Liam Folan, Vicente Soriano, Cayetano Uribe, George Yang
Operations Strategy & Consulting
Professor Joy Field
September 7th 2015
Scharffen Berger Case
Overview
The management team at Scharffen Berger is thinking of expanding capacity in order to cope with the anticipated growth in demand. Our analysis recommends that Scharffen Berger to simultaneously fix all bottlenecks (roaster, melangeur and conche) in order to increase capacity because simply purchasing a ball mill to improve conche capacity will not improve overall capacity of the production process and can prove very expensive without effectively preparing for increasing demand.

Analysis
There are several key issues that management should consider when deciding whether and how to add capacity. First, demand for Scharffen Berger products are increasing at a rapid pace. Sales grew 10 times in the span of 5 years ($1.1mm-$10mm) and revenue is expected to be over $15mm in 2005. In addition, a mass-market retailer had expressed interest in having a Scharffen Berger custom blend to sell in its stores all across the country. If the customer’s order is taken, it can “increase product demand by up to 30% by the end of the year.”
Furthermore, the industry itself is growing rapidly. The premium segment is considered as a growth segment with 15-20% annual growth projected between 2000-10 due to various reasons. In addition, during the beginning of the company, the founders were focused on achieving the quality of the product and were satisfied with fairly slow growth. However recently, they have begun to “recognize the strength of the brand and wishes to increase its market position.” In order for them to seize the opportunity and keeping up with the rapid growing demand, the company must look at its production capabilities for the past 18 months (demand from retailers had outstripped supply).
Scharffen Berger is one of the few companies that manufacture their products “from beans to bar,” as their operation process is controlled in-house. In terms of how to add capacity, the management must look at the bottlenecks of the production process and improve upon it. In their current process, the conche is the largest bottleneck as it takes 50 hours per batch to refine, mix, and aerate the chocolate. Although production have increased from 18 conches to 26-9 conches of chocolate per month under current capacity and hours of operations, management is looking to reduce the time needed to spend on the conche as it is severely restraining the capabilities of the production process.
Quality is Scharffen Berger’s primary differentiator. If the company adds capacity, it is essential that it does not affect the quality of Scharffen’s products. Scharffen Berger is primarily considering adding capacity by the purchase of a ball mill ($300,000USD) that will be able to perform the most rigorous refining task that the conche had been doing, using only “3 hours to take particles from 100 microns to 25 microns.” The management found out that there is little difference in taste due to the reduced time spent in conche. Although the conche would still be needed for aeration and mixing functions, the conching can be stopped after 10 hours and the ball mill would finish the grinding. The process will be completed in 15 hours as opposed to 50 hours (based on 62% semi-sweetened chocolate) without the ball mill. Management believes the additional equipment will increase capacity by at least 75%. However, the increased efficiency of the production process by reducing the time the product spend in the conche does not solve the bottlenecks that appears earlier in the production process.
The daily capacity of the proposed ball mill will be 6720 kg per day, which is even higher than the current ability to clean the beans. The conche will be pushed to a capacity of 3360 kg per conche giving a combined of 6720 kg per day. (assuming that the ball mill will be ran 24 hours per day). Furthermore, the payback of the ball mill will only be 36 kg per day. Even though the daily capacity of the ball mill is 6720 kg per day the final production will only increase by 36 kg per day given the bottlenecks that exist in the production process prior to the ball mill’s step. Therefore, in order for the $300,000 investment in buying the new ball mill to be justifiable the bottlenecks prior to the conche should be corrected first. Otherwise, the ball mill investment would yield a negative return.
Currently, Scharffen Berger produces 40,320kg per month (1344 per day). A 150% increase would mean monthly production would be 100,800kg, with a daily product rate of 3,360kg. In order to reach this 150% capacity, the roaster, winnower, and melangeur, and molding steps would have to be changed (see excel for calculation):

-Roaster: Currently maximum daily capacity is 1500kg, meaning 124% increase in roaster product capacity is needed to reach 150% increase.
-Winnower: Current production capacity is 2,264kg per day, meaning 26% increase in winnower production capacity is needed to reach 150% increase.
-Melangeur: Current production capacity is 1,472kg per day, meaning 128% increase in melangeur production capacity is needed to reach 150% increase..
-Temp & Mold: Current production capacity is 3,200kg per day, meaning 5% increase in temp & mold production capacity is needed.

The current capacity is illustrated in the attached excel spreadsheets with the assumption that all of the production is of semi-sweet (62%) chocolate and tempering and molding is considered as one step. From our excel analysis, it seems that the first bottleneck in the process is the roaster. The roaster’s full capacity handles 1500 kg per day (assuming every batch is full and the parameters given in the case study) which is approximately ¼ of the capacity of the bean cleaner. The melangeur is the next bottleneck. Given the current capacity base on the roaster’s full capacity, melangeur can only handle 1380 kg per day (rounded to per batch to ensure no products are mixed and the quality of product). Finally, as suspected, the conche is the final bottleneck in the process. Therefore, Scharffen Berger management should look into options that can increase capacity for the roaster, melangeur and the Conche in anticipation of rising demand.

Recommendation
Base on the key issues identified and capacity analyses, management should look into adding capacity of all the bottleneck as simply fixing the conche will simply not increase capacity to the extent that demands are anticipated. For the toaster, we recommend to increase the amount of shifts from 1 to 2 (as Harris points out, the benefits of additional sales through capacity increase far outweigh overtime payments). Thus increasing the capacity from 1500 kg to 3000 kg. We are not recommending 3 shifts at the moment because management is cautious about over stocking inventory. If capital is available, it might be a good idea to upgrade the 50 years old roaster that may experience breakdowns in the near future to one that will be more efficient, modern and allow even more additional capacity if need be in the future.
For the melangeur, we highly recommend the purchase of an additional one for $50,000USD and adding an extra shift to improve the bottleneck. We are cautious in recommending the modernization of the technique used to grinding nibs as Scharffen Berger are the only company in U.S. that relied on this historical melangeur and the switch to modern equipment might potentially affect the quality. Thus, the purchase of the same equipment is recommended that would theoretically increase capacity by 2. As to an extra shift, since we are trying to increase capacity to at least 3000 kg (which is twice the daily output of the first bottleneck, the roaster), the extra shift will safeguard and pushes capacity well over 3000 kg.
Finally, we recommend the purchase of the ball mill only if the above steps are taken in conjunction. This is because the conche will remain the final bottleneck even if the above steps are taken. In conclusion, the management need to think about improving the production process simultaneously in order to prepare for the anticipated demands and potentially taking the order from the mass-marketer. Overall, by implementing in these equipment and labor recommendations, this will improve production capacity by 98%.

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[ 1 ]. Assuming company only produces semi-sweet (62%) chocolate