Capacity and Forecasting at Green Valley Bakers - Research Paper Example

Capacity and Forecasting at Green Valley Bakers Introduction We now return to Green Valley Bakers in California and seek to discuss the importance of capacity utilization and financial, sales, materials and production forecasting for the business. The concepts of capacity utilization and forecasting techniques are very important for any business venture. Indeed, an entrepreneur or businessman will only venture to invest his capital in a business if he knows and understands that it will give him a good return on the capital invested. It takes a lot of time, effort and skills to plan out the start of operations, from where the inventory will come, how and when sales will be made and at what margins, so that some profit is left over to compensate the businessman and other stakeholders of the business, if there are any, after the costs and expenses of the bakery have been paid out. Forecasting must also take into account the current and future environment as regards legal, technological, social and other phenomena such as changes in Government policy regarding taxation on bakeries, prices of inventory items, changing tastes of consumers and improvements in baking technology. We will consider all these as we evolve a strategy for capacity utilization and demand and sales forecasting at Green Valley Bakers. Discussion Capacity utilization has been one of the main concerns of entrepreneurs and industrialists right from the very beginning of organized business enterprise. In fact the start of the Industrial Revolution saw much of the population of villages move to the cities, lured by the prospects of gainful employment and higher and more consistent wages, thereby leading to a better lifestyle and social progress. Imagine their predicament when they were forced to move into often cramped and squalid living quarters, eating meager rations and toiling long hours in factories and mills that sought only to gain the most advantage from this situation. It was only after the refusal of workers in Chicago to continue to work under these appalling conditions that the world has moved towards respecting the rights of the workers. Even the economists of old regarded Labor as but a factor of production. As regards capacity, J.B Say remarked that Supply would create its own demand. And the production concept in marketing so popular in the 1950s enunciated that if one built a better mousetrap (meaning product), people would flock to your door to buy it. Even today there is a debate among economists as to whether Full Employment or Partial Unemployment is better for the economy. The Marxists would say that nothing has really changed, in this class-ridden society; it is just the capitalist or rich class or bourgeoisie taking advantage of the proletariat or worker class, as it always has. Capacity utilization and forecasting trends are as important for a bakery as an airline or engine manufacturer (Croft, 2010). In the world of accounting, costing techniques have been applied to industrial production to determine the cost per unit of production. Indeed, there have been instituted wage rates per unit of output produced by the worker. In other words, the total cost of a product has been broken up into components of direct materials, direct labor and factory overheads (meaning other costs that cannot be directly apportioned to a product). Thus an amalgam of these costs divided by the number of units products over a specific period of time give a standard cost per unit for a particular batch of bread. This is much like the batch manufacturing processes at pharmaceutical industries and Green Valley Bakers could also adopt this method of identifying production of different batches of bread. It would be invaluable in also judging whether the best-if-used-by-date for a particular unit had passed or not. As explained in earlier assignments, the maximum shelf life of breads at normal room temperature tended to be 48 hours or two days, after which the bread was sold out at discounted rates and may have to be destroyed as well. It is best to refrigerate the bread after the first day in order to extend its life somewhat- this could be done for up to a week at most (Inman, 2011). The use of forecasts is that they help us think about the future today and prepare for it. Every business wants to expand and prosper but it has to do so an atmosphere of uncertainty. Forecasting and business planning help us deal with these issues in a changing environment (Watson, 2010). For specialized bread and cake varieties, it would be better if these are produced using job or batch order techniques as each order would most likely be unique. There would be accurate measurements and costing of materials used, labor utilized and overheads incurred. Each specialized batch of production was therefore likely to have a unique cost. Standard costing would not apply here. In terms of standard costing and variance analysis, there is often a working in four way analysis showing percentage of Capacity Utilization. The reverse of this could alternatively be stated as Capacity Unutilized. So cost accounting attaches due importance to both aspects of production. Of course, time, labor and space as well as cost would be some of the common constraints to raising capacity at the bakery. At the same time we should realize that man is a complex animal, he needs to be rested at regular intervals in order to perform better as F.W Taylor and other time and motion study scientists invariably found out. Otherwise, tiredness, breakdown and chaos would ensue, increasing the chance of errors and contributing to absenteeism, strikes and other problems. After the bakery has been automated using the scenario in the previous assignment, it was determined that a maximum of five staff entrusted with various responsibilities would be sufficient to handle the entire bread making process from start to finish. They would most likely be stationed at different machines, from dough making to mixing to bread cutting and slicing, cooling and packaging. If it was decided to increase production temporarily or permanently due to seasonal or population factors, the bakery could work in three eight hour shifts, or two shifts of eight hours each preceded and followed by a four hour period of rest. Since there are 30 people working at the bakery in total, it would all depend on the level of demand and fully installed machinery and labor capacity of Green Valley Bakers (Walonick, 1993). Another way to increase capacity for the bakery would be for the owners to consider opening up additional outlets and a production facility near to the towns or cities where demand was materializing. This is more likely a mid to long term decision taking from one to three years to finalize and complete. It would be beneficial to make a survey of the situation as to whether the demand was season or throughout the year, and look at the demographics of the population as to family size, number of households, income and consumption capacity. Only after this would the decision be made. It is not necessary that Green Valley Bakers tie up its own capital in this investment. It could borrow from a local bank based on its sales, production capacity and the business reputation of its owners. Green Valley Bakers could also handle the capacity issue by having additional shifts in times of excess orders or open up a small production outlet in a place near the city to serve both as a distribution center for the city as well as sending the additional production to the main bakery as needed. In this way both normal and excess capacity could be handled successfully. Conclusion We have thus looked at the importance and value of forecasting and capacity utilization in business. It is a good and prudent task for every business owner or its top management to spend some time at regular intervals looking at the current and future business prospects and planning ahead to take advantage of the opportunities and to avoid or minimize the threats. A good and honest look at the company and its competitors will help Green Valley Bakers plan accurately for the future. References Croft, J. (2010). Gulfstream to invest $500m in R&D, production capacity, Flight International. London: Nov 23-Nov 29, 2010. Volume 178, Issue 5267; p. 24. Retrieved from: http://proquest.umi.com/pqdweb?index=null&did=2215624281&SrchMode=5&Fmt=3&retrieveGroup=0&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1298417977&clientId=29440 Inman, R.A. (2011). eNotes. Retrieved on 12 Sep 2011 from http://www.enotes.com/management-encyclopedia/capacity-planning Watson, R. (2010). Freight Capacity Will Tighten, Carrier Executives Predict, Transport Topics. Alexandria: Nov 22, 2010. pp. 3 & 4. Retrieved on 12 Sep 2011 from: http://proquest.umi.com/pqdweb?index=null&did=2202914441&SrchMode=5&Fmt=3&retrieveGroup=0&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1298419372&clientId=29440 Walonick, D. (1993). An Overview of Forecasting Methodology, Statpac. Retrieved on 12 Sep 2011 from http://www.statpac.org/research-library/forecasting.htm Read More