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 20 100 100 400 400
2 5 2 10 20 50 100 200 400
TOTALS 30 40 150 200 600 800

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 20 100 100 400 400
2 5 3 15 30 75 150 300 600
TOTALS 35 50 175 250 700 1000

The annual and monthly capacity are summarised in Attachment 1a.

Attachment 1

1a: Current and Annual Capacity of the Business

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1kg cakes 400 400 400 400 400 400 400 400 400 400 400 400
4800
Weight 400 400 400 400 400 400 400 400 400 400 400 400
4800
2kg cakes 200 200 300 300 200 200 200 200 200 200 300 300
2800
Weight 400 400 600 600 400 400 400 400 400 400 600 600
5600
Total cakes 600 600 700 700 600 600 600 600 600 600 700 700
7600
Total weight 800 800 1000 1000 800 800 800 800 800 800 1000
1000 10400

1b: Monthly and Annual Sales (1994)

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

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 months: 300kg

2-3 months: 400kg
1-2 months: 400kg
0-1 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 Sales = 120 kg Total stock, end of July

3 - 4 months: 300 - 120 180
2 - 3 months: 400 400
1 - 2 months: 400 400
0 - 1 month: 400 400
 TOTAL: 1380kg

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 500kg
September 660kg
October 580kg
November 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 Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Opening stock 300 700 620 420 620 1020 1420 1620 2020 2220 2020
1620
Capacity (kg) 800 800 1000 1000 800 800 800 800 800 800 1000
1000
Sales (kg) 400 880 1200 800 400 400 600 400 600 1000 1400 2400
Net stock (kg) 700 620 420 620 1020 1420 1620 2020 2220 2020 1620
220
0-1 month 700 620 420 620 800 800 800 800 800 800 1000 220
1-2 months 0 0 0 0 220 620 800 800 800 800 620 0
2-3 months 0 0 0 0 0 0 20 420 620 420 0 0

2b: Stock Analysis: 1kg Cakes (in kg)

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

2c: Stock Analysis: 2kg Cakes (in kg)

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Opening stock (kg) 200 280 0 0 120 240 320 240 320 360
240 240
Produced (kg) 400 400 600 600 400 400 400 400 400 400 600
600
Sales (kg) 320 680 600 480 280 320 480 320 360 520 600 800
Net stock (kg) 280 0 0 120 240 320 240 320 360 240 240
40
0-1 month 280 0 0 120 240 320 240 320 360 240 240 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.