Challenges of planning operations of an industrial Bakery at Chennai

Subbu, owner in-charge of a Golden Toast bakery in Chennai was reviewing his sales,
operations and production plan for next planning horizon. He was worried with constant
demands of plant manager, Vineeta who is a nutrition specialist who has been
demanding increasing number of SKUs and wanting to play around categories to
improve brand image. Peter, the finance manager was uncomfortable with surpluses
generated by the business and wanted a reengineering being done with respect to
managing costs by way of reducing wastages. He was of the view expiry management
has been challenges and at times it may be good to go with a lost sales opportunity
rather than incurring wastages. However, the marketing head, Arif was of the opinion,
the need to look at high margin products and more of institutional sales. We begin here
with the industry background to consider advising Subbu.

Bakery business

Bakery is a simple and easy to run business even when we look at it from the outside.
As a customer, we are happy if we get multi grain bread or whole-wheat bread on
demand. What it makes to organise the same. How is the industry structured? What
competition looks like? How we have national player like HUL competing with regional
and local brands? Challenges seem to be a plenty.

Types of Bakeries

There are different types of bakeries. The common ones are as follows:

Small Retail Bakery: This is commonly observed in many towns and cities in India.
This is often a single store operation having a few employees and either own made
through ovens having a limited variety and stock at any given time. The small retail
bakery typically sells its baked goods on-site. Apart from bread, they also sell speciality
items like snacks and cakes with limited variety and at a low price point. Margins have
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 been low in this business but risk is limited as well. This business in typical Indian terms
is seen as a cottage business set up.

In-store Bakery: With multiple retails chains, introducing store brand of bakery has
become the in-thing as the customer foot prints are high and this is a high margin
business portfolio for retail. Increasingly lot of focus is given to this part of business as it
captures youth and kids as customers who have potential to make large basket of
purchase as they walk into the stores.

Large industrial bakery Plant: This category of plants produces bread and other
baked items in large volumes using industrial machines. The model itself is different.
Modern Foods which was earlier a public sector company and now with HUL is a
national brand selling Modern breads in India. Till it was taken over by HUL, it was
focused to serve common man. HUL has improved the brand image and increased the
offering with product variants.

The structure, conduct and performance of industrial bakery are to be understood. We

have leading market share holder like Modern Breads who will have a combination of
own factories and contract manufacturers in manufacture of breads. Since a bread has
a shelf life of seven days and in India over night reach by a transportation can be about
500 – 600 k.ms and in secondary distribution, it could be as low as 300 – 400 k.ms,
typically a last mile for a bakery could be maximum 1000 k.ms in 36 – 48 hours and
after which a shelf life of 5 days. A typical customer would like to keep and use the
bread for 2 to 3 days. This product has unique supply chain issue where dwell time in
the distribution channel is almost nil except at retail for a day and at customer point for
two to three days. Hence there is a challenge in setting up a national brand. A national
brand does not allow many categories other than dry breads and buns and cakes and
snacks are ruled out. Margin in business is low. Advantage could be in production
volumes and purchases.

Regional brands could be in large agglomeration of population with clusters of towns

and cities like National Capital Region, Mumbai, Greater Kolkata and other
metropolitans which may serve a large population. This would require having industrial
set up as production volumes would be high. The expectations of customers are
freshness and variety. The challenge is to have multiple categories and in the same
large number of variants. Some bakeries have about 300 -400 SKUs. This category of
units focus on building strong brand recall and focus on margins. Management
efficiency must be high. Success of this business depends upon efficiency of supply
chain, demand management and effective production planning.
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 Specialty SKUs like cakes and snacks need to be transported carefully as they are
susceptible to breakages. Golden Toast is one of such bakery units. Typically, these
bakeries cater to institutional buyers like large corporate, IT companies and other
offices, retail stores and then to individual chain of retail outlets.

A number of retail chains have similar disaggregated production centres at different

centres to serve its retail chains. They sell their products through chain stores or fast
food restaurants instead of marketing directly to the end-user through retailers.

Niche cake Shops are a specialty store selling mostly cakes, other desserts and snack
items. Their products vary from everyday cakes to cakes for big occasions like
weddings, birthday parties and celebrations like Christmas, etc. These are high
premium and mostly single store model with selective patronage of customers.

This business is a reasonably risk free business provided managed well. The products
are sold in an assured market. Bread has been a staple food for breakfast and with
increasing diabetics‟ occurrence and health consciousness improving, bread becomes
an important food item especially in high margin bread segment. Affordability and youth
eating habits support other two categories namely cakes and snacks. Popularity of all
products depends on delicious and filling nature of the item.

In order to run a bakery effectively, one must develop knowledge and experience in
both baking and business. One has to take into consideration the location‟s potential for
profit. The factory must be in the centroid of the city or market. Ability to ship to market
and route management is critical. Also the roads and vehicle in which items are
shipped must be good to avoid breakages while shipping.

The typical production process and supply chain are given in Exhibits 1 & 2.

Exhibit 1 Process flow for snacks

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 Exhibit 2 Process flow for cakes
Following is a partial list of the essentials that must be there in an industrial bakery:
industrial sized oven, mixer, weighting scales, chillers, food display counters, cash
register etc. Staffing is another challenge. One can work on fixed workforce and
manage demand accordingly or manage with a combination of fixed and overstaff on
need basis. An industrial bakery is taxing by way of operation. It is a 365 days, 24X7
work situations.

The peak production would be in the night shift especially for snacks and cakes as the
supplies must be in the early morning between 5 a.m and 7.30 a.m reaching the retail
point for sale. Transportation happens in the last mile through small trucks, typically 1.5
tons vehicle and items are carried in crates. The items must be under temperature
control. Thus it is a challenging industry but assured of market if run well.

Location – Chennai contour complexity:

Golden Toast operates in Chennai as an industrial bakery. There is an excellent

opportunity for this business in Chennai as there are a number of IT companies,
factories and industrial malls functioning in the city. Also there are a number of
educational institutions, hospitals and retails stores demanding bakery items. The
Chennai city had a population of 4.34 million in the 2001 census within the area
administered by the Corporation of Chennai and an extended Metropolitan Population
of 6.5 million.

The urban agglomeration of metropolitan Chennai has an estimated population over 8.2
million people. The current levels must be far much ahead of this. The growing
population has pressure on transports. The roads are congested and there is severe
restriction for movement of goods during the day. Road are being re-laid, repaired and
work progressing for metro rail project throws up challenges for transportation.

Demand

Golden Toast has built adequate capacity. The demand for three categories as
aggregates for the next six months is given below:

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 Exhibit 3 Six month demand

The volumes of the categories to be sold:

Exhibit 4 Six month volume in kg

The category wise revenue is given below:

Exhibit 5 Six month revenue in Rs./kg

The demands are the forecasts and form the basis for production and operations
plan. Typically, Golden Toast works to serve the demand. Arif was of the view to
do demand generation especially at institutional level through discounts. The
data given here are based on revenue realized on categories. Also Subbu is of
the view at the end of the day; a customer is same whether he consumes at work
or at a mall with his family. According to him, demand management must be
through category management and looking at high margin products and relate
with sensitivities of lost sales and wastages.

Production facility of Golden Toast

The factory of Golden Toast is at Guindy Industrial Estate, Chennai which is one
of the oldest industrial estates. The facility covers 10,000 sq.ft and is a corner

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 plot with access to input material from a door, adequate space for washing and
cleaning. Water availability is another important criterion in this business which is
well endowed in this plot. The factory has tie up to buy water on demand and
created enough storage facility. The bakery operation is a 24 X 7 operation
throughout 365 days power back up is very critical. There has been a number
restriction from government on power utilization and anything above normal load
has to be supported with generator. This would affect the margin by nearly 1%
with current operations plan.

The facility has adequate capacity for manufacturing. The capacity is as

mentioned below.

Breads Cakes Snacks

Capacity in kg/day
2500 300 250

Exhibit 6 Daily capacity across categories in kg/day

The facility is controlled by many regulatory policies as it is under food items. The
PFA Act, Weights and Measure Act, Packaging Act, Corporation governed Food
Handlers Certification, Foods Standards, The Factory Acts, are highly critical and
full compliance is required. Health, safety and Environment management of the
production facility is the top most priority of the management. Though there could
be temptations to go beyond capacity established by nearly 20 per cent, the
challenges are maintaining the quality. The risk of over stepping the capacity
would increase wastages by another 2%. This mainly because of limit in
temperature controlled stocking and handling increased capacity during
production processes and loading for transport. Cooking for snacks is well
supported but risk of spoilage is there when there is increase in capacity beyond
defined levels. Thus, capacity is almost set except for some meticulous product
mix design.

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 Labor & Wage cost

Golden Toast had recently conducted a study on their employee productivity on

all the shifts. Any demand over and above this based on production plan and
schedule would be hired from the market.

Categories Breads Cakes Snacks

Revenue contribution/employee/shift/day 3000 2500 2000
Number of employees 30 16 18
Rate/employee/shift in market 180 300 200
Exhibit 7 Labor and Wage Cost

The current gross margins are based on fixed employee model and the overtime
rates need to be adjusted there. Also, idle time cost is not considered and needs
adjustment. Arif was of the view to increase employee as per production capacity
and push demand. Subbu viewed that it would increase fixed commitment.

Distribution plan including transportation

The distribution plan of Golden Toast is typically operating 10 routes which are
despatched starts at 5 a.m in the morning and the last vehicle to leave the factory
is 7.30 a.m. The routes are given in Exhibit 3. Arif was of the view to assess
some of the routes transportation and handling charges and was of the view to
increase the institutional coverage especially of IT companies, factories and
educational institutions. Subbu was of the view that though the IT companies and
educational institutions are good points of sale, IT companies would not have
week end businesses and educational institutions would lead to week end and
seasonal loss of sale especially during vacation. Vineeta felt that that is a good
buffer as week end sale in the city goes up in malls and shops. There is scope to
meticulously look at the current demand and transport plan and rework to
improve yield.

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 Exhibit 8 Route plan of Golden Toast at Chennai

Lost sales & wastages

In this business which is in highly perishable category, managing wastages is

important. At the factory level, most of the wastages which go in shaping and
designing are well recovered. The returns of unsold items are what bother
especially to institutional segment. Wastages happen at transportation where due
to jerks on the roads, the shapes may be lost which would be returned by the
customer.

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 Categories Breads Cakes Snacks

Wastages 3% 5% 10%

Lost Sales 5% 10% 5%

Exhibit 9 Lost sales and wastage

Arif viewed that producing to defined capacity would reduce lost sales by 2% in
all categories whereas wastages may go up by 2% in snacks and 1% in cakes.
One needs to look this impact and advise accordingly.

Gross profit

Vineeta has worked gross profit for breads at 25%, cakes at 40% and snacks at
30%. The gross profit is after covering materials, standard labour and factory
direct overheads. One must adjust for wastages and lost sales. Also one must
look for labour overtime / increased staffing and excess electricity costs. Vineeta
is of the view that if the gross margin is about 20 per cent they must still produce
and try to play around variants and realisation to be viable.

Other overheads

The distribution cost is about Rs.25,000/- per day which is given on the table of
transportation for all routes. The other overheads are about Rs. 1.5 lakhs per
month. These include insurance, rent, taxes and duties to be paid. There is a
need to cover managerial remuneration of Rs. 2 lakhs per month.It looks
challenging with the current production plan. Subbu is keen to make it make
more attractive for him to scale it up and cover overheads.

Capital cost

Subbu has invetsed about Rs. 1.5 crores in the facility and there is a working
capital of about Rs. 50 lakhs. The imputed cost of capital is critical for Peter to
ensure viability. He is arguing that he must provide for 20% and Subbu is
convinced a weighted average cost of 15% must be acceptable to him

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 You may advise the company Golden Toast based on the information given by
answering the questions below.

Questions that you need to answer:

1. Analyse the revenue projections of the Golden toast and comment

improving the revenue yield.

2. If you are a supply chain analyst, what kind of aggregate planning

strategy you would recommend? Why?

3. Analyse the staffing requirement and its impact on cost.

4. Analyse the profitability projections and how do you propose to improve

the profitability through category management, lost sales, wastages cost
and production planning.

5. If you were to advise Subbu, on demand management and supply chain

efficiencies, prepare your views and implementation plan

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