Kristen Cookie Company - Term Paper Example

? Kristen Cookie Company The following is a study on the production process of Kristen Cookie Company. The paper evaluates the chosen production system which is made to order if it is aligned with the production objective of the business. The course of the investigation of this paper reveals that there is a bottleneck in the present production set up where production has the potential to stall due to the slow capacity of other components in the production line. Computation of the company’s optimum capacity compared to its break-even point also revealed that the present production system cannot make the company viable because optimum capacity is almost equal to break-even point. Having identified the weaknesses in Kirsten Cookie Company, recommendations were made on how to eliminate the bottleneck in production and how to make the company more viable and competetive in general. I. Introduction Background information  Kristen’s Cookie Company is a company that I co-own with my roommate. We operate in an on-campus apartment with the university students and personnel as our primary market. The initial idea of the company is to bake fresh cookies to order, using any combination of ingredients that the customer wants. The cookies that were ordered will be available for pick up within an hour. Thesis of the case study  This study will investigate whether the chosen production process which is the made to order is the most profitable mode of production considering the kind of market that we have and the facility and opportunity available to us. During the course of its investigation, it is important to note that the organization is a start-up company and is operated and manned by its owners (me and my roommate) and as such, this limitation should be considered in the assessment of the organization to arrive at an accurate findings where realistic recommendations can be made where it is appropriate. II. Methodology SWOT Analysis SWOT provides an organization the environmental assessment of which it operates and thus provides the framework to determine the appropriateness of Kristen Cookie Company’s production process. It includes both the internal and external factors of an organization’s environment. The internal factors involve the internal capability of an organization as expressed by the strength and weakness of SWOT. The external environment of an organization is expressed in the opportunities and threats of the SWOT (Beagrie, 2004). SWOT provides a reality check in determining the appropriateness of the elected production process in the initial phase of Kirsten Cookie Company. Strength Making cookies through made to order has a marketing appeal of having a product that is freshly baked right from the oven cookies. Compared to the make to stocked cookies, they are fresher and relatively tastes better. Producing cookies through made to order minimizes risk because the company keeps no inventory of its finished products that has the potential of incurring loss due to spoilage and waste when it is not sold before its expiration date. Weakness The make to order production of cookies limits the production capacity of the business according to the number of orders which are done in almost real time (one hour before the customer can pick up their cookies). It also does not optimize production capacity and makes the facility vulnerable to idleness during off season. It is also vulnerable to opportunity cost because the company’s commitment to sell freshly baked cookies which the customers can pick up after an hour of ordering implies opportunity lost with demands foregone during the day (the business only operates at night and has a commitment that customers can pick up their cookies after an hour of ordering). Given the capacity of its facility, the make to order production system also has a bottleneck in the baking stage where it will compile buffers as it takes longer to bake (10 mins) before the next batch will arrive (6 mins for the 3 trays to complete). Opportunity The possibility of expansion if demand picks up and sustained. It can even be developed to a full blown cookie manufacturing company if the business will be successful at its current set up. It can also expand its market to nearby communities once the production can manage an additional demand. Threat Make to order cookies are relatively more expensive to make to stock cookies that allows the product to be in inventory. This may not be appropriate to its market who are students with very little discretionary income (being dependent to parents or doing extra work on the side) The current payment set up of waiting for customers to pick up their cookies is also risky. There is a big possibility that when customers will no longer crave for the cookies after an hour of making the order thereby losing their motivation to get out of their dorm and pick up the cookies. This could mean spoilage for the company and potential source of loss. Evolution of the problem Currently, the chosen production system of made to order involves the following production process; a. Washing out of the mixing bowl from the previous batch where all the ingredients are added and mixed in the food processor. The mixing bowls can hold up to to three (3) dozen cookies. Dish up the cookies into the cookie tray one dozen at a time. Total time required: six (6) minutes b. Put the cookies in the oven and set the thermostat and timer which will take one (1) minute. The cookies will then be baked for nine (9) minutes. Total baking time: 10 minutes c. Putting the dough into the tray: 2 minutes per tray d. Removing the tray from the oven to cool down. Time required: 5 minutes e. Packing the cookies by the dozen. Required time: two (2) minutes f. Accept payment for the order Required time: one minute Note that there is a bottleneck in the baking stage because the oven can only bake one (1) tray at a time for 10 minutes totalling to 30 minutes before it can bake the trays that will be readily availabe in every 6 minutes. The bottleneck can be best illustrated in a process flow below in the figure in Appendix 1. Application of course concept Jacobs and Chase stated that if the production process does not match the needs of the firm, it will punish the firm every minute that it operates (2011 pg., 108). The punishment would come in various ways. It could come in a bottleneck in the production process, difficulty in keeping up with the demand among other things that would ultimately lead to the company folding up due to non-profitability (Greasley, 2005). Kirsten Cookie Company is start up company and it is a business imperative that the company will profit in the early stage of its operation for the business to be convinced that the company is a viable business endeavor. Such, the elected production process must be aligned to this profit objective and therefore must provide the optimum productivity at the lowest cost possible to make the company profitable (Slack and Johnson, 2006). The chosen production system of make to order is not aligned to its objective because it is prone to waste due to the bottleneck in its production. Bottleneck is harmful in production system because it stalls the production line due to undercapacity (Yan et al., 2010). Business Production Capacity It can only bake the 3 trays in 30 minutes as it would bake them 10 minutes at a time while the trays would be made available in 6 minutes. There is a bottleneck of 24 minutes in every batch or cycle (30 mins – 6 mins). Optimum capacity therefore is dependent on the capacity of the oven which is 240 minutes (60 minutes x 4 hours)/30 minutes which is a mere 24 dozen per night for 4 hours of operation. Price per unit is $3 (Appendix 2 for computation) Break-even point is 22.22 (Appendix 2 for computation) III. Discussion and Results Given the current production set up of make to order and considering the capacity of its equipment, the break-even point is 22.22 units which is almost equal to its capacity of 24 units. This means that the production system and capacity of Kristen Cookie Company is not viable to sustain the business because its breakeven point nears its optimum capacity leaving no room to make a profit. Having a production system that does not provide opportunity for profit, it is now necessary to evaluate the current made to order production system and look for other alternative production system that would make the company not only viable but profitable as well. Evaluating the Current Production System and the Need to Shift to Make to Stock Production System Electing to have a made to order cookies has its advantages and disadvantages. The obvious advantage of made to order production system is the near zero or absence of spoilage in production because the business does not keep inventory of their finished product. Thus, waste is minimized if not totally eliminated. The production set up has also the marketing appeal of attracting customer through its freshly baked cookies that guarantees their customers right from the oven cookies. It has also lesser risk because they have no idle capital lying around in case there are no orders from them. The business however have more pressing disadvantages. These disadvantages of the production of the business production process has to be viewed from the business aspect. Legitimate business questions such have to be asked such as “Is it profitable to keep the production process this way? Is this business production process that can yield the most optimum productivity? Is this production process most appropriate for the given market? is this business process viable given the physical structure where the business is situated in the campus of the university? We also have to bear in mind that the budding entrepreneurs are still students who have classes to attend. Although the problem is silent, it is obvious that the cookie selling business is just a sideline either to augment the finances of their studies or to try the viabilit of a business idea. Whatever the real reason of the entrepreneurs, it is a given that the business is subordinate to the priority of studying. They are in a campus dorm in the first place. From the standpoint of profit, it would be difficult to ascertain if the production process is profitable. As mentioned erlier, the current production system is not efficient given the current capacity of the facility. In the mixing stage, the container can accommodate up to three (3) dozen worth of ingredients that would take equal time of six (6) minutes in putting in the tray. The oven however will become a bottleneck in production because it cannot accommodate the output of trays in the production line where it will take 30 minutes for it to bake the trays that will become ready in 6 minutes. There will be a buffer of 24 minutes in every batch of trays which could be thrown to spoilage if the oven cannot keep with its cycle. The current production system is also vulnerable to incurring heavy opportunity cost. If there are no orders during that time, then the facilities would be idle incurring us opportunity cost . In the same vein, demands which were unmet due to the limited hour of operation of the make to order will also incur us opportunity cost. Opporunity cost in production is the profit foregone due (Lewis and Spencer, 2007). The production process is also risky in terms of maintaining the goodwill of its customers. Goodwill and Customer Relations Management (CRM) is as equally important to a business as the production system. CRM is the ethical interaction of the company among its various shareholders particularly its customers that would contribute to its positive image (Payne and Frow, 2007). The production process poses as a risk in maintaining a positive CRM because the business cannot meet the demand during a peak period thus frustrating its customers. Since the business does not stock inventory, it can only produce a constant optimum number of cookies which is 24 dozens given the available time (four hours) allocated and the capacity of the facility and space that the dormitory will allow. Also, given the nature of the production process, Kristen’s Cookie Company products will be priced at a premium compared to make to stock production process. It is because the price would compensate the time that the production facility was not in use as it does not allow stocking up inventory which could be used to meet future demand and capitalize on scale. Pricing at a premium would be inappropriate given the nature of the market that is comprised of students with very little discretionary funds and thus, very sensitive to price. Market which is sensitive to price will readily trade product feature (which in this case is freshness) for affordability and it follows that the make to order process is inappropriate with the budget of the market (Hill, 2005). Summary and Recommendation The production problem of Kristen Cookie Company can thus be summarized into the following categories; a. Production bottleneck in the the baking stage – trays made availabe in the second stage of production cannot be readily baked because the oven can only accommodate one tray at a time for a total of 30 minutes (10 minutes per tray). This bottleneck produce a problem of over-buffering in the baking stage. b. Vulnerability to opportunity cost – attending to customers only in the evening meant forgoing potential customers during the day. Kristen Cookie Company’s commitment to deliver the cookies in an hour after they are ordered is actually working against them because it meant they cannot take orders during the day because they only operate in the evening. c. Inability to meet demand during peak season thus jeopardizing good customer relations because of the limited and problematic capacity of their made to order production system. It is also vulnerable to idleness during off season where facilities sit idle instead of optimizing capacity due to non-order. d. Higher price that comes with a made to order production system could make the company less competetive and vulnerable to substitution. To address the abovementioned issues it is recommended for Kirsten Cookie company to adopt the following; a. Replace the existing oven with two ovens that can accommodate three (3) trays to eliminate bottleneck in the baking stage of production. This way, production will line will run smooth and remove the bottleneck in baking. The production time in the tray preparation will now equal to the capacity of the oven to bake. b. Shift from make to order production to make to stock production system to eliminate idleness in production during low demand and to be able to fulfill demands during peak season through its inventory. c. Lower price to gain wider market share among the students who are price sensitive. Instead, realize profitability through scale and expand market reach to neigboring communities. d. If capital and market demand will allow, hire another personnel to optimize production. References Arsham, Hossein  (1994). Break-Even Analysis and Forecasting. Retrieved from http://home.ubalt.edu/ntsbarsh/Business-stat/otherapplets/BreakEven.htm Beagrie, S. (2004). How to... conduct a SWOT analysis. Personnel Today, , 21-21. Retrieved from http://search.proquest.com/docview/229950392?accountid=32521 Greasley, Andrew (2009) Operations Management, Wiley, UK Lewis, R. M., P.E., & Spencer, G. R., P.E. (2007). Total cost management: A case study in missed opportunity. AACE International Transactions, , 31-OW36. Retrieved from http://search.proquest.com/docview/208182419?accountid=32521 Payne, Adrian; Frow, Pennie (2005). A Strategic Framework for Customer Relationship Management. Journal of Marketing, 69(4):167-176. Slack, N., Chambers, S., Johnson R (2006) Operations Management (5th ed) Prentice Hall, UK Terry Hill (2005) Operations management (2nd ed) Palgrave Macmillan Yan, Hong-Sen; An, Yu-Wei; Shi, Wen-Wu (2010). A new bottleneck detecting approach to productivity improvement of knowledgeable manufacturing system. Journal of Intelligent Manufacturing, 21(6):665-680. Appendix Appendix 1 Appendix 2: Business Production Capacity There is a bottleneck of 24 minutes in every batch or cycle (30 mins – 6 mins). Optimum capacity therefore is dependent on the capacity of the oven which is 240 minutes (60 minutes x 4 hours)/30 minutes which is a mere 24 dozen per night for 4 hours of operation. Please see Appendix 2 for detailed computation Variable cost: Cost of ingredients = .60 per dozen Packing = .10 per box (holds a dozen cookies) Compute the optimum capacity Constant for up to 3 dozens Washing and mixing: 6 minutes Putting it into tray (2 mins@ 3 trays): 6 mins Bottleneck at Baking It can only bake the 3 trays in 30 minutes as it would bake them 10 minutes at a time while the trays would be made available in 6 minutes. There is a bottleneck of 24 minutes in every batch or cycle (30 mins – 6 mins). Optimum capacity therefore is dependent on the capacity of the oven which is 240 minutes (60 minutes x 4 hours)/30 minutes which is a mere 24 dozen per night for 4 hours of operation. Computation of Unit price Assuming that fixed cost is $ 10 Labor cost is $5 an hour ($20 each for 4 hours of work for me and my roomate) Raw materials is the variable cost totallingto $.70 (.60 ingredients + .10 packing cost for each dozen) Labor cost per dozen is 1.67 ($40 labor cost divided by 24 dozen) Formula: Raw Materials + overhead cost + labor cost (production time x hourly wage) / number of units = selling price per unit. Computation .70 + 10 + 40/ 18 dozen 50.70/18 dozen = $ 2.81 or $3 per dozen Break even point (Arsham, 1994) Q = FC / (UP - VC) where: Q = Break-even Point, i.e., Units of production (Q), FC = Fixed Costs, VC = Variable Costs per Unit UP = Unit Price Computation Q= 10 /(2.81-.2.36) =10/.45 Break-even point is 22.22 Read More