The Pillsbury Company *

In late January 1967 the Pillsbury Company of Minneapolis, which produced a wide range of convenience home foods, was trying to decide what quantity of pecans to order to the coming year. Orders for pecans were normally placed only once a year just before the crop was harvested – although for a slight premium additional purchases could often be made at other times. During the 1967 season, however, the pecan growers had suffered extensive crop damage, and a considerably smaller crop than usual was coming onto the market at a much higher price. The purchasing department at Pillsbury realized that if it did not place a large enough order now it would not be able to buy any more pecans until the next crop was harvested in March 1968. In addition, because of the shortage, the 1967 price for pecans was considerably higher than normal. Thus the purchasing department knew that by placing too large an order it would unnecessarily increase the cost of future production – especially as the department was certain that the 1968 price for pecans would return to normal levels. [Excess stocks of pecans purchased now would be used for 1968 production.] The uncertainty as to what quantity to order was further increased by the sales department’s decision to introduce a new pecan product to the market during the coming year. The sales department was not sure how the new product would be received, and consequently, it could only give the purchasing department a very vague idea of how many pecans would be needed. Faced with having to place a firm order within seven days and with the uncertainty of demand for the new pecan products, the purchasing department believed that is normal procedure of estimating the average sales of the products and adding a little extra for inventory might not be the best course of action for the 1967 pecan purchase. Consequently, it requested one of the company’s staff department members help lay out a decision tree. In this way the purchasing department felt that a more rational decision could be reached. The staff member, in conjunction with the purchasing department, asked sales for an estimate of the demand for both the old and the new pecan products. The sales department replied that demand for 1967 could only be one of three values because of the manner in which the products were sold -- in bulk lots to wholesalers. The most likely demand was for 180,000 cases of the product. There were, however, two other possible demands; one was for 220,000 cases, and the other was for 140,000 cases. When asked to estimate the probability of these levels occurring, the sales department replied that its best estimates of probabilities were: 0.7, 0.2, and 0.1, respectively. If the demand was for 180,000 cases, then the purchasing department calculated it would need to purchase 400 hundredweight of pecans in excess of the stock it already had on hand. If, however, the demand was for only 140,000 cases, then 120 hundredweight of pecans in excess of existing stock would be sufficient. Should the demand reach the high figure of 220,000 cases, however, purchasing decided it would then need to buy an additional 680 hundredweight over existing stock.

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The Pillsbury Company *

The staff member then asked the purchasing department the extent to which present prices were above normal (i.e., including 1968 prices). This figure was set at $40/hundredweight. He then asked sales for the net margin that accrued to the company from the sale of the pecan products. After some quick calculation the sales department decided that the figure was $2/cases. Armed with this information, the staff member returned to his office to prepare his recommendation to the purchasing department.
* From Quantitative Methods in Management, Vatter et al.

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