CaffèOro SpA. Roberto Cigolini Department of Management, Economics and Industrial Engineering Politecnico di Milano

Transcription

1 CaffèOro SpA Roberto Cigolini Department of Management, Economics and Industrial Engineering Politecnico di Milano

2 CaffèOro SpA 1. Introduction Once Ms. Colombo achieved her MBA degree, she was hired by CaffèOro SpA, a famous coffee producing company both for coffee bars and households located in the North East of Italy. During the first two weeks of job, Ms. Colombo began working in the production area to learn the characteristics of the production & logistic process of the company and to reorganize (where possible) the management procedures. She learnt that the pod (compressed block of coffee) was the product provided with the (increasing) greatest demand rate. Pods were packaged on strips of paper and used in Espresso coffee machines in households and offices alike. The Financial department considered that an all in yield of 20% before tax were available on the pods business. However, the Sales department had not been able to exploit that potential because there were not resources enough to hire expert salesmen and to build appropriate stocks of finished products. Actually, the last balance sheet showed around 70,000, turnover and more important 10.5 millions invested in stocks (see also Table 1), without the possibility to have to resort to additional debt. Table 1 Stocks splitting according to the locations (in ) Finished products (regional warehouses) 3,100, Finished products (plant warehouse) 3,620, Customs warehouse (green coffee) 3,460, Materials for packaging and packing (packages, tins, labels etc.) 310, ,490, As a consequence, to strengthen the competitive position, Ms. Colombo began to reduce the inventory level, by focusing on the production planning and control (PP&C) cycle. The PP&C system, created some years before, was based on issuing an order (equal to an economic lot EOQ) of each product when the corresponding inventory 1

3 level falls below the re order point. Re order point corresponded to 3.5 times the average sales per week, tracked on a 12 month horizon. Probably, EOQs needed to be reviewed, to take into account last year s variations in demand, but it did not seem an adequate path to cut down costs and to reduce the huge amount of stocked products. 2. Plant lay out During the first weeks of her job, Ms. Colombo found out that CaffèOro SpA produced and traded 158 products, by considering different blends, roasting temperature, processes (in beans or grinded), labels for domestic and international markets, multiple formats (2.5 kg for bars, 0.25 and 0.15 kg for households and pods) and different packages (6, 12 and 24 tins). A huge amount of space in the plant was used as warehouse for finished products (ready for sale). However, only 50% of the room available was filled with products. Beside the area for finished products, there was a warehouse for materials and an area for roasting and packaging machines. Moreover, the company owned customs warehouses in harbour areas, where the green coffee imported by overseas Countries was stocked. Due to law constraints, all the imported coffee has to enter the plant through the customs warehouses and is subject to duties and specific taxes, called excise taxes. 3. Production process The whole production process takes place in house (excluding the treatment for decaffeinated products) supervised by two employees who have been responsible for the process for 20 years: a chemist and an engineer. Their annual salary amounted to 230, The process is divided into three macro phases: A) raw materials withdrawal from customs warehouse and blending; B) roasting; C) packaging, divided up into two lines: for pods for tins (of different formats). A) raw materials withdrawal from customs warehouse and blending Green coffee is bought in bags or containers, separated by quality, and placed in the customs warehouse. On a fixed time basis (e.g. every week or even more often if needed), the chemist and the engineer collect the required blends from the customs warehouse, and they bring the coffee in storage bins. They use to delay moving the green coffee from the customs warehouse up to the release of a batch to the packaging line in order to delay as much as possible taxes and duties. As a consequence, the time in between raw materials are moved from the customs warehouse and the finished products are delivered is no more than a week (in some cases green coffee is directly placed in tins instead of in storage bins). Charges are represented by duties, which are paid at the withdrawal and excise taxes that are paid six months later the withdrawal. As a matter of fact, CaffèOro benefits from a special tax regulation be 2

4 cause it is located into a special status region. In addition to these taxes the value added tax (VAT) is paid monthly on the basis of the finished products sold. The blending activity requires to collect pre defined quantities of different green coffee types from a storage bin (divided in several independent parts) and to blend them into a feed hopper after an electronic check on the beans integrity. B) Roasting After blending, green coffee is roasted: computerized pneumatic machines withdraw the blended coffee from the blending storage bin and they arrange the roasting process in fixed quantities (called batches), that depend on different acidities, which in turn are responsible for the aroma of the coffee. The laboratory (through quantitative analyses) and some tasters check the roasted coffee, before sending it to the storage bins used for feeding the packaging line. C) Packaging Packaging process is completely automated: a conveyor belt moves the roasted coffee to a series of machines for grinding coffee (otherwise the coffee is left in beans), filling the tins (of different sizes), creating a vacuum, pouring in inert gases, sealing the cap and for labelling. At the end a pack filler completes packing and packaging. Packaging takes place only two working days out of three: production capacity dimensioned in the light of an expected growth of business activities is greater than the actual sales. The actual average throughput rate of the line is 1,000 packages per shift. The chemist and the engineer carry out (on their own) all the preliminary phases before the release of production lots (of tins) to fill, including the machine set up for each combination of tin size and label. After that, 5 employees (members of a cooperative) provide help: they work part time and earn per hour. The chemist and the engineer also check the process, whereas the other 5 people deal with packing, putting bar codes and putting packages on pallets to bring them to the finished product warehouses. The employees are paid as soon as each specific batch packaging is completed. 4. EOQ based PP&C system First of all, Ms. Colombo focused on the documents that showed the way the planning system was formally designed. The system was based on the EOQ and the reorder point (ROP), expressed in packages and calculated as follows: EOQ 2aD p c m 3.5 ROP D 52 D represents the annual demand (expressed in packages of tins), i.e. the demand of each product over 12 months. a represents the preparation costs for each lot of tins (of a given product), i.e. the sum of the costs related to: blending preparation, change of tin size, change of the label and order issue. In particular: 3

5 The costs related to blending preparation represent the actual staff cost: they vary according to the specific product, they depend on the chemist and the engineer salary and they are related to the working time to finish both blending and roasting processes. The costs related to the change of tin size represents the average costs of personnel to set up the process during the change of the different sizes of tins: these costs are calculated as the overall machinery set up cost, divided by the average number of products of the same size, processed on the line between two consecutive changes. Costs depend on the chemist and the engineer annual salaries and on that they spend an entire day prepare a size change. On average, CaffèOro s packaging line worked 170 days per year: the chemist and the engineer set the machinery around 35 times per year and between two changes, they dealt with nearly 10 different products. By doing so, they produced nearly 350 different batches per year. The costs of size change are calculated by accounting for all the 158 products and by dividing annual salary of the chemist and the engineer (i.e. 230, ) by 260 (i.e. the number of working days per year). The costs related to the change of the label represent the average costs of personnel to set up the labelling machine. These costs are calculated by accounting for all the 158 products and by considering that the downtime of the line due to a label change is equal to 30 minutes: 20 minutes are required to set up the machine and 10 minutes are required to make the machine reach the production steady state (i.e. to remove the mistakes due to the label change). Since the cooperative s workers do not have anything to do during this phase, the cost of label change depends both on the 5 workers wages and on the chemist and the engineer annual salary. The costs of order issue represent the average costs of administrative staff to issue the order to fill a lot of tins. These costs are calculated by accounting for all the 158 products. The costs of order issue depend on two employees annual salary (i.e. 180, ), divided by the overall number of lots per year (i.e. 350, see above). The two employees have to comply with book keeping fulfilments concerning duties, taxes and other administrative activities. c m represents the annual cost of ownership stocks, i.e. the quota of value embedded into stocks (sum of the financial cost of capital and of the other holding costs) which is invested in stocks and so it is prevented from being alternatively invested. The main component is given by the cost of capital which is equal to 9% and based on the loan interest rate. The other costs (obsolescence, drops, insurance, etc.) accounted for 2.5% all included. p represents the production cost of a single package of tins, which is the sum of the costs of materials, of direct labour, of the general variable and fixed costs, of the duties and of the excise taxes. In particular: 4

6 The costs of materials are referred to green coffee, tins, caps, gases, labels, packaging raw materials etc. The costs of labour are referred to cooperative s workers cost per package: they are calculated by accounting 1.00 for all the 158 products. The general variable costs are the sum of all the direct costs (apart from materials and labour) linked to a package of tins: they are calculated by accounting 5.00 for all the 158 products. The general fixed costs consists of the company s general and annual fixed costs divided by the number of packages sold during the year: this cost is equal to per package for all the 158 products. The duties and excise taxes are actually the import levy on green coffee and they vary according to the specific coffee quality. Finally, to define the wholesale price of a package of product CaffèOro company employed a form called cost and price analysis, reported in Table 2. Table 2 Cost and price analysis ( per package) Strong Extra Aroma Napoli America Wholesale price (A) Green coffee blend (b1) Materials for packing (b2) Direct labour (b3) Duties (b4) Excise taxes (b5) General variable costs (b6) General fixed costs (b7) Overall cost (B) = (bi) Profit before tax (A B) Actual PP&C system First of all, Ms. Colombo decided to emendate the calculation pattern of EOQ and of ROP for the products to be packaged during the next production cycle, starting on May 20 th (see table 3). As a consequence, she set reference to the cost and price analysis, to the original calculations of EOQ and of ROP (see table 4, where the demand is referred to the second last year) and to the actual demand data of the last year (see table 5). 5

7 Table 3 Detail of the next production cycle (starting on May, 20 th ) Strong Extra Aroma Napoli America Packages available Packages to produce 1, Table 4 Original EOQ and ROP calculations. Strong Extra Aroma Napoli America Annual demand D packages 2,455 1, , Costs of blend preparation Other preparation costs Total preparation cost a Ownership rate c m % Production cost p /package Economic lot EOQ packages Reorder point ROP packages Table 5 Sales (in packages) Strong Extra Aroma Napoli America January February March April May Last June Year July August September October November December January Current February Year March April

8 After calculating EOQs and ROPs, Ms. Colombo focused on the chemist and the engineer ways to plan the line: she learnt that the production requirements depended on the warehouse information system, since it used to show the under stock products every week by comparison to the 3.5 weeks forecast margin. Since the chemist and the engineer took two days to set up all the machinery, each production schedule consisted of only one size: they put all the kind of coffee together according to their tin size and they separate different blends and labels. Then, they added the products that needed to be reordered to the weekly plan while understock products of other tin sizes were delayed until the following week, betting not to run out of stock too early and with the aim of covering the 3.5 weeks. Despite planning by tin size, the process required other adjustments, to take into account the change of blend and label: on average, the chemist and the engineering estimated that changing blend took 8 minutes, when they also removed tins with hybrid blends. Changing the pack of labels in the labelling machine took nearly 20 minutes unless the labels format was the same. In that case it only took 3 minutes. In the end, Ms. Colombo realized that the chemist and the engineer tried to put products together in a some sort of batches to reach a 4 week cycle, which sometimes took them away from economic lots. Actually, they tried to forecast the demand of each product for the time fence between two consecutive order releases: they took into account the initial stock available and guessed the packages needed to fulfil the demand up to the following release of the same size. 7