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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

 


 

Shop

 

Daily

 

Demand

 

Breads

 

Pies

 

Annual Growth

 


 


 

Glen

 

Waverley

 


 


 

Melbourne

 

Doncaster CBD

 


 


 


 

Hoppers

 

Thomastown St. Albans Crossing

 


 

700

 

400

 

15%

 


 

1000

 

700

 

12%

 


 

500

 

300

 

18%

 


 

1,500

 

1,000

 

20%

 


 

800

 

450

 

15%

 


 

1,000

 

750

 

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

 

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$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

 


 


 


 


 

Plant

 

Attribute

 

Capacity for Baking Breads per Day

 

Capacity for Baking Pies per Day

 

Construction Cost

 

Annual Fixed Cost for Baking Breads

 

Annual Fixed Cost for Baking Pies

 

Variable Cost for Baking Breads

 

Variable Cost for Baking Pies

 


 


 

Existing

 

Mentone

 

6,000

 

4,000

 

Already

 

built

 

$200,000

 

$300,000

 

$0.3 /unit

 

$0.5 /unit

 


 

Potential Site

 

Prahran

 

Northcote

 

6,000

 

7,000

 

4,500

 

5,200

 

$1,200,000 $1,500,000

 


 

Laverton North

 

7,500

 

5,500

 

$1,600.000

 


 

$220,000

 

$300,000

 

$0.25 /unit

 

$0.45 /unit

 


 

$240,000

 

$320,000

 

$0.25 /unit

 

$0.45 /unit

 


 

$240,000

 

$320,000

 

$0.25 /unit

 

$0.45 /unit

 


 

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)

 


 

Shop

 

Plant

 

Mentone (Existing)

 

Prahran

 

Northcote

 

Laverton North

 


 

Glen

 

Waverley

 

$0.10

 

$0.10

 

$0.18

 

$0.22

 


 


 

Doncaster

 

$0.12

 

$0.12

 

$0.16

 

$0.24

 


 

Melbourne

 

CBD

 

$0.11

 

$0.04

 

$0.05

 

$0.10

 


 


 

Thomastown

 

$0.20

 

$0.12

 

$0.04

 

$0.13

 


 


 

St. Albans

 

$0.22

 

$0.15

 

$0.10

 

$0.04

 


 

Hoppers

 

Crossing

 

$0.24

 

$0.17

 

$0.11

 

$0.05

 

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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?byyear?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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Paper#9210724 | Written in 27-Jul-2016

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