Kristens Cookie Company

Yes, it takes longer duration to fill a two-dozen cookie order than a one-dozen cookie order.

But one more important thing to be considered while evaluating the discount and that is, time taken to complete the order. It is observed that time taken to complete 3 one-dozen order is same as one order of 3 dozen (46 minutes). Therefore, if labor cost is fixed (as decided by us), then we don’t find any advantage in giving discount to bigger orders(but that is not the case as explained below).

But if we get into details of process performance and utilization time, we would get different solution. Let us consider the case of 2-dozen.

If we decide on salaries based on minutes worked and not on number of orders, we find we do less work in 1 two-dozen order and therefore we would have higher margins in this case as compared to case with 2 orders. Therefore, we can give discount in order to attract larger orders.

5. How many electric mixers and baking trays will you need?

In present situation, mixer is just used for mixing and it takes 2 minutes. It takes 9 minutes for mixed ingredients to bake. As shown in process chart (see answer 1), though baking is dependent on mixing but rate of output in baking(1 per 9 minutes) is less as compared to that in mixing(1 per 2 minutes). Hence, baking in oven is a bottleneck activity and therefore, purchasing more mixers is of no use in present situation as it would be offset by high baking time of oven. To conclude, purchasing more mixers would be of use only when we procure more ovens. Not more than 1 electric mixer is needed.

In case of baking tray, it is used in production process

• For putting the mixed ingredients(2 minutes)
• As a holder of cookies in baking process (1+9 minutes)
• As a holder of baked cookies in cooling process(5 minutes)

So, one tray is used for 17 minutes in one cycle of production process.

As shown in process diagram, it is observed that at 23rd minute of production process, maximum of 3 trays are used (one used in cooling process of batch 1, 2nd used in baking process of batch 2 and 3rd used in spooning process of batch 3).

Procuring more than 3 trays would lead to some trays lying idle. But, as trays are not that costly, so, four to five trays can be bought as a part of contingency events. Overall, three trays are optimal number of trays but it is recommended to go for atleast 5 trays(for reasons mentioned earlier).  

6. Are there any changes you can make in your production plans that will allow you to make better cookies or more cookies in less time or at lower cost? For example, is there a bottleneck operation in your production process that you can expand cheaply? What is the effect of adding another oven? How much would you be willing to pay for an additional oven?

1. Baking in oven is a bottleneck operation. First, it has to be improved then only improvement on other processes can be seen. How much we would be willing to pay for additional oven would be dependent on incremental profit or benefit we would get by procuring one.

Assuming that we have 60 minutes of operational time, following table compares total number of dozen possible in case of one and two ovens.

As evident for above, if 2 ovens are bought then incremental benefit gets increased to 7.5 from 6 dozens per hour in earlier case. In that case, washing and spooning becomes bottleneck activity.

2. In order to remove this bottleneck activity of washing and spooning, roommate can help me in doing the activity of washing and spooning when he is idle. This would increase the output rate of washing and spooning.

Problems for Further Thought

1. What happens if you are trying to do this by yourself without your roommate?

                                                                                                                                                                               

We can describe the process as follows:-

1) Washing (6 minutes) and spooning (2 minutes) for batch 1.

2) Putting tray in oven takes 1 minute.

3) When cookies of batch 1 are kept in oven for 9 minutes, in that time the task of Washing /Mixing (6 minutes) and spooning the tray (2 minutes) of batch 2 could be completed. This helps in utilizing 8 minutes out of 9 minutes of baking period of batch 1 and leaves us with 1 minute of idle time.

4) When batch 1 is baked, it is removed and kept for cooling. During cooling period of batch 1, we can utilize 1 minute of cooling in putting batch 2 in oven. During remaining 4 minutes of cooling of batch 1, 4 minutes of baking of batch 2 is also completed. In these 4 minutes, there is no task which could be completed as starting washing for next batch requires atleast 6 minutes* (washing for next batch).

5) Packing and payment of batch 1 will require 3 minutes.

6) Here we have 2 minutes of idle time after which batch 2 is cooked.

7) It is removed and kept for cooling. Again this leaves us with idle time of 5 minutes where new task of washing could not be started.

8) Finally batch 2 is packed and payment is received which requires 3 minutes.

Thus batch 1 is can be delivered in 26 minutes and batch 2 in 36 minutes from start of production.

Now if there are any further orders, then at a time only 2 orders can be processed as explained above.

Thus we can say that if there are no more than 2 orders pending at same time, then the time taken by individual and time taken 2 people is same. But in case of more than two orders, it would be beneficial to take help from roommate.

Also while working alone; there are chances of failure as many activities need to be performed single-handedly. Unless the person expertise the entire process, his failure rate would be high.

*Assumptions –

 Swapping between the activities is not allowed. As in above case, when there is idle time of 5 minutes while cooling, then person could not do washing for 5 minutes, pack and receive payment for cookies and then continue with remaining 1 minute of washing.

To consider worst case scenario, it is assumed that batch 1 and batch 2 are different types of cookies and requires washing and mixing step.  

2. Should you offer special rates for rush orders? Suppose you have just put a tray of cookies into the oven and someone calls up with a “crash priority” order for a dozen cookies of a different flavor. Can you fill the priority order while fulfilling the order for the cookies that are already in the oven? If not, how much of a premium should you charge for filling the rush order?

The time taken to fill a rush order for the first dozen of cookies is 26 minutes. The subsequent dozens take 10 minutes each. In other words, the Set up time is 16 minutes and the Run time is 10 minutes. We simply cannot fill a crash priority order when a rush order is being manufactured because of the bottleneck of a single oven.

In case of crash priority orders, we should consider the opportunity cost of the pending order and charge a premium accordingly for filling that crash priority order.

The opportunity cost includes the variable cost involved for delayed order.

Case 1 - Suppose we have a rush order of 2 dozens of cookies. The crash priority order arrives at the 9th minute (when the first dozen of rush order is being baked), we incur a loss of variable cost for that dozen of rush order taken out of the oven half baked. This is because washing and spooning could be completed in 8 minutes by first person, but baking requires 9 minutes. So in 8th minute of baking of rush order, it has to be removed from oven.

The variable cost includes 0.6$/dozen for ingredients, 0.1$/box which holds a dozen of cookies and the value of time lost in preparation of that order. Therefore the premium charged should be atleast 0.6$ + 0.1$ = 0.7$ / dozen. The premium that can be charged should also include profits generated from that rush order cookies as there might be a contingency that we might lose out on that delayed rush order and a loyal customer as well.

Also the premium depends on the type of crash priority order. A single order of 2 dozen requires less time to be devoted by employees as compared to 2 orders of a dozen each. 2 orders of a dozen each require 24 labor minutes whereas a single order of 2 dozen requires 17 labor minutes only. Hence, a higher premium should be charged for a smaller order as compared to a bulk crash priority order.

Case 2 – In above case, we would require 26 minutes to serve crash priority customer.  Now if we request him to wait for 27 minutes, then we would be able to serve him as well as complete our rush order.

When crash priority order is received and rush order of 1 dozen is just kept in oven, first person could complete his task of Washing, adding and spooning in 8 minutes. Now after 9 minutes when rush order is baked, roommate keeps it for cooling and at the same time can keep crash priority order for baking in oven. Thus when rush order is cooled; it could be served as during that time crash priority order is still in oven. Thus total time for crash priority order comes to be 27 minutes (8 minutes(washing/spooning)+1 minute(idle)+1minute(put in oven)+9minutes (baking)+8minutes(cooling and packing).

Thus premiums could be decided on time priority customer is ready to wait. If we can convince him to wait for 1 extra minute, then we could serve two orders successfully.

3. When should you promise delivery? How can you look quickly at you order board (list of pending orders) and tell a caller when his or her order will be ready? How much of a safety margin for timing should you allow?

Using the Critical Path Model, we can generalize a formula for the number of minutes to produce n one dozen batches. This expression would be:

No. of minutes required to produce n one-dozen batches=16+10n

In other words, the Set up time is 16 minutes and the Run time is 10 minutes. Though it has been mentioned in the case the cookies will be ready for pickup within one hour, it also depends on the no. of pending orders yet to be produced.

Assumption: Priority to the order is given in the sequence the orders arrive.

Suppose the no. of pending orders is 5 dozens, the time required for producing the same is 16 + 10(5) = 66 minutes. In case another order for 3 dozen cookies arrives at the 24th minute of production (when the second dozen of previous order is being baked), the minimum time required to serve the new order is 72 minutes (66 - 24 + 30). Therefore the order will be ready for pickup only after 72 minutes.

Thus, the time (in minutes) for any new order to be ready for pickup can be generalized as 16 + 10 (pending orders in dozen) +10 (new order in dozen) .

The safety margin for any order can be kept at 5 – 10 minutes. A high safety margin might result in loss of order due to further delay caused to unsatisfied customer.

4. What other factors should you consider at this stage of planning your business?

Factors to be considered:

a) Demand Pattern - Present method of processing employed by us is “Made to order”. In this case, we wait for customer order and then start processing. The prominent problem in made to order is demand fluctuation. If these is heavy demand at certain hours, our response time would increase that may affect our goodwill and reputation. Since firm is at startup phase, these factors are of utmost importance in long term sustainability of business. How can then demand pattern be calculated? It would come up with survey, its logical analysis and some reasoning. For example, during exam days students tend to study for late hours and hence demand might increase. Therefore, our present system should be capable of handling that.

b) Flexibility – At this stage, our strategy should be to attain flexibility in manufacturing process (stage 1). Knowing a tentative pattern and knowing our bottleneck operation (i.e. baking in oven) can help us in making decision that would impart flexibility in our process. For example, should we take oven on rental basis or purchase it to satisfy peak demand? Purchasing would make the cost of oven sunk cost and it has to be accommodated in price of cookies. Hence, other factor then comes is price.

c) Price- Price to be charged for cookie is also an important factor. Since firm is in start phase, company should take into consideration the pricing policy seriously as in this case penetration pricing and hence tighter margin should be the strategy to attract students. Even though we may argue that customization is our comparative advantage and more price should be charged, but our target customers are price sensitive customers and most of them would not have enough disposable income to go purchase cookies. Hence to make an image in the minds of students, we have to employ penetration pricing strategy at this stage.

d) Order size and total number of orders – More the number of orders, more would be the time to fulfill those orders because most of the activities are sequential in nature(as event in CPM diagram, answer 2). For instance, if one customer has given the order of 5 dozen of cookies, it needs (16+10*5=)66 minutes to fulfill that order. Assume after one minute of giving first order, second order of 5 dozen comes. Because of bottleneck activity inherent in process, worst case would need 66+65=131 minutes to fulfill second order. There comes a issue, if we reject second order but that was a exclusive order where margins were high then opportunity cost would be high in that case? So the question to be answered is what should be the order size had the particular order with specific ingredients ordered? Higher the margins, higher should be the size of order and vice-versa.

Using the same logic, we can say that we have also to decide on total number of orders to be taken in one particular day. All these are needed because we need to improve on our process performance metrics like response time and waiting time so as to build reputation in initial years which would impart long term sustainability to our firm.

5. Your product must be made to order because each order is potentially unique. If you decide to sell standard cookies instead, how should you change the production system? The order taking process? Other policies?

Standard cookies if made would help us in many ways in terms of improving process performance metrics. But this also comes with significant changes in production system, order taking process and other policies. Following are some:

1. Standardization of cookies would make us to adopt “made to stock” process. As we know that for one dozen of cookies to be processed in “made to order”, it takes 26 minutes. It is because of high baking time and sequential sub-activities. In short, “made to order” with high sequential activities tend to be constrained by blocking (bottleneck process) and starving. These issues and hence response time can be reduced in “made to stock process” by making use of inventory. Therefore, our process would include one more component called inventory.
2. We can incorporate 2 inventories, one would be work-in-progress which would contain ingredient mixture and other would be finished goods. Or we can go for only one inventory which would contain ingredient mixture. Or third plan can be to have inventory of finished goods.

Taking into account all pros and cons, case 3 seems to be attractive. But then higher accumulation of cookies in finished good inventory may compromise on quality and freshness. Therefore, threshold of 1 hour or less can be set based on demand forecast beyond which if cookies are retained in inventory has to be discarded.

3. Having considered above point, we need to change on policy of total number of orders based on what we have on inventory.
4. Now the problem arises from shift to new process is our loss of comparative advantage of customization. This can be regained by positioning our product at lower price and high quality. Standardization of process can lead to lower operating cost and hence we can reduce selling price to attract students. Secondly, inventory threshold time as explained in point 2 would still be making our cookies fresher than that of our rivals. We can take advantage of that in positioning the product.
5. There would also be change in policies of providing discount to customers. As there would be buffer or inventory to absorb the finished goods, then labor cost would be uniformly distributed in this case and hence discount in bulk order is not suggested.

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