Case 3

Chen Xiaoli & Huang Minying

To obtain the lowest cost, we should buy raw materials at the lowest delivered malt price and use
the We believe that malt’s price may go on rising and RMB has been strengthening against the
Australian dollar.
Therefore, there are there rules of ordering raw materials:
1.Offer enough materials for production;
2.Purchase materials as early as possible;
3.Pay the order in the more distant future.

In 2014 Yanjing’s annual malt consumption will be 60,000 tonnes.

So average malt consumption every month in 2014=60,000/12=5000 tonnes
At the end of October 2014, Yanjing had 30,000 tonnes of malt stored in its warehouse. In November
and December malt consumption=5000*2=10,000 tonnes.
Malt stored at end-2014=30,000-10,000=20000 tonnes.
Yanjing Beer estimates that Yanjing’s beer production will increase 20% in 2015 and again in 2016,
over 2014.
2015 malt consumption=60000*(1+20%)=72000 tonnes
Average monthly malt consumption in 2015=72000/12=6000 tonnes
2016 malt consumption=72000*(1+20%)=86400 tonnes
Average monthly malt consumption in 2016=86400/12=7200 tonnes
The stored malt can support the beer production until end-March, 2015 with a new stock 2000
tonnes(20000-6000*3=2000)

In the case, Mr Zhang is concerned that the malt price may go on rising and orders placed now for
delivery up to 12 months forward can be fixed at this month’s malt price. So the two orders should be
placed now for lower price with the first order Q1 tonnes, and second Q2 tonnes.
Supposed the lowest malt stored quantity is 2000 tonnes to ensure the beer production and
highest quantity shipped from Australia 58000 tonnes to ensure the warehouse can store the malt and
for the discount given by supplier as shown in the sheet. From the excel, we get the optimal Q1=36000
tonnes and Q2=50000 tonnes.

The Bank of China projects the average Australian inflation rate for 2014 and 2015 at 7%. The
People’s Bank of China is forecasting an average Chinese inflation rate of 3% in 2014 and 2015. If the
exchange rates change as expected inflation changes:
Exchange rate estimation: , , )(1  E A )
1  i A$ (E1AC rA37$ %

， and the 1 i (1  r￥ )(1  E C ) 1.03 12n
expected
exchange rate in￥ n months = spot rate （ ）
1.07
exchange rates
and BOC’s forwards are:
 Time A$/RMB Forward
spot 5.28 5.28
1 month 5.263263 5.28
3 month 5.229947 5.25
6 month 5.180368 5.2
12 month 5.082617 5.11

From the data above, the expected exchanged rate is smaller than the forward rate, RMB
strengthens as A$ weakens.
But the exchange rate may not change as we expect. Based on the historical data in the last two
years, the risk is about 48.28%. We think the exchange rate will exactly go down faster than the
forward’s exchange rate and choose not to buy the forward.So we use the expected exchange rate in 3
months and in 12 months.
And the total costs of two orders =￥109,275,006
Calculation:
Time Stored Delivery Price(A$) Cost(A$) Cost(RMB)
Oct-14 30000 　 　 　 　
Nov-14 25000 　 　 　 　
Dec-14 20000 　 　 　 　
Jan-15 14000 　 　 　 　
Feb-15 44000 36000 247 8892000 46504688.4
Mar-15 38000 　 　 　 　
Apr-15 32000 　 　 　 　
May-15 26000 　 　 　 　
Jun-15 20000 　 　 　 　
Jul-15 14000 　 　 　 　
Aug-15 8000 　 　 　 　
Sep-15 2000 　 　 　 　
Oct-15 46000 50000 247 12350000 62770317.8
Nov-15 40000 　 　 　 109275006
Dec-15 34000