B6D10 >= 400 B1D11 +…+ B6D11 >= 100 END LP OPTIMUM FOUND AT STEP: 15 OBJECTIVE FUNCTION VALUE: $99,770

Mathematical Model (Cont.) The LINDO equation for current year with San Jose is: MIN 21 B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B7D B7D B7D B7D B7D B7D B7D B7D B7D B7D B7D11 SUBJECT TO B1D1 +…+ B1D11 <= 500 B2D1 +…+ B2D11 <= 1000 B3D1 +…+ B3D11 <= 2700 B4D1 +…+ B4D11 <= 2000 B5D1 +…+ B5D11 <= 500 B6D1 +…+ B6D11 <= 800 B7D1 +…+ B7D11 <= 1200 B1D1 +…+ B7D1 >= 300 B1D2 +…+ B7D2 >= 500 B1D3 +…+ B7D3 >= 600 B1D4 +…+ B7D4 >= 400 B1D5 +…+ B7D5 >= 1100 B1D6 +…+ B7D6 >= 1300 B1D B7D7 >= 600 B1D B7D8 >= 100 B1D9 +…+ B7D9 >= 100 B1D10 +…+ B7D10 >= 400 B1D11 +…+ B7D11 >= 100 END LP OPTIMUM FOUND AT STEP: 12 OBJECTIVE FUNCTION VALUE: $99,090

Mathematical Model (Cont.) The LINDO equation for year 1 without San Jose is: MIN 21 B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D11 SUBJECT TO B1D1 +…+ B1D11 <= 500 B2D1 +…+ B2D11 <= 1000 B3D1 +…+ B3D11 <= 2700 B4D1 +…+ B4D11 <= 2000 B5D1 +…+ B5D11 <= 500 B6D1 +…+ B6D11 <= 800 B1D1 +…+ B6D1 >= 306 B1D2 +…+ B6D2 >= 510 B1D3 +…+ B6D3 >= 612 B1D4 +…+ B6D4 >= 408 B1D5 +…+ B6D5 >= 1122 B1D6 +…+ B6D6 >= 1300 B1D7 +…+ B6D7 >= 720 B1D8 +…+ B6D8 >= 102 B1D9 +…+ B6D9 >= 102 B1D10 +…+ B6D10 >= 408 B1D11 +…+ B6D11 >= 102 END LP OPTIMUM FOUND AT STEP: 16 OBJECTIVE FUNCTION VALUE: $103,457.4

Mathematical Model (Cont.) The LINDO equation for year 1 with San Jose is: MIN 21 B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B1D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B2D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B3D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B4D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B5D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B6D B7D B7D B7D B7D B7D B7D B7D B7D B7D B7D B7D11 SUBJECT TO B1D1 +…+ B1D11 <= 500 B2D1 +…+ B2D11 <= 1000 B3D1 +…+ B3D11 <= 2700 B4D1 +…+ B4D11 <= 2000 B5D1 +…+ B5D11 <= 500 B6D1 +…+ B6D11 <= 800 B7D1 +…+ B7D11 <= 1200 B1D1 +…+ B7D1 >= 306 B1D2 +…+ B7D2 >= 510 B1D3 +…+ B7D3 >= 612 B1D4 +…+ B7D4 >= 408 B1D5 +…+ B7D5 >= 1122 B1D6 +…+ B7D6 >= 1300 B1D7 +…+ B7D7 >= 720 B1D8 +…+ B7D8 >= 102 B1D9 +…+ B7D9 >= 102 B1D10 +…+ B7D10 >= 408 B1D11 +…+ B7D11 >= 102 END LP OPTIMUM FOUND AT STEP: 12 OBJECTIVE FUNCTION VALUE: $102,634.2

5 Year Analysis Grid Following is the analysis grid that contains up to 5 yrs with and without San Jose:

5 Year Analysis Grid At our projected 5 year term we are unable to recover the $4,000,000 cost of starting a new bakery.

5 Year Analysis Conclusions Current distribution is not optimal It can be improved further as shown in table 1 $3500/day savings Assumption: Cost of keeping a plant non-operational for temporary period is negligible) For current year there is no need to run the Santa Rosa and Santa Cruz bakeries

5 Year Analysis Conclusions Current distribution is not optimal It can be improved further as shown in table 1 $3500/day savings Assumption: Cost of keeping a plant non-operational for temporary period is negligible) For current year there is no need to run the Santa Rosa and Santa Cruz bakeries

Optimal Distribution for Current Scenario To Major Market Areas From Bakery Plant Locations (Quantity in cwt) Santa Rosa SacramentoRichmondSan Francisco StocktonSanta Cruz Santa Rosa300 Sacramento500 Richmond600 Berkeley400 Oakland1100 San Francisco1300 San Jose Santa Cruz100 Salinas100 Stockton400 Modesto100 Current Operation Cost (per day): $103,270 Optimal Operation Cost (per day): $99,770 Net savings: $3,500 Table 1

Optimizing Current Operation Current distribution is not optimal It can be improved further as shown in table 1 $3500/day Assumption: Cost of keeping a plant non-operational for temporary period is negligible) For current year there is no need to run the Santa Rosa and Santa Cruz bakeries SAVINGS!!

Optimizing Current Operation Current distribution is not optimal It can be improved further as shown in table 1 $3500/day savings Assumption: Cost of keeping a plant non-operational for temporary period is negligible) For current year there is no need to run the Santa Rosa and Santa Cruz bakeries

Optimizing Current Operation Current distribution is not optimal It can be improved further as shown in table 1 $3500/day savings Assumption: Cost of keeping a plant non-operational for temporary period is negligible) For current year there is no need to run the Santa Rosa and Santa Cruz bakeries

Will the Bay Area Bakery have the capacity to meet the growth projections for the next 10 years? Bay Area Bakery will reach maximum production limit (7500 units per day) with current bakery plant capacity starting Jan 1, 2017 (11 th year). Lack of increasing capacity by constructing San Jose plant could realize a 112 cwt loss of market sales potential per day yielding a $122, loss in profits for fiscal year 2017 ($3.00 per cwt). Growth of San Jose market (200%) by 2016 (10 th year) is main driver. Capacity Analysis 10 Year Capacity Analysis

10 th Year (2016) Shipping Analysis To Major Market Areas From Bakery Plant Locations (Quantity in cwt) (w/o San Jose / with San Jose) Santa Rosa (B1) Sacramento (B2) Richmond (B3) San Fran (B4) Stockton (B5) Santa Cruz (B6) San Jose (B7) TOTALS Santa Rosa (D1)360 / 3200 / Sacramento (D2)600 / Richmond (D3)720 / Berkeley (D4)280 / 0200 / Oakland (D5)140 / / San Fran (D6)1300 / San Jose (D7)600 / / / 0480 / 00 / Santa Cruz (D8)120 / 00 / Salinas (D9)120 / 00 / Stockton (D10)0 / / Modesto (D11)120 / TOTALS500 / / / / / / 00 / 1200 Cost Without San Jose Plant (per day): $140, Cost with San Jose Plant (per day) : $135, Savings Differential with San Jose Plant (per day) : $4,400.00

Investment Analysis There can be many considerations to when the San Jose Bakery should be opened depending on management and investor goals: Minimize time to recuperate $4,000,000 investment Maximize additional savings after investment recuperated Latest deployment time and still recuperate investment Effect on other bakery operations Investment Analysis

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Additional Factors Construction cost growth (Materials, Labor etc) Pure money inflation cost Current and future maintenance Operation cost for current plants Land cost due to growth in cities Analysis considering other location than San Jose Enhance the product line Competition from other bakeries Decrease in demand

Any Questions??