Hay Dairies Pte Ltd - Decision Analysis

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OPIM101 – MANAGEMENT SCIENCE

AY2014/2015 TERM 2

GROUP PROJECT

HAY DAIRIES PTE LTD

Prepared for:

PROF. Liew Sing Loon

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G12 – GROUP 1

ADDISON KWANG HUI FENG

AMIRA LIYANA BINTE AMIR

JANELLE LOH ZHI XIAN

LAY JUN YUAN CALVIN

Contents

1. INTRODUCTION        1

1.1 HAY DAIRIES PTE LTD        1

1.2 CURRENT PROBLEM FACED        1

2. ADDRESSING THE PROBLEM        3

2.1 PROPOSED ALTERNATIVE SOLUTIONS        3

3. ANALYTIC HIERARCHY PROCESS (AHP)        6

3.1 LIST OF CRITERIA        6

3.2 DEVELOPING THE HIERACHY        6

4. LINEAR PROGRAMMING        22

4.1 ASSUMPTIONS        22

4.2 FORMULATION OF LINEAR PROGRAMMING MODEL        25

4.3 RESULTS        28

4.4 SENSITIVITY ANALYSIS        29

4.5 ALTERNATIVE MODEL        33

5. RECOMMENDATIONS        38

5.1 EVALUATION        38

5.2 CONCLUSION        39

1. INTRODUCTION

1.1 HAY DAIRIES PTE LTD

Since 1988, Hay Dairies has been Singapore’s very first and only goat farm that produces fresh and pure goat milk locally. Located at Lim Chu Kang, Hay Dairies houses up to more than 900 goats of mixed breeds and uses state-of-the-art bottling machinery as well as milking and pasteurising techniques to produce the fresh goat milk.

The company serves a niche market locally by offering a substitute for cow’s milk. With Singaporeans becoming more educated on the various benefits of goat milk, there has been a stable increase in the number of goat milk consumers and thus, a growing increase in the sales revenue of Hay Dairies. The sale of goat milk is done through three main sales channels, namely direct farm purchasing, home delivery or purchasing from selected PRIME supermarket outlets in Singapore.

Additionally, Hay Dairies welcome walk-in visits by individuals or groups and educational tours are frequently conducted at the farm premises. This helps to boost the awareness of Hay Dairies and the benefits of drinking goat milk.

1.2 CURRENT PROBLEM FACED

From the interview conducted with Mr Leon Hay, Operations Manager of Hay Dairies, he disclosed that Hay Dairies is currently facing a problem with its low and stagnant profit growth rate. Although the farm has been in existence for more than 20 years, Mr Hay hopes that the company would be able to reap increased profits, much more than what it has been generating.

Its current profit growth of approximately 5% has been remaining at a standstill for over the past decade, largely due to several reasons. Firstly, Hay Dairies has been running its operations at high costs whilst charging low prices for its products. Secondly, its delivery services only covers 60% of Singapore residential areas, thus neglecting the potential profits that could be earned in the other 40% of residential areas in Singapore.

Lastly, Hay Dairies are executing production operations without actually knowing the optimal number of bottles of each type of milk to be produced. The absence of optimal production might lead to losses that could have been strategically avoided should optimal quantities of products were produced. Likewise, production of optimal quantities of products will allow Hay Dairies to maximise its profit through the production of more popular profit-generating products.

By tackling these problems, Hay Dairies would be able to maximise its profits and see a steady growth of its profit rate over the next few years.

2. ADDRESSING THE PROBLEM

After taking into consideration the different facts and solutions proposed by Mr Hay, our group has formulated several alternatives to deal with the problem.

2.1 PROPOSED ALTERNATIVE SOLUTIONS

Alternative #1: Derive an optimal production plan  

We propose that Hay Dairy should be take on a more strategic approach in its operations. Based on the current selling prices of each of the four products, Hay Dairies should aim to maximize profit by producing the optimal number of bottles of each flavour of milk. This should be done by taking into account various factors like consumer demand, production capacities and the proportions of products being produced for direct farm purchase or distribution via supermarkets.

Since the four products are priced differently when sold via direct farm purchase as opposed to at the supermarket, Hay Dairies should aim to maximize profits by ensuring the production of the optimal numbers of each product. By producing the optimal number of each product, Hay Dairies can ensure that the products produced generate maximum sales whilst minimizing losses incurred from unsold products. As goat milk is a perishable good, unsold products would have to be discarded after a few days.

This measure can be reasonably sustainable in the long run as it helps Hay Dairies to adapt to changing consumer demands and preference.

Alternative #2: Improve their distribution of products

In our recent interview with Mr Hay, he stated that Hay Dairies is currently distributing 60% of its products through PRIME supermarket while the remaining 40% of their products are being delivered to the homes of its customers. Hay Dairies’ goat milk is distributed across a total of 9 PRIME supermarket outlets. With Hay Dairies’ current delivery services covering only two-fifths of Singapore and with the limited locations of PRIME supermarkets, they do not provide enough coverage across the island.

Hence, in order to improve their coverage and distribution of products, Hay Dairies can first increase the coverage of their delivery services. This will ensure that customers who want to buy goat milk are not hindered by factors such as inconvenience or distance. This can be achieved by increasing the number of delivery trucks used for delivery, whilst maximising the delivery region coverage of each truck. In addition to that, they can consider supplying to other supermarket chains such as NTUC FairPrice and Cold Storage, where their outlets are better distributed across Singapore as compared to PRIME.