Karma Cola, Inc.

Karma Cola, Inc. is a small producer of specialty cola beverages fortified with nutrients. The firm commenced operations in the San Francisco Bay area in 2008, and was an unqualified success. Karma Cola expanded its operations to cover the entire state of California in 2010. The firm currently has two bottling plants: San Carlos and Inglewood. The colas are dispatched from the bottling plants to four distribution centers: Emeryville, Anaheim, Fresno, and Redding, which then serve their allocated markets in California.

June Hwang, CEO of Karma Cola, had been looking at the recent sales figures. She realized that the firm would soon run out of capacity. She sent for Jeff Horen, VP of Supply Chain Operations. "Jeff," she said, "It seems to me that our bottling plants are running close to capacity. We will have to add capacity at our existing plants a couple of years down the road. Why don't you get back to me with forecasts of demand for the next five years?" Jeff was back a week later. "I can tell you what karma has in store for us, June," he said. "I expect demand to grow rapidly for the next four years, and then level off after that. I've given the matter some thought. Rather than expanding capacity at our existing plants, I suggest that we consider opening a new plant at a third location. Our existing plants in San Carlos and Inglewood can focus on our major markets in the San Francisco Bay area and the Los Angeles Metropolitan area. A third plant in, say, Roseville or Turlock could cater to the other California markets. By spreading our bottling capacity around, we can reduce our distribution costs. Besides, production costs would be lower at Roseville or Turlock. Land can be acquired quite cheaply as well." "You make a good point, Jeff," responded June. "Why don't you run some numbers and figure out the best location for a third plant?"

Jeff went to work right away. His demand forecasts for the distribution centers in 2015 were as follows: Emeryville, 1700 cases/year; Anaheim, 2100 cases/year; Fresno, 1200cases/year; and Redding, 800 cases/year. Based on these figures, he worked out the bottling capacity required at the third plant. He provided some safety margin, just in case demand continued to grow for another year, and arrived at a figure of 1800 cases/year. The existing bottling capacities at San Carlos and at Inglewood were 2000 cases/year and 2400 cases/year. He estimated unit production costs at Roseville ($12/case) and Turlock ($10/case). The corresponding figures for San Carlos and Inglewood were $15/case and $14/case. Finally, he worked out the unit distribution cost ($/case) from each bottling plant to each distribution center.

|From Plant |To Warehouse |
| |Emeryville |Anaheim |Fresno |Redding |
|San Carlos |0.50 |3.50 |1.50 |2.00 |
|Inglewood |3.50 |0.50 |2.25 |4.25 |
|Roseville |1.75 |4.00 |2.00 |0.75 |
|Turlock |1.25 |3.25 |0.75 |1.75 |

Jeff was quite pleased with all the data he had gathered. But he soon realized that he was at a loss as to how to proceed with his analysis. He had heard that the MBA students at San Francisco State University were pretty smart. He decided to ask them for advice ….