Southern Brewery*

Southern Brewery is a regional brewer of a line of beer products. Markets for its products are limited to
the southeastern portion of the United States, as shown in Figure 1. Southern's beers are local favorites,
and demand is growing rapidly among consumers over the age of 50. Its products are slightly lower in
alcoholic content and are considerably lower in calories than the more popular brands. They are
promoted as a healthy choice, and consumers are responding with increasing patronage.

To meet the growing demand for its products, Carolyn Carter, the director of logistics, was asked to
evaluate the effect on operating costs of constructing a brewery at Jacksonville, Florida. This proposal
was brought about by the rapid growth in the southernmost markets of its region, and the projected strain
on the capacity of the Montgomery brewery. Carolyn began her analysis by noting that the existing
breweries at Richmond, Virginia, Columbia, South Carolina, and Montgomery, Alabama, vary in their
costs and capacity to produce. The cost to produce a barrel of beer products is composed of fixed and
variable costs. These costs differ among locations due to variations in the age of equipment, local labor
rates, delivered costs of raw materials to breweries, and miscellaneous cost differences resulting from
local property taxes, insurance rates, and utilities. The cost of labor was approximately 20 percent of total
production costs, and when overtime was needed, it was charged at time and a half (or 1.5 times normal).
Costs and capacities are summarized in Table 1. The complete product line is produced at each brewery.

Southern maintains a uniform delivered price to distributors of $280 per barrel throughout its marketing
region. Current average annual sales from each brewery for each market area are given in Table 2. The
target profit margin is 20 percent of sales. Transportation between the breweries is handled by a private
trucking fleet owned by Southern. From the records of truck and driver expenses, and the deliveries made,
Carolyn constructed the average transport costs shown in Table 3. Based on her experience with the other
breweries, Carolyn estimated the transport costs for the proposed brewery.

The primary reason for suggesting a new brewery at Jacksonville was the projected doubling of the
Florida market, whereas the remaining markets are anticipated to grow between 15 and 50 percent. Thus,
it was thought that the Jacksonville brewery would relieve the Montgomery brewery from serving the
Florida market area. The anticipated five-year demand pattern and how it would be served are shown in
Table 4.

A brewery at Jacksonville with a capacity of 100,000 barrels is planned. To construct a brewery of this
size is expected to cost $10,000,000 with a useful life of 15 years. The company's expectation for such a
project is a 20 percent return on investment before taxes. Sales expenses and overhead are approximately
27 percent of sales. The new brewery is believed to be able to produce at a cost of $135 per barrel.

* Ronald H. Ballou, Business Logistics Management, Fourth Edition (Upper Sadler, NJ: Prentice Hall,
1999), pp. 537-542.
Figure 1
Map of Southern Brewery’s Plants and Market Regions

Table 1
Production Costs at Southern’s Three Breweries

Production Annual Production

Brewery Location Cost/Barrel Capacity in Barrels*
Richmond, VA $140 100,000
Columbia, SC 145 100,000
Montgomery, AL 137 300,000
* Full capacity is rated at 80 percent of the figures shown.

2
 Table 2
Current Average Annual Sales by Market and Brewery of Origin
Brewery Annual Sales
Market Area of Origin in Barrels
1 Richmond, VA Richmond, VA 56,000
2 Raleigh, NC Richmond, VA 31,000
3 Knoxville, TN Columbia, SC 22,000
4 Columbia, SC Columbia, SC 44,000
5 Atlanta, GA Montgomery, AL 94,000
6 Savannah, GA Montgomery, AL 13,000
7 Montgomery, AL Montgomery, AL 79,000
8 Tallahassee, FL Montgomery, AL 26,000
9 Jacksonville, FL Montgomery, AL 38,000
Total 403,000
Table 3
Delivery Costs Between Breweries and Market Areas in Dollars per Barrel
Breweries
Market Area Richmond Columbia Montgomery Jacksonville
1 Richmond 8.49 12.54 19.98 17.13
2 Raleigh 10.70 9.78 16.35 14.25
3 Knoxville 16.38 12.81 13.80 15.48
4 Columbia 12.54 6.96 12.93 11.16
5 Atlanta 15.48 11.85 10.20 13.80
6 Savannah 14.64 9.54 13.80 9.54
7 Montgomery 19.98 12.93 6.96 13.80
8 Tallahassee 24.30 15.18 13.65 9.72
9 Jacksonville 18.84 12.27 15.18 7.68

Table 4
Proposed Fifth Year Average Annual Sales by Market and Proposed Brewery of Origin
Brewery Annual Sales
Market Area of Origin in Barrels
1 Richmond, VA Richmond, VA 64,000
2 Raleigh, NC Richmond, VA 35,000
3 Knoxville, TN Columbia, SC 33,000
4 Columbia, SC Columbia, SC 55,000
5 Atlanta, GA Montgomery, AL 141,000
6 Savannah, GA Montgomery, AL 20,000
7 Montgomery, AL Montgomery, AL 119,000
8 Tallahassee, FL Jacksonville, FL;
Montgomery, AL and
Columbia, SC 52,000
9 Jacksonville, FL Jacksonville, FL 76,000
Total 595,000