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New Bakery for Oz Bread
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
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
Thomastown St. Albans Crossing
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
Table 2 ? Cost figures of the current and the potential new bakery facilities for Oz Bread
Capacity for Baking Breads per Day
Capacity for Baking Pies per Day
Annual Fixed Cost for Baking Breads
Annual Fixed Cost for Baking Pies
Variable Cost for Baking Breads
Variable Cost for Baking Pies
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)
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1. As?Is Situation: What is the current annual cost of serving all the shops from the Mentone
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-2016Price : $22