Answer Fine Country Fruit Cakes 1.

With the current method of working, what is the monthly and annual capacity of the business? The capacity has been calculated according to the following assumptions:• There are five working days per week. • There are four weeks per month. • The 1995 forecast assumes a similar demand pattern to 1994. • The rate of production is the same as in 1994. No down time is assumed. • The sales for 2kg cakes in February 1994 have been corrected to 340 cakes (680kg) as the original sales figure results in negative stock figures. • The total opening stock of 300kg is not taken into account for the calculations. The calculations are as follows: All production in 10kg batches, i.e. ten 1kg cakes or 5kg cakes Production: Cake size (kg) Cakes/ batch Batches/ day Cakes/ day Kg/day Cakes/ wk Kg/wk Cakes/ month kg/ Month 1 10 2 20 20 2 5 2 10 20 TOTALS 30

100 50 40

100 100 150

400 200 200

400 400 600


During March, April, November and December, production of the 2kg cakes was increased by 50%: Cake size (kg) Cakes/ batch Batches/ day Cakes/ day kg/day Cakes/ wk kg/wk Cakes/ month kg/ month 1 10 2 20 20 2 5 3 15 30 TOTALS 35

100 75 50

100 150 175

400 300 250

400 600 700


The annual and monthly capacity are summarised in Attachment 1a. Attachment 1 1a: Current and Annual Capacity of the Business Month Jan 1kg cakes 4800 Feb 400 Mar 400 Apr 400 May 400 Jun 400 Jul 400 Aug 400 Sep 400 Oct 400 Nov 400 Dec 400 Annual 400

Weight 400 4800 2kg cakes 200 2800 Weight 400 5600 Total cakes 600 7600 Total weight 1000 10400

400 200 400 600 800

400 300 600 700 800

400 300 600 700 1000

400 200 400 600 1000

400 200 400 600 800

400 200 400 600 800

400 200 400 600 800

400 200 400 600 800

400 200 400 600 800

400 300 600 700 800

400 300 600 700 1000

1b: Monthly and Annual Sales (1994) Month Jan Feb 1kg cakes 80 4720 Weight 80 4720 2kg cakes 160 2880 Weight 320 5760 Total cakes 240 7600 Total weight 2400 10480 Mar 200 200 340 680 540 400 Apr 600 600 300 600 900 880 May 320 320 240 480 560 1200 Jun 120 120 140 280 260 800 Jul 80 80 160 320 240 400 Aug 120 120 240 480 360 400 Sep 80 80 160 320 240 600 Oct 240 240 180 360 420 400 Nov 480 480 260 520 740 600 Dec 800 800 300 600 1100 1000 Annual 1600 1600 400 800 2000 1400

Is the total weight (kg) of product a useful aggregate measure of capacity for this business? The company is producing a mix of outputs, so some kind of aggregate measure of capacity is required. As much of the production process is done in 10kg batches and the products have little variation (only varying in weight), the total weight (kg) of output may be considered to be a good measure of capacity. It gives an easily understood maximum value to capacity and allows an analysis of the input resources required. However, as a capacity measure it does have some disadvantages in terms of trying to analyze maximum output should market conditions change. The total weight is a measure of output which assumes that the mix of 1kg and 2kg cakes remains the same (i.e. 50:50 mix in an average month). However, 1kg cakes take less time to cook. Consequently, a shift in demand towards 1kg cakes and the resulting shift in manufacturing would increase capacity, even though the process and labour inputs have not changed. Hence capacity changes as the mix of cakes changes, because the different products have different production rates. Currently, with production of fairly standardised products in a repetitive manner, a total output measure of capacity seems most useful. Should the mix of products increase, it may become necessary to measure capacity in terms of labour inputs. As the process requires large labour inputs, one may wish to measure capacity in terms of inputs, such as person-hours, which would require calculation of standard hours. How does capacity compare with demand in 1994? From Attachments 1a and 1b, the total demand for cakes in 1994 was greater than the normal aggregate capacity of the business (10 400kg capacity compared with 10 480kg demand). This extra demand seems to be met by the stock from the previous year, but further investigation shows that there was a shortage of 2kg cakes and a surplus of 1kg cakes. This was dealt with by making another batch of the 2kg cakes per day in the months of March, April, November and December. The graphs 1a, 1b

and 1c show the total supply and demand pattern of the two cake sizes (in total kg), and each cake size respectively. It can be seen that the supply of 1kg cakes is seasonal, peaking at Easter and Christmas (graph 1b). However, the planned capacity is level and consequently surplus cakes are produced during the summer months, some of which are later sold off cheaply as old stock (see question 2). Supply of the 2kg cakes follows demand more closely, but failed on one occasion, February, to meet demand (graph 1c). The only answer for them appearing to sell more cakes than they had is that opening stock was available to cover the demand (unaccounted for on the graphs). Again, the annual demand for the 2kg cakes appears to show some seasonality, peaking again at Christmas and Easter. However, there is less fluctuation in demand for the 2kg cakes over the year compared to the 1kg cakes. 2. Why did Dave have to sell stock at reduced prices in 1994? In which months do you think that happened, and explain clearly the reasons. Justify your answers with simple calculations. There are two main reasons for Dave having to sell stock at reduced prices in 1994. The first is that some cakes may have been near to the end of their storage life and so they had to be sold because their quality was diminishing (with time), and thus were sold cheaply in order to increase demand. The second reason is that Dave may have filled his cool room and therefore had to sell off some cakes, so as to put any new production in the storage room. Looking at the accumulated production and sales data (Graph 2a), one can see that stock never exceeds (or closely approximates) the maximum capacity of the store room (3000kg). Thus it would seem that he sold off some cakes cheaply because they were becoming 'old'. A stock analysis indicates that this occurred in July, August, September, October and November for the 1kg cakes (Graph 2b). The stock analyses by age for both the 1kg and 2kg cakes are featured in Attachments 2b and 2c. The calculation for July (1kg cakes only) is demonstrated below as an example of the method used. July 1994 - 1kg Cakes At the beginning July, opening stock = net stock at end of June = 1100kg. This is split according to age as follows: 2-3 months: 300kg 1-2 months: 400kg 0-1 month: 400kg During July, a further 400kg of cakes are produced and the stock continues to age. Thus, assuming no sales at the end of July, the stock will have increased as follows: 3-4 2-3 1-2 0-1 months: 300kg months: 400kg months: 400kg month (July production): 400kg

Sales for July 1994 were 120kg. Assuming first-in first-out (FIFO) stock rotation, this is subtracted from the stock levels: Age 3 2 1 0 4 3 2 1 Sales = 120 kg Total stock, end of July months: 300 - 120 180 months: 400 400 months: 400 400 month: 400 400



The net stock at the end of July is therefore 1380kg. This becomes the opening stock for August. Following this method, it may be seen that quantity of old stock (> 3 months) sold off is as follows: July 180kg August September October November 500kg 660kg 580kg 180kg

The 2kg cakes stock was analysed using the same method. It was found that no stock was held for more than one month (Graph 2c and Attachment 2c). The stock of 1kg cakes builds up because the capacity plan is level and there is a low seasonal demand during the summer. Because demand does not fluctuate so critically with the 2kg cakes, a similar situation is avoided. Attachment 2 2a: Stock Analysis: Total Weight of Cakes Month Jan Feb Opening stock 1620 Capacity (kg) 1000 Sales (kg) 400 Net stock (kg) 220 0-1 month 700 1-2 months 0 2-3 months 0 Mar 300 800 880 700 620 0 0 Apr 700 800 1200 620 420 0 0 May 620 1000 800 420 620 0 0 Jun 420 1000 400 620 800 220 0 Jul 620 800 400 1020 800 620 0 Aug 1020 800 600 1420 800 800 20 Sep 1420 800 400 1620 800 800 420 Oct 1620 800 600 2020 800 800 620 Nov 2020 800 1000 2220 800 800 420 Dec 2220 800 1400 2020 1000 620 0 2020 1000 2400 1620 220 0 0

2b: Stock Analysis: 1kg Cakes (in kg) Month Jan Feb Mar Opening stock (kg) 1780 1380 Produced (kg) 400 400 Sales (kg) 80 200 Net stock (kg) 420 180 0-1 month 400 400 1-2 months 20 220 2-3 months 0 0 3-4 months 0 0 4-5 months 0 0 Apr 100 400 600 620 400 20 0 0 0 May 420 400 320 420 400 100 0 0 0 Jun 620 400 120 500 400 380 0 0 0 Jul 420 400 80 780 400 400 300 0 0 Aug 500 400 120 1100 400 400 400 180 0 Sep 780 400 80 1380 400 400 400 400 100 Oct 1100 400 240 1700 400 400 400 400 260 Nov 1380 400 480 1860 400 400 400 400 180 Dec 1700 400 800 1780 400 400 400 180 0 1860 400 1600 1380 180 0 0 0 0

2c: Stock Analysis: 2kg Cakes (in kg) Month Jan Feb Mar Opening stock (kg) 240 240 Apr 200 May 280 Jun 0 Jul 0 Aug 120 Sep 240 Oct 320 Nov 240 Dec 320 360

Produced (kg) 600 Sales (kg) 320 Net stock (kg) 40 0-1 month 280

400 680 280 0

400 600 0 0

600 480 0 120

600 280 120 240

400 320 240 320

400 480 320 240

400 320 240 320

400 360 320 360

400 520 360 240

400 600 240 240

600 800 240 40

3. Jean believes that they should try to get more business from craft shops and tourist centres. What advantages/disadvantages would this market have compared with the existing retail outlets? The immediate advantage of craft shop and tourist business is the higher margins that can be obtained, compared with the discounts that the existing retailers, such as restaurants, demand. The new outlets may not require the goods at such short notice, reducing pressure on the operation. They also require 1kg cakes which take less time to produce and so more can be made in a given time period, which if sold could yield higher profits than under the current mix of products. Their present custom is largely seasonal with heavy demand at Easter and Christmas. The 'new' outlets would allow the company to smooth demand over the year, with much of the new demand being in the summer months. Thus, by developing alternative non-peak demand, the firm would be able to utilise a level capacity plan, without the large inventories, which are costly and resulted in the firm having to sell off cakes cheaply in 1994. However, much of the present production is used to satisfy winter demand. This implies that in order for the company to keep all its custom, it would have to increase hours, especially of the 1kg cakes during the autumn. This would lead to longer hours and possibly increased staff levels or more production facilities, such as ovens. If they were unable to increase production, the company faces alienating their original customers, by reducing their delivery reliability and/or quality, and they are left with the original seasonal demand. Consequently, the new outlets offer the same seasonal problems, except this time there is only one peak during the summer, making a level capacity plan less practical and further increasing inventories. The new areas of demand will change the present product mix and may make scheduling harder as more 1kg cakes are required, this may in turn affect quality (bad oven). Their new customers may also demand a greater variety of cakes (mix flexibility) and a different presentation of the product. The Fulbrights have some experience of the demand patterns of their present customers, but this is not true of any new trade. There is uncertainty in forecasting possible demand in these new areas, which means the firm will have to be responsive to changes, otherwise they might incur unnecessary costs or unsatisfactory customer service. If the company can augment its present business with new customers, then it can gain many benefits. It will have to increase capacity and it is their response to this which is important. Increased capacity and smooth demand would allow better use of resources and thus reduction in costs and potentially lower costs per unit. 4. What are the main differences in operations tasks of running the proposed retail shop? What are the implications of this for the owners? If they operate a retail shop alongside the present production, then the company would deliver a service along with a physical product. This involves a front office/back office process whereby there is a higher customer contact compared with straight manufacture. The operations task and design considerations are very different. The customer is now a participant in the service process, i.e. the customer is present. This means that the owners will have to pay attention to the physical surroundings, for example the interior decor. As customer perception is

all important (this is how a customer will assess the quality of the service) the staff (initially the owners) will need to be courteous, friendly and helpful. The service is created and consumed simultaneously and thus cannot be stored, which implies the owners will have to be there when the service is demanded. This could mean coming from the production area (back office) when a customer arrives, and hence they may need to be available at all times. Thus the owners will have to be flexible, so that the service, i.e. selling the good, is immediately available (volume flexibility). In manufacturing demand varies by week, month and season, whereas for a service demand often varies by day, hour or minute. Demand may follow cyclical behaviour during the day, for example busy during the lunch hour, when people are on lunch breaks. This implies that the owners may no longer be able to have lunch together or that extra staff will be required during heavy periods, which is a new facet of operations management. The new demand patterns will also be unknown to the owners, making production decisions harder. The service will have to be dependable with predictable opening hours, placing further 'restrictions' on the owners' time. The owners will also have to learn how to promote the product directly to the consumer which is very different to selling to shops and may require advertising or more product variety. Thus service management requires the owners to acquire a new set of skills, particularly interpersonal and selling skills. The operation will have to be flexible (volume and product mix) and fully capable of serving both markets. They must ensure that the demands of the service do not adversely affect their production efficiency and scheduling. 5. What are the operational implications of making ten varieties of cake, each in two sizes? The most obvious operational implication of making ten varieties of cake in two different sizes is that it will dramatically increase the complexity of the entire production and planning processes. It should be noted that the original idea for the company was to get away from the complexity of a normal bakery. Sales of the standard cake might not be greatly affected by the introduction of new varieties. This means that operations would have to change to meet the new demand. If the production process and plant stay as they are, it would take a week to produce one batch of each size of each variety. This means that they would need to keep large stocks of each type of cake simply because of the manufacturing lead time, increasing the risk of obsolescence and stock holding costs. It would also be impossible to meet the demand if it increases above present levels. It may be possible to increase flexibility by using smaller batch sizes and making a mix of cakes at the same time. This increases the complexity of the manufacture by having different baking times, ingredients and decorating fruits and nuts being used simultaneously. It is likely that they would increase capacity by hiring people and buying more plant. This would require training and put Dave in a supervisory position over staff. New operations such as quality checking may be necessary as the employees will not be as concerned with quality as the couple. Another problem would be the planning of production and ordering of raw materials. With ten varieties of cake each with their own recipes, ordering materials would be very difficult, and could need some simple form of MRP system working from recipes as BOMs. Computers would also be useful for keeping track of stock levels of the 20 products.

Diversification would make every operation more difficult, and this would cause increased costs. These complexity costs would come from increased stocks, materials, hired labour etc., but could not be recovered by simply increasing the price of the cakes. It would therefore need an increased volume of sales to support the cost of variety.

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