What is the current annual cost of serving all the shops from the Mentone baking plant?

How should the shops be served by the new baking plants?

 

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New Bakery for Oz Bread

Background

Oz Bread, a rapidly developing new bakery in Melbourne, is facing a critical supply chain problem. Mitchell McGuire, supply chain manager of Oz Bread, was asked by the boss to find a solution. Given the growth in business and the significant increase in transportation costs over the last two years, it is obvious that the current production and distribution network of the company needs to be restructured. Oz Bread started off with a single baking facility in Mentone. Every day, the freshly baked breads and pies are delivered to its shops located in Glen Waverley, Doncaster, Melbourne CBD, Thomastown, St. Albans, and Hoppers Crossing. Business is growing and soon the maximum daily production capacity at the Mentone baking plant will be reached. Also, transportation costs have been rising during the last couple of years and the increase is expected to continue. A quick decision on building one or more new baking plants could save the company significant amount of money in lost sales as well as transportation expense in the future. A new baking plant will take a year to build from planning to completion. For example, if Oz Bread decides in this year to build a new baking plant, the earliest date the new facility is available will be next year.

Oz Bread was founded eight years ago and has been producing since then fresh breads and delicious gourmet meat pies for Melburnians. Current average daily demands for their breads and pies, which are relatively stable throughout the year, are shown in Table 1. The shops open 360 days a year. It is expected that the demands (breads and pies alike) at the existing shops will grow by the percentages shown in Table 1 for another three years before they become stabilized due to market saturation. For simplicity reason, it can be assumed that the increase in demand takes effect all of a sudden at the beginning of each year and now it is the beginning of the current year. At present, the company has one baking plant in Mentone which produces both products for the entire metropolitan area of Melbourne.

Table 1 – Average daily demand for breads and pies at Oz Bread in current year

 

Daily Demand/Shop Glen Waverley Doncaster Melbourne CBD Thomastown St.Albans Hoppers Crossing
Breads 700 1000 1,500 500 800 1,000
Pies 400 700 1,000 300 450 750
Annual Growth 15% 12% 20% 18% 15% 12%

 

New Network Options

The bread production line at the Mentone baking plant has a capacity of 6,000 units per day, an annualized maintenance and overhead cost of $200,000 a year, and a production cost of $0.3 per unit. The pie production line has a capacity of 4,000 units per day, an annualized maintenance and overhead cost of $300,000 a year, and a production cost of $0.5 per unit. Upon careful analysis of the locations of the existing shops and possible expansion of the company’s business in the future, Mitchell has identified three suburbs – Prahran, Northcote, and Laverton North – as potential sites for the new baking plants. At the new facilities, a bread production line or a pie production line or both can be set up. Using newer baking technologies, the new plants can run at lower costs. Production capacities, construction cost, annualized fixed costs, and unit production costs of the new plants are shown in grey in Table 2. It can be assumed that all these costs will remain unchanged in the next three years until the demands become stabilized. For the new plants, a saving of 30% from the construction cost can be achieved if only one production line is constructed. Shutting down the existing facility at Mentone can recover at most $100,000 in scrap value. If any of the new plant constructed at Prahan, Northcote, or Laverton North has to be shut down in the end due to underutilization, the maximum scrap value that can be retrieved is 10% of the construction cost. To make things simple, net present value is not considered in this case.

Table 2 – Cost figures of the current and the potential new bakery facilities for Oz Bread

capacity

The current transportation costs per unit from the Mentone baking facility to the shops are shown in Table 3. The estimated transportation costs per unit (in current year) from the potential sites for the new plants to the shops are also shown in in grey Table 3. It can be assumed that the unit transportation costs increase by 15% per year. Based on these information, Mitchell has to decide for the next three years where to build the new plants and if so, which production lines to put into the new facilities.

Table 3 – Existing and estimated transportation costs per unit for breads and pies (at current year)

Plant/Shop Glen Waverley Doncaster Melbourne CBD Thomastown St.Albans Hoppers Crossing
Mentone(Existing) $0.10 $0.12 $0.11 $0.20 $0.22 $0.24
Prahran $0.10 $0.12 $0.04 $0.12 $0.15 $0.17
Northcoat $0.18 $0.16 $0.05 $0.04 $0.10 $0.11
Laverton North $0.22 $0.24 $0.10 $0.13 $0.04 $0.05

 

Case Questions

1.As-Is Situation: What is the current annual cost of serving all the shops from the Mentone baking plant?

2.Scenario A: Assuming you were Mitchell and that the Mentone baking plant must be kept but not necessarily making both breads and cakes, would you recommend adding any new baking plant for the next three years? Why? If so, where should the new plants be built, what production lines should be included and how should the shops be served by the existing and the new baking plants? Make your recommendations on a year-by-year-basis (starting from next year).

3.Scenario B: If you could design a new network from scratch (assuming you had the choice of keeping or not keeping the existing baking facility at Mentone), what production network would you recommend and how should the shops be served by the new baking plants? Again, make your recommendations on a year-by-year-basis (starting from next year).

4.Scenario C: If you were required to set up only one production line at each baking plant (i.e., either baking breads or pies but not both), and assuming you could design a new network from scratch as you did in Question 3, what production network would you recommend and how should the shops be served by the new baking plants? Again, make your recommendations on a year-by-year-basis (starting from next year).

5.Action Plan: Taking into account the construction costs of the new plants and the scrape value of the existing plant and assuming the demand for breads and pies will become stabilized in three years, what is the network configuration you would recommend for Oz Bread for the long run and how should the shops be served by the new baking plants? Analyze the total costs involved under the three scenarios taking into account the construction cost of the new plants and the scrap value of the existing baking facility at Mentone. For simplify reason, net present value, inflation, and depreciation, etc. can be ignored in the calculation. Upon the analysis, generate an action plan for your final recommendation on a year-by-year basis from Year 0 to Year 3 assuming the current year is Year 0, i.e., what should Oz Bread do at the beginning of Years 0, 1, 2 and 3, if any.

Note: In calculating the new demand, round to the nearest whole number. In calculating the new unit transportation cost, round to the nearest two decimal points.

 

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