Reference no: EM132243478

Assignment - 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 continuous growth in business over the 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. A quick decision on building one or more new baking plants could save the company significant amount of money in lost sales 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

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 $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.

For simplicity reason, it can be assumed that the annualized maintenance and overhead cost will not be incurred if the production line is not running in the year.

New Network Options -

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 costs, annualized fixed costs (i.e. maintenance and overhead 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. However, once the plant with a single production line is built, it will not be possible to add another production line in the future. Shutting down the existing facility at Mentone can recover at most $100,000 in scrap value. If any of the new plant constructed at Prahran, 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

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 grey Table 3. It can be assumed that these costs will remain more or less the same in the next three or more years.

Table 3 - Existing and estimated transportation costs per unit for breads and pies (at current year)

Based on the above 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.

Case Questions -

Assume you were Mitchell and you need to answer the following questions of your boss:

1. As-Is Situation: What is the current annual cost of serving all the shops from the Mentone baking plant?

2. Scenario A: If the existing Mentone baking plant must be kept but not necessarily making both breads and cakes, what new plants would you recommend for the next three years? Where should they 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 Year 1).

3. Scenario B: If the existing Mentone baking plant must be scrapped because of its out-of- date production technology and new plants are to be built in other suburbs instead, 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 Year 1).

4. Scenario C: If only one production line is to be run at each baking plant at any time (i.e., either baking breads or pies but not both), assuming you could use any plant including the existing one at Mentone, what production network would you recommend and how should the shops be served by the baking plants? Again, make your recommendations on a year-by- year-basis (starting from Year 1).

5. Action Plan: Taking into account the construction costs of the new plants and the scrap 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 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. 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 - Need only Question 1 and Scenario A.

Attachment:- Assignment File.rar