Operations Management at HOLLY FARM Essay
Operations Management at HOLLY FARM
This consultancy report is prepared for Holly Farm in order to improve its future business. In the second part of this report; ‘Evaluation of Current Operations and Gillian’s Business Strategy’ and ‘Conclusion’, Holly Farm’s operations will be critically evaluated in the aspect of current and future potential capacity constraints and any other operational problems. Also, I will discuss the feasibility of Gillian Giles’ strategy for the business there. In the last part; ‘Recommendations and Action Plan’, I will show a recommended alternative strategy for the business and several solutions for alleviating its constraints.
2. Evaluation of Current Operations and Gillian’s Business Strategy
2.1 Gillian’s Aims and Objectives
2.1.1 Sales Forecast
According to Gillian’s forecasts, while there will be an increase in farm shop sales by 50%, there will be a decline in retail shops sales by 13.3% in 2004 (Table 1). However, these forecasts are unlikely to come true. Firstly, its retail shops sales has increased by 75% on average of each year, and its farm shop sales has increased by 28% on average each year for the latest five years. It may be unreasonable that she dramatically changes these recent growth trends on her forecast without any factors that could impact on both channels.
Secondly, since the ice cream market in the UK is mature and stable (Table 2), sudden changes of previous trend hardly happen excepting entering strong new players into the region, spoiling the farm’s reputation hugely and investing tremendously on the marketing for its farm shop. Moreover, in terms of Holly Farm’s managing on its farm visitors, this sudden change of the number of visitors could lead to collapses of its operations. These reasons discussed above clearly show that Gillian’s demand forecast is not reliable. Hence, they have to forecast in the other way.
2.1.2 Line Extension
Gillian wishes to increase the number of ice cream flavours from four to ten. However, this line extension can cause the following problems.
First of all, many products of relatively lower demand items would be abolished due to their expiration dates. In 1999, the Ice Cream Alliance published the date of top ten ice cream flavour in the UK in 1998 (Table 3). I can assume that, when Holly Farm produced all of these ten items, the share of each item in their products would be the same as the market shares of each flavour ice cream in the whole market. The items that total demands are less than 1,516 litres per annum, hence below the fourth position, should not be produced because it is obvious that the items would be abolished due to their expiration dates (Table 4, Calculation 1). Moreover, in the case of retail sales, the minimum annual demand for each item is 3,035 litres (Calculation 1).
Secondly, also major of the raw materials would be thrown away before they are used. Since the periods that are needed raw materials to be completed to use are longer than maximum storage times allowed, even strawberry flavour for strawberry; 2nd item and chocolate flavour for chocolate; 3rd item could be abolished before being completed to use. Much more could raisins for rum and raisin; 5th, lemon sorbet for lemon sorbet; 8th, banana flavour for banana; 9th and tropical fruits for tropical fruits; 10th be (Table 5).
Finally, the line extension would result in higher cost through frequent changing items and smaller amount of production than maximum production in most items. For example, when the different item from before one is produced, the production line should be carefully cleaned up beforehand in order to avoid producing different colour or flavouring ice creams from their original specifications. In fact, it takes one hour to clean the ice cream making machine between flavours in Holly Farm. This careful clean-up tends to cause higher cost and lower productivity. Furthermore, smaller amount of production will lead to higher fixed cost per production unit and, as a result, will result in higher total cost.
2.2 Capacity Constraints
2.2.1 Production Line
Although it is clear that Holly Farm has a crucial capacity constraint on its production line, Gillian has hesitated to tackle this problem, as a result, has abandoned the growth strategy in spite of the recent sustainable growth trend of its annual revenue. In order to proceed the growth strategy, she should try to solve the problem. For instance, she should negotiate with its employees for the expansion of working days in a week from 4 days to 5, 6 or 7 days in the busy period.
While Holly Farm groped about the probability of producing the different volumes of packages of ice cream for responding special orders for the local catering trade, I would recommend that they stop attempting to do this. Wasting a lot of ice cream, taking 2 or 3 hours to set the dispenser up and being demanded low justify my statement enough. If they continued this trial, more serious capacity constraints would be caused.
2.2.2 Milking Parlour
According to this case, the number of visitors who want to see the milking parlour on a busy day in2003 was 206. However, the capacity of the gallery for watching milking parlour is 200 visitors per day (Calculation 2). It could be said that they are about going over the capacity in 2003. Moreover, Gillian wishes to increase the number of farm visitors in 2004 by 50%. The problem would grow in 2004.
The problem in milking parlour is not ignorable. 33% of total revenue of Holly Farm, including paying visitor sales; 11% and entrance fee; 22%, is provided from farm visitors, and 27% of total revenue of the farm is related to its milking parlour (Table 6). This incident clearly shows that if the milking parlour made visitors dissatisfied, the revenue of the farm would decline seriously.
Therefore, without any solution for the capacity constraint related to milking parlour, the farm would neither be successful nor survive in the near future.
Apart from the capacity constraints, the milking parlour has queuing problems. This case mentioned that about 100 people visited the gallery from 4 pm to 5 pm on a busy day. Then I have already mentioned above that 206 people visited the gallery on a busy day (Calculation 2). Thus about half of the visitors arrived there within only one hour. As a result, a queue is made before starting the milking parlour and is not solved the queue for a while. The queuing problem easily leads to customer dissatisfactions and could result in serious decline in its total revenue as I warned above.
According to this case, Gillian delivers ice cream to retail customers by the delivery van once a week, and the delivery van has a capacity of 500 litres of ice cream and does not have a freezer. While the average maximum temperature in the warmest month in the UK from 1971 to 2000 was less than 20 degree centigrade (Met Office, 2003), the temperature on the van could be much than 30 degree centigrade. Moreover, attempting to deliver all ice cream for that week at once tends to lead to longer duration of delivery. As a result, melting ice cream would be accelerated. It means that these facts cause over half of corporate customer complains in 2003, which regard melting ice cream. This problem may be one major reason why Gillian forecasted that retail sales in 2004 decrease by 13.3 %. However, it is more reasonable to tackle and solve the problem in order to meet market demand than to forecast wrong in order to avoid the problem.
2.3 Other Problems
2.3.1 Raw Material Stock Control
This case mentioned that Holly Farm has currently ordered raw materials on an ad hoc basis when an operative feels that the materials are required. While it maybe true that the quantities of the raw materials the farm uses are so small that the farm hardly has any other better ways to control them properly than one an ad hoc basis, their way to deal with stocks is obviously unsuitable because companies are to have raw material stocks in order mainly to have a buffer for productions, response to unexpected larger or smaller demands and take advantage of price discounts on large order. In fact, they have had several experiences unwanted stocks and short stocks of materials and flavour. The former led to unnecessary cash outs, the later caused disruption, rescheduling of productions and re-timing of maintenance periods (Waters, 2002).
2.3.2 Inventory control of final products
Holly Farm did not control its stock level of final product in 2003. As a consequence, a short stock occurred at the end of September (Figure 1). Short stock of final products is more serious than one of raw materials. While it directly causes retailers’ loss from their sales, its indirect effects are more widespread, including lost goodwill, loss of reputation and loss of potential future sales (Waters, 2002). Moreover, from January to February, there was a minus cash flow caused by overstock, hence, by overproduction (Figure 1). If the farm had not retained enough cash to supplement this negative cash flow, they would have had to raise money. However, potential cash suppliers such as banks, building societies and individual investors would not be willing to lend or give money to the farm because of the farm’s mismanagement of cash.
As I discussed above, Holly farm has many problems in its operations. These problems seem to be appearing through its current remarkable growth. Holly Farm is at a turning point. Should they grow with huge investment? Should they cover up their problems with sacrificing their bright future? In the next part of this report, I will give several suggestions to their problems.
4. Recommendations and Action Plan
4.1 Business Aims and Objectives
4.1.1 Sales Forecast
Since Gillian understands Holly Farm has a number of capacity constraints, she seemed to decide not to take the growth strategy but to take the profit focusing strategy, which is feasible by expanding the share of its farm shop sales in its total revenue only on the assumption that it is possible to increase in the number of its farm visitors and to accept all of the visitors. Nevertheless, neither a significant rise in the number of the farm visitors is probable, nor ignoring growth opportunities for its retail sales is reasonable. Therefore, I would like to propose to adopt the growth strategy to Holly Farm with several solutions to capacity constraints.
By linear regression (Waters, 2002), the annual sales of retail shops, the farm shop and total are calculated at 93.0, 32.5 and 125.5 thousands pound, respectively (Table 1, Figure 2). In this case, both correlation coefficients of retail shop sales and farm shop sales are above 0.9500. Thus these forecasts can be said to be reliable in terms of the linear regression.
However, when Holly Farm adopts this forecast, they have to mention the following things. First, the forecast by linear regression is based only on historical data. Thus it is assumed that the future trend is referred to the past one. Then, because the trend is recognised as linear one without any particular reason, if the trend were based on the different pattern such as logarithmic, exponential and moving average, the forecast could become failure. Furthermore, the forecast does not include any expertise. Therefore, it could be a vulnerable argument in terms of environmental changes. In any case, due to the risk of the forecast’s failure and the huge impact of the sales forecast on the following plan, I strongly recommend that Holly Farm and its consultants again discuss on the sales forecast of 2004 before proceeding the plan.
4.1.2 Line Extension
As a result of the discussion in the section 2.1.2, I recommend Holly Farm not to expand its production line from four items in 2003 to ten items in 2004. All of the problems I mentioned, which are related to the expiration dates of final products and raw materials, can cause unexpected cost up.
Besides the discussion above, the argument over whether or not they should decrease the number of items from four is also controversial because the demand of the other items than top one is still so low that keeping these items is hardly justified. However, I propose Holly Farm to keep the number of items four based on the following discussions.
First, while it is no problem for Holly Farm to have only one item if they did business only on their farm shop, in order to expand their sales on retail channels, keeping several items is inevitable for the marketing reasons. Second, even when they sale ice cream on their farm shop, only one item may not be attractive for their customers. Finally, in terms of accountability of companies, it is difficult to explain why they abolished the items to their customers unless they prove keeping the items that they stopped selling is harmful for the business.
By keeping the number of items at four, Holly Farm can keep the stock level of final products of each item more than 1,516 litre per annum (Table 7). Although the problems over raw materials’ stock level still remain, the solution for these items will be discussed in section4.3.1.
4.2 Capacity Constraints
4.2.1 Production Line
The process line of ice cream in Holly Farm consists of batch processes, an industrial manufacturing method in which several separate serial and, or parallel operations are carried out to produce a product, in contrast to continuous process (Williams et al, 2001). Hence, the capacity of the line is limited by the one of the bottle neck process. In this case, the bottle neck process is the ageing process, a continuous freezing process in the ice cream machine, and one batch capacity of the process is 350 litres. Moreover, the process takes 8 hours. In order to increase in the capacity, they have to make the machine bigger or to shorten the time. Nevertheless, since it is hard for Holly Farm to make any big investment, they do not have any other way than one to give up to improving capacity of the process line in a short-term.
As the alternatives to increase in the annual production, there are contract-out and extension of operation days from 4 days per week to 5, 6 or 7 days per week. Because of Holly Farm’s difficulties in disclosure of its own original recipes to the counterpart due to its conservative corporate culture, the risk of rise in total cost and capacity constraints of whole ice cream manufacturers in the busy time, it would be hard for Holly Farm to contract out its ice cream production. Therefore, I propose extensions of operation days as solution for capacity constraints of the production line.
4.2.2 Milking Parlour
I propose the following three solutions for the capacity constraint and queuing problems in the milking parlour.
Firstly, abolishment of explanatory tape through headphones would be effective. It is obvious that the tape makes a bottle neck of a series of processes in the gallery. By replacing the tape through headphones to one not through headphone but merely broadcasted in the gallery and waiting room (Figure 3), service time per visitor would be shortened, and the capacity of the gallery could be improved.
Secondly, arrangement of visiting time to the gallery would alleviate its queuing problem. For example, the farm divided the duration of the milking parlour into five; 4.30 pm – 5.00pm, 5.00pm – 5.30 pm, 5.30pm – 6.00 pm, 6.00 pm – 6.30 pm, 6.30 pm – 7.00 pm. When visitors enter to the farm, it allocates them into each time block. While there are vacancies in the time block visitors want, it is good idea that visitors choose which block they are in.
Finally, queuing entertainments are effective to allay customer dissatisfactions. For instance, while visitors are in a queue, the scene of milking parlour will be broadcasted on a TV screen of the waiting room. This solution can be expected to make service time shorter at the same time to make customer dissatisfactions reduced.
In order to carry out growth strategy I proposed in section 4.1.1, solving problems in distribution is essential because bigger burden on distribution is inevitable for the strategy. Hence, I recommend that Holly Farm uses a delivery van equipped with a freezer of about 1,000 litres and replaces old one by it. I assume that the farm rent a VW LT35 Chiller / Freezer Van from a rental company (Figure 4). The monthly rent of the van should be considered £1,911 as a variable cost.
4.3 Other Problems
4.3.1 Raw Material Stock Control
I propose that minimum order quantities of strawberry and chocolate flavour decrease from current 1,000 ml to 400 ml, because the farm could not complete using them within their maximum storage time allowed in 2004(Table 8). While the reorder costs for these items will be charged three times as much as usual ones, the cost of the raw material that will be abolished, hence, abolishment cost can be eliminated. Even though the cost down will be almost offset by reorder charges, this action would be essential in aspect of green issues.
Since Holly Farm has used relatively large amount of milk powder, box and cardboard, I recommend these raw material orders at the economic order quantities (Waters, 2002). When they assume that the farm attempted to order these raw materials at minimum order quantities in 2004, the cost down is expected to be more than 2,000 pound per annum (Table 9).
In terms of the time to place orders, I propose the reorders of raw materials based on the reorder level (Waters, 2002). When calculating the reorder levels of each items, I assumed that demands can be equally divided into each day. The reorder levels of raw materials are shown in Table 10. This control method is not considered any uncertainties about consumption of raw materials, in other words, production schedule of ice cream. However, since the farm has not taken any flexible scheduling method for its production; Just-in-Time, MRP, MRPII (Waters, 2002) and so on, it is thought that there is no problem.
4.3.2 Inventory control of final products
In the farm, production of ice cream has been carrying out based on a fixed schedule. Thus it is crucial to hedge the risk regarding uncertainties of future demands. Therefore, I propose the final product stock control based on the safety stock level considered standard deviation as future uncertainties (Waters, 2002). Since the uncertainties in each month are different, the levels should be varied (Table 11). I assume that the main factor that affects to ice cream demand is weather including temperature. Thus the safety stock levels of each month are calculated by standard deviations of five months including before and after each two months. This method is not as safe as periodic review approach is. However, the approach can be reasonable because the risk of unexpected change of demand was controlled below 5%.
4.4 Aggregate Planning
Based on sales forecast of each month (Table 12), I made an aggregate plan for Holly Farm in 2004 (Table 13). In order to meet all forecast demand without any big investment in its production line and to eliminate unnecessary stocks, I recommend them to take the policy of chase demand production (Waters, 2002) (Figure 5). While this is not only the best policy but also only one policy for the farm at the present time due to its capacity constraints, they have to operate carefully because it can be very difficult to organise. By taking this policy, they can keep the stock level relatively low (Figure 6).
4.5 Cash Flow Analysis
Basing on an assumption that Holly Farm has to pay 50% more money for overtime works of part-time workers than usual ones, I analysed cash flow of the farm (
Figure 5 Demand and Production in 2004
Figure 6 Stock Level Control
Table 14). 14% of the total cash out, £9,958/anum out of £91,158/anum, will be spent for extra payment for overtime in 2004. Hence, the farm should start considering expanding the capacity its production line when the sales forecast comes true.
Compared with the actual cash flow in 2003 and the cash flow forecast based on Gillian’s plan in 2004, the cash flow in 2004 will be relatively allocated among each month equally. Especially, even between January and May, there will be few negative cash flows ( Figure 7). The farm’s credit during the term can be improved. In terms of cash flow during the year, although the cash flow on my proposal is less than one on Gillian’s plan, the cash position will be better than one in 2003.
4.6 Break Even Analysis
The profitability on my plan is not improved from 2003 result due to an increase in the percentage of the variable cost in the annual revenue. The main reason for the decreased profitability is the serious increase in extra payment for overtimes. While the break even point on my plan drops from 2003 result, the reason is a remarkable increase in total revenue in 2004. The margin of safety to unexpected decrease in total sales would be improved. The break even point on my plan is higher than one based on Gillian’s optimistic plan. The reason is that Gillian assumed that they can increase farm shop sales with a £1 margin per litre of ice cream and £2 entrance fees (Table 15, Figure 8). However, as I mentioned in section 4.1.1, her forecast is unreliable. Therefore, the farm should withstand against the unprofitability in 2004 and should keep its growth strategy. Euromonitor plc. (2003) Euromonitor market research: Ice cream in the United Kingdom. London.
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