The shelf life of the concentrate is 80 days and the

Management Science

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Case 1: TexMex Foods

TexMex Foods operates a plant in Irving, Texas, for manufacturing taco sauce used in fast-food restaurants. The sauce, which is packaged in plastic containers, is made from a special recipe that includes tomato concentrate, onions, and chilli peppers that TexMex purchases from various suppliers. The plant operates 365 days a year and TexMex uses an annual holding cost rate of 18%.

Tomato Concentrate

TexMex Foods purchases its tomato concentrate from Hunt Farms. The company requires 2500 gallons of concentrate per day to manufacture this sauce. Hunt Farms offers customers the following all units price discount schedule:

Number of Gallons Ordered Price per Gallon ($)

1-9999 3.12

10000 - 49999 3.08

50000 - 124999 3.02

125000 - 249999 3.01

250000 or more 2.96

The shelf life of the concentrate is 80 days and the ordering cost is $750. Orders must be placed in 1000-gallon increments. The lead time for delivery is 10 days. Management wishes to determine the optimal ordering policy for concentrate.


In the cooking process, the amount of onion required weekly follows a normal distribution with mean 16000 pounds and standard deviation 4000 pounds. Onions cost $0.15 per pound. If any are left over at the end of the week, they are unusable and thrown away. If TexMex finds themselves running short of onions, they would need to make an emergency purchase from a local supermarket. They would have to pay the retail cost of onion at $0.95 per pound. Management wants to determine the optimal order policy for onions.

Chilli Peppers

TexMex also needs an estimated 2000 pounds of chilli peppers daily. The peppers cost $0.37 per pound. Order cost, including transportation, is $1500. Lead time is normally two weeks but may vary somewhat. Because of this variability, the company estimates that the lead time demand for chilli peppers follows approximately a normal distribution with mean of 28000 pounds and a standard deviation of 4000 pounds. Management wants to determine the optimal ordering policy for chilli peppers to meet a desired service level of 99.5%.

Plastic Containers

TexMex packages the sauce in one-ounce plastic containers it buys from Union Chemical at $0.003 per unit. The ordering cost is $120. TexMex is contemplating leasing a machine to make the containers. The yearly lease cost of the machine is $45000, and the production setup cost of the machine is $260. The machine can produce 1 million containers per day at a per unit cost of $0.0027 (excluding leasing, inventory holding and production setup costs). The company estimates that it requires 450000 containers per day. Management wants to determine whether it should continue purchasing containers from Union Chemical or begin in-house production and what the optimal policy should be.

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Management Theories: The shelf life of the concentrate is 80 days and the
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