Kristen’s Cookie Company Case Study
OPTM 6090
Spring 2014
Team 1
Executive Summary
Kristen and her roommate have planned the Kristen’s Cookie Company (KCC) as a joint venture to create and operate a successful business operated in a college campus apartment, with potential to grow in the future. The core competency is providing made-to-order fresh cookies after standard business operating hours. There are several immediate decisions to address including scale of operation, business partner relationship, operation and production systems, as well as pricing, ordering, and delivery policies. Kristen and her partner must determine which of various alternatives presented will help them achieve operational optimization.
After a careful analysis, it is recommended that Kristen that all orders be standardized to one dozen, with rush deliveries limited to the first batch of the night while using existing equipment available. Kristen should continue to maintain her working relationship with her roommate in order to run the business out of their apartment using one oven, one mixer and two baking trays.
Problem Definition
Kristen needs to decide how to optimize the cookie making process to achieve the best business practices. The partners must formulate rules for accepting and fulfilling orders that will address any of the system’s current insufficiencies. The business is small, with limited resources in finances, space, equipment and time. The primary constraint is limited capacity. Kristen and her roommate also need to plan how to manage the constraints on their capacity, and on what strategy they will use to grow capacity and invest in equipment. Decision Criteria
The following factors must be taken into consideration by Kristen when choosing which alternative or combination of alternatives should be implemented to create a successful and sustainable business. * Adherence to Core Competency
Quality of product is a high consideration for Kristen because it is what sets her apart from other competitors. Her ability to make and deliver cookies that are consistently fresh, high quality and have the ability to provide unique combinations are order winners. Any decision should bear these criteria in highest regard. * Prudent Capacity Management
This is one of the most important concerns for this business analysis because maximization of the allotted time available can make or break this business. Due to the limited hours of labor designated, it is critical to maximize equipment, personnel and process to ensure the highest output of product to appease demand. It is important to analyze time required for each process so that business and profits are not negatively impacted. Each potential change to the process must be applied in terms of time. * Maximization of Profits/Low Costs
Kristen must attempt to keep unit costs low with the limited resources she has available as a college student running a business out of a small apartment. * Efficient Constraint Management
Due to the fluctuations that may arise in demands on a daily basis, the system needs to be able to function with flexibility in order to accommodate demand. These demands may create bottlenecks in the system which needs to be planned for and addressed in advance so not to impact business now and in the future.(just a comment—do the bottlenecks change with demand?—I didn’think so—BH)
* Customer Satisfaction
Although it is important to maximize profits, by increasing customer base and demand for product, it is a fine line before the system becomes overwhelmed. This reflects back to the numerous constraints already mentioned, but customer satisfaction must be taken into account to achieve repeat business and create a potential for increased customer traffic in the future.
Analysis of Alternatives
There are a large number of alternatives and combinations from which Kristen can choose. Each of these alternatives can be broken down into two main categories: 1) order acceptance and processes and 2) capacity and equipment. Since there are multiple options and operational questions that apply to this business concept, a process flow diagram (Table 1) provides clarification to explore these alternatives. The process flow diagram discussion addresses the bottleneck, rush orders, cycle time, nightly capacity, labor costs, labor utilization, and establishes the minimum charge per dozen to offset costs.
Process Flow Diagram
The cookie baking process is broken into 4 grouped steps: mix & spoon, load & bake, cool, and pack and pay.
Several features can be extracted from the process flow diagram: 1) Assuming there are no cookies in the oven, a “rush order” will take 8+10+5+3= 26 minutes. 2) The company’s bottleneck is the load & bake process with an hourly capacity of 6 dozen. 3) Since the company’s hourly capacity is 6 dozen per hour, the cycle time, i.e. the elapsed time between the completions of successive orders (dozen), is equal to 10 minutes. 4) Assuming that KCC is open for four hours (240 minutes) each night, the nightly capacity can be computed by looking at the completion time between completed orders: 26, 36, 46, 56, 66, 76, 86, 96, 106, 116, 126,…216, 226, 236. In the first hour, 4 dozen orders are filled. In hours 2-4, 6 dozen orders are processed per hour. Therefore, the nightly capacity for a 4 hour shift is 4+(3*6)=22 dozen. 5) Kristen’s utilization is 8 minutes/10 minute cycle time= 80%. Therefore, Kristen has 20% idle time. The roommate’s utilization is (1+3)/10 minute cycle time= 40% and a corresponding 60% idle time. 6) With the assumptions of a pay schedule for Kristen and her roommate of $12.00 per hour and no payment for idle time, the nightly labor cost is:
($12.00 * 4 *.8) + ($12.00 * 4 * .4) = $57.60 7) The materials cost per dozen is $0.60 for ingredients + $0.10 for the box=$0.70/dozen. 8) Since the nightly capacity = 22 dozen, the total nightly cost is (22*$0.70) + $57.60 = $73.00. Therefore, the minimum break-even cost/dozen = $3.32 (assuming 22 orders). This leaves Kristen the opportunity to set a price above that breakeven point to create profit.
Order Acceptance and Process Alternatives
The order acceptance rule is a major factor in how the business will run. It determines much of the processes and is really the first step in designing the flow. There are four basic alternatives for how to accept orders: 1. Take advance orders only and stop accepting orders at a predetermined time. 2. Take advance orders first, then accept rush orders if time and ingredients allow. 3. Take advance orders, but reserve a specific number of spots per night for rush orders with a premium charge assigned. 4. Take orders anytime and fill them as ingredients allow, which necessitates refusing orders beyond capacity.
Each of these options also relies on capacity, personnel and equipment. No one decision can be made without regards to each of these other categories. Kristen also needs to decide if cookie orders can be of any size or if a standard order size will aid the process flow. Another concern of Kristen’s has been whether she may be forced(just another comment-I might have missed this-was she concerned about being forced to do business alone or did she just want to explore that possibility?) to run the business alone at times. The Gantt chart shown in Table 2 shows the configuration of Kristen working with her roommate. Table 3 shows the change in cycle time and hourly capacity if Kristen chooses to work alone. The bottleneck now becomes Kristen herself. Cycle time increases to 12 minutes and hourly capacity decreases from 6 to 5.
Analysis of Order Acceptance and Process Alternatives: * Adherence to Core Competency * * Larger order sizes will increase delivery times, which could delay delivery time past the one hour guaranteed time, damaging the core competence of quick delivery * Prudent Capacity Management * * KCC will need to ? Is something missing here? * Maximization of Profits/ Low Costs * * Charging a premium for rush orders can boost revenue * * KCC will lose some revenue from decreased capacity if Kristen works alone * Efficient Constraint Management * * Order sizes larger than one dozen will put even greater pressure on the oven as a constraint * Customer Satisfaction * KCC will need to refuse orders that exceed current capacity, which will damage customer goodwill and lose future customers. * KCC is able to fill many more one dozen cookie orders than larger order sizes, which decreases the likelihood of needing to refuse an order
Capacity and Equipment Alternatives
Capacity is a crucial factor in this entire analysis. The amount of product that Kristin and her roommate can produce in the allotted four hour time slot without compromising quality or cost and profits is the ultimate number game. Capacity is dependent on time, but also on equipment used. There are several alternatives to be considered in terms of capacity and equipment combinations: 1. Use existing equipment 2. Rent or purchase additional oven 3. Rent kitchen space 4. Purchase other additional equipment
Table 4 addresses the potential maximum capacity for each of these scenarios. Using the existing oven and mixer would provide Kristen with the 22 dozen maximum capacity as discussed earlier. Kristen also has the option to rent a larger or additional oven. While there is an obvious capital expenditure to achieve this additional oven space, there is the prospect of producing more batches of cookies each night. In a single oven operation, the bottleneck process is the load and bake with a 10 minute cycle time. Leasing a second oven removes the bottleneck from the load and bake process and shifts it to the mix and spoon process and brings maximum capacity to 56 dozen cookies (Table 5).
Renting kitchen space would provide not only more oven space, but more space for additional equipment such as mixers, trays and perhaps refrigerator or freezer space to make cookie dough ahead of time or store more ingredients. While this may be an appealing route at first glance, it also would require more capital expenditure both up front and long term in investments and rent, but also would require the hiring of additional staff to maintain efficient workflow and optimization of equipment. Although adding a second oven would obviously increase capacity, it did not double the hourly capacity. The new bottleneck capacity becomes 7.5 dozen per hour with six additional orders per night (Table 5). An increase in utilization of the roommate for the second or larger oven loading with result in a nightly pay increase of $4.80, as well as an increase in supply costs. The cost of leasing a second oven should not exceed the six additional orders per night plus increased cost of labor and supply. This same logic applies to renting an additional kitchen instead of just an oven, but on a larger scale.
Kristen currently possesses the mixer, trays and spoons required to start this business. The question is what combination of mixers and trays would provide her and her roommate with an efficient process flow without holding inventory between stations or creating a bottleneck within the labor design. Using a Gantt Chart (Table 6), the scenario of having one mixer and two trays is examined.
Analysis of Capacity and Equipment Alternatives: * Adherence to Core Competency * * KCC will be better able to customize the cookies with a limited capacity and volume * * A larger volume and capacity may not necessarily affect the freshness or quality of the cookies * Prudent Capacity Management * * At this point in KCC’s business cycle, investment in additional equipment would outpace the company’s growth. Although supply is currently constrained, demand is unknown * Maximization of Profits/ Low Costs * * By using existing equipment for the time being, KCC minimizes capital expenditures and costs * Efficient Constraint Management * * With both Kristen and her roommate working, investment in any other equipment than the oven bottleneck would be wasteful and not increase capacity * Customer Satisfaction * By increasing capacity, less orders will need to be refused, increasing customer satisfaction
Recommendations and Justification for Decision
Kristen and her roommate are attempting to create a new business with the potential to expand in both their future careers as students and even after graduation. The possibilities in terms of how and where they run this business are numerous. Since this is a new venture, Kristen must be well prepared and have a solid plan that includes a process flow that is perfected down to the minute due to the number of current constraints. With this in mind, and after extensive analysis, it is recommended that all orders be standardized to one dozen, with rush deliveries limited to the first batch of the night while using existing equipment available. Kristen should continue to maintain her working relationship with her roommate in order to run the business out of their apartment using one oven, one mixer and two baking trays. This gives the duo a maximum capacity of 22 dozen cookies in a four hour time period.
This entire business model relies on efficient order placement systems as well as labor efficiency. Demand management and tight production schedules must coexist in harmony in order for this business to thrive. Limiting orders to one dozen and allowing for advanced reservations would create a moderated work flow and allow for the Kristin and her roommate to plan ahead and know the upcoming schedule. Order size limitation also reduces the likelihood of needing to refuse orders, which would be bad for customer satisfaction. This is also why rush deliveries should be limited to the first batch of the night. Standardization of this process creates consistency that the business and the customer can rely on and does not jeopardize quality and service.
This is only a starting point for Kristen and her roommate. It is important to determine if there is in fact a demand for her product and services. If they find that the demand is high, there is room for growth in some of the other options presented in this analysis. Kristen can also explore the options of pre-made dough and extra staff to increase capacity and delivery speeds. However, if the investment in extra space and equipment is made prematurely before a solid customer base is built, Kristen may not be able to maintain her quality, low costs and flexibility which are all important in her core competencies considerations.
Table 4: Capacity Planning with Equipment Variations | Existing OvenExisting Mixer | Larger OvenSame Mixer | Larger OvenSecond Mixer | Max Capacity | 22 dozen | 57 dozen* | 114 dozen* | | | *maximum capacity would be rare because the triple batch must all be the same ingredients | *would require the addition of more staff to work the mixer and oven |
