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Business Running Case: Investing in a New BrewPub?

BU MET AD715: Assignment 3 Zlatev, Sep-01, 2018

Each team has to prepare and submit a Managerial Report and provide an answer to the question “What is the Rationale for Investing in a New BrewPub?”

The charges of each team are listed by tasks as follows (the grading points are given per team member):

Task 3-0 (max 1 gr.pt): Overall requirements - the expected length of the main body of the managerial report (tasks 3-1 to 3-5) is up to 25 pages APA format, excluding cover page, table of content, executive summary (task 3-6), and appendices.Task 3-1 (max 2 gr. pts): Based on the business simulation and the business running case, select a location for the existing fictitious restaurant. Define and present the overall

goals and objectives from the business owner point of view.

Task 3-2 (max 3 pr. pts): Methodological framework - formulate your preparations for a step-by-step decision making process, based on a research of all five areas of your study (Marketing Management, Operations Management, Innovation & Technology Management, Financial Management, and HR Management) and the rational of using quantitative and qualitative decision making methods, covered in this class.

Task 3-3 (max 3 gr. pts per functional area): For each one of the functional areas (task 3-2) apply at least two from the discussed in this course decision support tools (e.g. Decision Tree, SWOT Analysis, PESTEL Analysis, Break-Even Analysis, What-If-Analysis, Sensitivity Analysis, Optimization Analysis, Risk Analysis, others).

Task 3-4 (max 3 gr. pts per functional area): Evaluate the output parameters of the performed simulation cycles and explain which cycle is offering the best business parameters for the proposed new project, and why.

Task 3-5 (max 3 gr. pts): Summarize the results from the study and formulate the decision strategy that the business owner should follow if he/she decides to invest in the new project. Prepare an action plan for the implementation of your proposal.

Task 3-6 (max 1 gr. pt): Prepare an executive summary

Appendices: (max 4 gr. pts)

Submission Requirements:

Assignment 3 is due December 10, 2018 by 11:59pm ET

Submit the completed assignment as a zip file using the Attachments tool on this page. Please be sure to include your own name in the filename (last name, then first initial, for example: doej_assignX.doc) and in the text of the document, so your instructor/facilitator always knows whose submission he/she is reading.

The team assignment 3 should include the following documents:

1. Managerial Report (pdf file)

2. Best decision cycle - excel file

3. Best decision cycle – pdf file (printout generated at the end of the business simulation)o Financial statement(s) – excel file(s), generated during the simulation

4. Attachments to Assignment 3 – excel of word files (such as SWOT Analysis, Decision Tree Analysis, Implementation Plan, others)

5. Team statement with estimates for the individual participation of each team member.

Assignment 3: Conceptual Study for a New BrewPub System

at Legal Harborside Restaurant

Group 8 - Topaz

Qiaoyu Cai | Zehuang Hong Chen | Yijing Li | Linrui Liu

Budsarin Watcharasemakul | Jingdong Wei

MET AD 715 Quantitative and Qualitative Decision Making

Prof. Richard Maltzman

December 10th, 2018

Table Of Content

Executive Summary …………………………………………………………………..

1. Introduction ……………………………………………………………………….

1.1 Problem Statement ……………………………………………………….

1.2 Overall Goals and Objectives of the Report …………………………….

2. Managerial Decision-Making Process for Selected Functional Areas ……………

2.1 Marketing Management and Decision Making ………………………….

2.2 Innovation Management and Decision Making ………………………….

2.3 Operations Management and Decision Making …………………………

2.4 Financial Management and Decision Making ……………………………

2.5 Organizational and HR Management and Decision-making ……………

3. Application of Decision Support Tools …………………………………………….

3.1 Decision Support Tool for Marketing Management ……………………..

3.2 Decision Support Tool for Innovation Management ……………………...

3.3 Decision Support Tool for Operations Management ……………………..

3.4 Decision Support Tool for Financial Management ……………………….

3.5 Decision Support Tool for Organizational and HR Management ……….

4. Evaluation of the Result of the Business Simulation ……………………………….

4.1 Comparison Based on Marketing Management ………………………….

4.2 Comparison Based on Innovation Management ………………………….

4.3 Comparison Based on Operations Management …………………………

4.4 Comparison Based on Financial Management ……………………………

4.5 Comparison Based on Organizational and HR Management ……………

5. Summary of the Results, Recommendations, and Conclusions ……………………

5.1 Summary of Results ………………………………………………………....

5.2 Recommendations ……………………………………………………………..

5.3 Implementation Plan for the Selected Strategy ………………………………

5.4 Conclusions …………………………………………………………………….

6. Appendixes……………………………………………………………………………….

Executive Summary

1. Introduction

Our client’s restaurant is located in Fort Point, Massachusetts. An area with many upscale restaurants, historical sites, and art galleries that attract a large customer base of local residents and tourists. After extensive market research, we concluded that the restaurant has the capability to increase its market share by investing in a new BrewPub because there is only a few competitors within a two mile radius and it is located in Boston, a city known for its craft beer culture. Furthermore, “brewpubs provide an opportunity for consumers to engage with the culture of craft beer, and right now, there is a golden opportunity to engage with drinkers in a memorable, meaningful, and interactive way” (Nielsen, 2018). The investment in a BrewPub will enable the restaurant to target a new market segment, mainly craft beer lovers, and to have a strategic market positioning not only as an upscale restaurant but also as a high-quality brewpub.

The recommendation to invest in a Brewpub is based on the premise of internal and external analysis. From an internal perspective, Legal Harborside Restaurant serves food that pairs well with beer like seafood, pasta, and burgers. It also has the sufficient space to assemble a Brewpub system and it is legally to do so under federal and state level. Moreover, the restaurant is located in the port of Boston; as a result, it has the opportunity to attract many customers because this location offers beautiful sceneries and it is one of the stops for many cruises. From an external assessment, Boston is an appealing destination for millennials in their early to late 20’s, as it is the home for great universities like Harvard, MIT, and Boston University; the city is also a popular destination for young professionals working in entrepreneurship and healthcare industry. For the reasons mentioned above, an investment in a Brewpub system will enable the restaurant to attract a larger customer base, mostly millennials since we like to experience something new, “with craft beer, consumers can experiment with a huge diversity of beer styles and taste profiles, and the younger the consumers are, the more likely they are to drink craft beer at a pub or restaurant” (Carneiro, 2018). With millennials having positive experiences at Legal Harborside, they often share their opinions on social media, i.e. Facebook, Instagram, and Yelp. This will promote the popularity of the restaurant without spending excessive costs on local and online advertising.

To further explain our decision-making process, we will analyze each functional area with decision support tools to understand the feasibility of a brewing system in our restaurant. Furthermore, we will employ a business simulation method to foresee the financial performance and operating conditions of the restaurant for the next three years. From the results obtained in each functional area, we can determine whether investing in a Brewpub system will increase the restaurant’s profitability and market share.

2. Managerial decision making process for selected functional areas of the new business unit

2.1. Functional area #1: Marketing Management and Decision Making

Legal Harborside serves food that compliment well with beers, i.e. seafood platters, pasta, and burgers. For this reason, we are going to analyze if the owner should invest in a new Brewpub system to serve his own craft beers. The objective of this decision is to increase our product offerings and market share to generate higher profits.

The reason why we chose to invest in a Brewpub system is that demand for craft beers has dramatically increased over the years. In the greater Boston area, the demand for craft beer even surpassed soda consumption in summer 2018 (1). According to a research published by Columbia University, BrewPub has become the 7th influencer that attract customers to a restaurant, previously from 23rd in 2016. This reflects the changes in customers preferences for drinks; as a result, we need to correspond to these changes and make use of this new consumption to increase our revenue.

Before we proceed with the investment, we conducted market research to evaluate the craft beer market. The analysis for the demand of drinks in Boston is conducted through a survey delivered to residents in this area by a random sampling method. Therefore, it represents the percentage of craft beer consumption in this area. Currently, the number of restaurants that offers craft beer is only 5%, so there is a discrepancy between supply and demand. Within a 2 mile radius from Legal Harborside, there are only 27 restaurants serving craft beer, which can meet annual demand of 125,6650 out of 224,4017. (2) (3)

(2) (3)

Among consumers who often eat at restaurants, it has been reported that 62% may consider eating there only if they sell craft beer. Therefore, this turns out to be a competitive advantage for restaurants who want to attract more customers and it is starting to be a requirement if restaurants want to succeed.

Besides the increasing demand and business opportunities in the craft beer industry, Legal Harborside has another advantage of investing in a Brewpub system. The restaurant has a big space to store a large variety of craft beers. The current restaurants serving craft beer in this area only offer 6 different brews. Due to its extensive storage space, Legal Harborside can store over 20 distinct brews, which may attract more customers because it has the capability to offer different brews. Also, a large area allows Legal Harborside to have a higher inventory buffer for surges in demand, i.e. sport events.

The structure of customers also makes Legal Harborside an ideal place to brew its own craft beer. 55% of the customers in Legal Harborside are family and 28% of the customers are coming for business trips (4). According to a research conducted by New York University and by our observations, 78% of family customers (5) and 87% of the customer (6) coming for business trips would order beers with their meals. Thus, the high percentage of family customers and business meal customers increase the demand for craft beer at Legal Harborside higher, resulting in an ideal place to serve craft beer.

(4)(5)(6)

For the materials and techniques required to brew craft beer, Legal Harborside also has an advantage in comparison to other restaurants. Mass Bay Brewing Company is a brewing company near Legal Harborside; also, there are some other brewery companies around this area. If Legal Harborside cooperates with these brewery companies, Legal Harborside would have a better access to technical support and materials. It also reduces the transportation cost of the brew beer. Therefore, Legal Harborside could have a more competitive price compared with other restaurants that offer self-made brew beer and have a higher profit margin to become break even sooner than others. Conclusively, the current investment condition is positive and can be evaluated as ideal for the investment.

According to our survey and other primary market research tools, we estimate the number of customers for our brew beer in the first year would be 125,665 or even higher. Considering our estimated customer growth in the next two years, we estimate that the number of customers for brew beer in Legal Harborside would be 159,614 in the second year and 202,685 in the third year. Many of our customers and partners also reports that they are interested in purchasing the bottled brew beers. So, we are also planning to invest in two types of brew beers for wholesale. The potential customer number for wholesale brew beers is estimated to be 188,497 in the first year, 195,084 in the second year and 202,685 in the third year.

Based on the estimation of the marketing potential, we have negotiated with Mass Bay brewing company and other brewing companies near Legal Harborside about the future cooperation and the price of material, techniques, and equipment. We talk about 9 brands of brew beers, including Pilsner (wholesale and retail), Bavarian Lager (wholesale and retail), Light Wheat, Red Wheat, Pale Ale, Bock Dark, Special Offer, Lobster Hurricane, and Boston Pier Mojito.

According to the negotiation results, we have estimated the material cost (including material and transportation) of Lobster Hurricane and Boston Pier Mojito to be $1.5 per unit and the cost of the rest type of brew beer to be $0.28 per unit.

We also estimate the labor cost for brew beer in Legal Harborside, we have estimated that for Pilsner (wholesale) and Bavarian Lager (wholesale), Lobster Hurricane and Boston Pier Mojito, the labor cost per unit would be $0.25 and for the rest to be $0.2 per unit.

We have also calculated some other cost, such as waste, damage, low quality and such like that. The estimated other cost would be $0.25 per unit.

Based on our cost estimation, we show an advantage in cost management than other restaurants offer self-made brew beer. Our costs are lower due to the higher customer size and the high volume of brew beer, low transportation cost, low labor cost, as well as low stocking cost. This make Legal Harborside become more competitive in price setting and become more profitable.

With the estimated cost, we introduce an application of simulation to estimate the number of buyers, the revenue and profit under each pricing situation. The simulation application is produced by XXX and proven to be predictive about the market. The simulation application can reflect the change of customers’ decision making when facing different price and also predict the seasonal effect on the order numbers of brew beers. We will take use of the simulation application to set up a price which not only can be competitive in the market but also can make the investment become breakeven in half year, or to be more perfect, in four months.

2.2. Functional area #2: Innovation Management and Decision Making

Innovation management aims to integrate innovation into the current business by exploring new ideas to reach new customers and maximize the utilization of existing assets. The primary goals are to increase profit, decrease overall cost and enhance growth.

Brewers Association analyzed a statistic from Nielsen's Harris Poll between 2015 and 2018 and concluded that average growth of U.S. new craft beer drinker is around 4-5 million per year (Watson, 2018). However, when taking a more in-depth look into the demographic, the statistic shows that craft beer drinkers are 31.5% female and 68.5% male in 2018 (source: Nielsen Harris on Demand). Caitlyn Battaglia, Nielsen’s Beverage Alcohol Practice Area manager, suggested the way to reach female consumers is through beers with crisp, fruity or juicy flavor profiles since female consumers are less interested in typical IPA profiles (Kendall, 2018). This information triggers the idea to offer more variety of craft beer to meet female preference by twisting two most popular craft beers into new cocktail drinks. We will offer fruity drinks that still retain the spirit of craft beer as a base of the cocktail. Lobster Hurricane (Pilsner) and Boston Mojito Pier (Bavarian) will be added to the restaurant's drink menu all year long. Each cocktail cost is 2 dollars and the retail price is 12 dollars.

Another idea is that we want to reduce material cost by implementing 'Yeast Washing' process. Yeast washing is easy, requires minimum equipment and can be done in a short period (Smith, 2008). Instead of purchasing fresh yeast for every new batch of beer, we can separate live yeast from the spent hops and grains after fermentation and reuse them in the next batch. The average cost of yeast in a craft beer is approximately 1% of the retail price and washed yeast can be reused 4 to 6 times (Satran, 2014). With that, we can reduce the raw ingredient cost 1 cent per unit.

2.3. Functional area #3: Operations Management and Decision Making

The operation management is relevant to restaurant’s current resources and business philosophy. First, we should have a general understanding on these aspects to better integrating operation strategies and plans with the company’s strategy and resources. The restaurant is a chain store with rich in talent resources and financial support, and enjoys a great reputation in the local area. The style of the restaurant itself is outstanding and impressive. The branch we chose is located in the popular seaside scenic spot. Not only the local diners, but also the thousands of foreign tourists who come here during the tourist season. In this environment, our business philosophy has become more proactive and bolder, and we hope to bring more quality food and services to customers.

Since the craft beer marketing is changing rapidly, bringing a challenge to quality and risk management, in the following paragraph, I am focusing on process and capacity design and more specifically on capacity and constraints management (Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7). The chart below (see Appendix) helps sorting the tasks and problems we may face in operation management (Zlatev, 2018).

Understand the processes of products and services and set production management objectives. Combined with the plans of other departments, I learned the seasonal sales distribution forecast and market capacity of various products from the work of the marketing department, so as to arrange seasonal production tasks for different flavors of beer. Based on the forecast results, select a strategy for production scheduling. Combine the existing resources of the restaurant to optimize the production process. For example, when our demand is greater than the current month's production, we should reasonably allocate production tasks, and use the previous monthly idle production line to produce the next month's demand, which is achievable in our case, because the beer sales are affected by the season. The impact of changes, there are more obvious fluctuations (Stephen Ngo, 2016) based on risk assessment, key indicators such as residual rate, operating rate, scrap rate, unit production cost, evaluate the production process.

2.4. Functional area #4: Financial Management and Decision Making

The Brewpub investment requires our client to invest $150,000 for the acquisition of 8 tanks producing an average of 476,160 pints on a yearly basis. To understand the feasibility of this project, we forecasted future financial performance using the following assumptions. First of all, we determined that consumption for craft beer will be increasing by 5% year after year because we want the restaurant to be branded as a high-quality craft beer and we are also increasing our social media advertising cost throughout the years to reach a broader audience. Moreover, to have a more realistic approach about the restaurant’s future performance, we took into consideration the following costs, i.e. additional workforce, utilities, rent, equipment, and advertising. For this reason, we decided to take a loan of $40,000 with a 10% annual interest rate from Bank of America. This will help the owner to meet short-term obligations since we expect the restaurant to start generating profits after the first 3 months of operations with the Brewpub system in place.

To further understand our assumptions, we will analyze our forecasted sales, costs, and income tax rate. The forecasted units are 125,665, 159,614, and 202,685 for FY-1, FY-2, and FY-3 respectively without accounting for wholesale distribution. The restaurant’s current yearly sales are 139,590 units; therefore, we believed that our FY-1 sales with the new system should be within this spectrum because it will take some time for the restaurant to be branded as a high quality craft beer brewery and to attract a larger customer base. In regards to our forecasted costs, we increase the cost for additional workforce since we need to hire an executive senior consultant, a sales representative, and a brewmaster. The consultant will evaluate our performance on a yearly basis, the sales representative will be hired for only a year because we want him to promote our craft beer, and it is crucial to hire a brewmaster that can successfully brew high-quality craft beer that appeals to our customers’ taste. Additionally, it is expected that utilities and equipment expense will be rising, as the restaurant needs more electricity and water to run the Brewpub system and it also needs to spend on equipment maintenance, i.e. cleaning the tanks. We also determined that income tax is 35% because Boston has a federal tax rate of 30% and a state tax of roughly 5%.

2.5. Functional area #5: Organizational and HR Management and Decision Making

Human resource management is an internal control for a company to how reasonable assigned number of employees to balance the benefit between company and employees in long term development. The company manager should consider about three major areas that are staffing, employee compensation and benefits, and defining work. What’s more, good human resource management can influence employees have a positive working attitude, performance promotion and united collective that are significant for a company internal development.

The most important thing for human resource is hiring appropriate employees that can give full play to their abilities. The aim for company is quality rather than quantity for employees, a better work quality, attracting more customers and making more money. To own a professional brewer is the key for a brewpub because it will directly impact the quality of the products and indirectly impact the sales volume of the products. Good managers are also important for a brewpub based on formulating and adjusting feasible selling strategies that like brains of the whole teams.

The primary aim for Legal Harborside is retaining one critical salesman and one critical worker in three years. As a just budding startup company, retaining talent and satisfy their requirement are significant. Giving them suitable salaries and promising them an increase salary each year are the ways to increase their working motivation and have passions to seriously treat this job. In addition, company can adjust general salesmen and workers based on the operating status. Our plan for assigning general salesmen and workers is setting up one salesman and one worker in first year because they can help critical employees share the work. After the company becomes stably, general salesman is unnecessary existing anymore because critical salesman can handle the business by his/her self. Decreasing the salesmen number will also save money for company and can use the extra money hiring more workers based on company becomes stable and increasing customers require more labors add in to provide better service. Critical and general employees are indispensable because company needs their mutual cooperation to create more benefits and values.

3. Application of decision support tools

3.1. Selected decision support tools for functional area #1

Sensitivity Analysis for all brew beer products: After we have conducted the pricing setting for all our craft brew beer products, we also do a sensitivity analysis to test whether our strategy is reliable and see whether model needs to be changed.

Based on the result of sensitivity analysis, we have found that the swing of our products is accumulated from $0 to $20,162, which is the difference of the high output value and the low output level. The high and low boundary of the range of the output are $377,701 and $357,539. The base output is $372,969. Since the total swing is about 5.4% of the base output, the uncertainty of the model is within our acceptable range. Therefore, the output of our model is not varying much and could be evaluated as reliable. Therefore, we can accept the output generated by the model and could use those result for the followed steps of analysis.

3.2. Selected decision support tools for functional area #2

For innovation management, we implemented two tools to support our decision-making process. First, the Decision Tree can help us decide whether or not we should add new cocktails to the drink menu. We use estimated revenue and cost as our Expected Monetary Values (EMV) to calculate our alternatives. If we add new cocktail drinks to the list, there are two possible alternatives for launching new items 1) success 2) fail and the probabilities for both options are high (0.3), medium (0.4), low (0.3).

The second tool to support decision-making in innovation management is What-if analysis. It will conclude the cost reduction and compare the material cost before and after implementing the yeast washing process. The analysis will show improvement of performance and present the additional revenue restaurant can gain if the material cost reduced by 1 cent per unit.

3.3. Selected decision support tools for functional area #3

In business simulation in MS excel, we may change variables from cost, cut-off point to sales projection (distribution). Take the previous analysis in consideration, the main task in operation management is to balance the demand and supply, reflecting to the simulation, that is the sum of excess demand should be minimized, this is our simulation goal. Besides, it is possible to observe how the variable cost will affect the total profits. Before applying analytical tool, capacity constraints in the running case should be defined:

(v) Maximum capacity of a 40 bbl BrewPub system (8-155 gallon tanks):

Max capacity 32 tanks per month；The storage life of craft beer is 30 days；Variable cost range: min 0.4; max 0.9

Principle-Flexibility: try to put every tank into full use, in case our supply can’t catch up with the increasing demand. Fast in fast out strategy. Trace the actual sales performance, figure out sales of each type of beers and take it into account for the next production cycle. For example, if we find out that the sales of BR01-03 Light Wheat goes down in winter, and BR01-04 Red Wheat goes up instead, we may cut down the capacity of BR01-03 to compensate the increasing demand of BR01-04.

Sensitivity Analysis are based on analytical modeling activities where users are: (1) exploring possible alternatives and not demanding pre-specified information. (2) using this decision support approach to find the information they need to help them make a decision. (Zlatev, 2018) As mentioned, the main task in operation management is to balance the demand and supply and get to know how the variable cost will affect the total profits. So, in sensitivity analysis, I can change the variable cost and see how it affect the total profits, then decide to use

Optimization analysis is a more complex extension of goal-seeking analysis. The goal here is to find the optimum value for one or more target variables, given certain constraints. To make this possible, one or several other variables are changed repeatedly, subject to the specified constraints, until the decision maker discovers the best values for the target variables (Zlatev, 2018). In optimization analysis, the dependent variable (objects) is determined as profits before taxes. The changing variable is variable cost. The goal is to maximize profit, constraints are variable cost should be in the range from 0.4 and 0.6.

3.4. Selected decision support tools for functional area #4

To assess the projected financial performance of the restaurant, Break-Even analysis, Discounted Cash Flow, and Financial Statements will be employed to help with the decision of whether the owner should invest in a Brewpub system.

Break-even analysis is when our total cost equals revenue, in other words, it exhibits how long it will take for the owner to recover his initial investment and start generating profit. Furthermore, the Discounted Cash Flow analysis estimates the present value of an investment using its future cash flows and the discount rate; this analysis will use the Statement of Cash Flows. Also, the income statement illustrates the revenue, cost, and profitability of the company throughout the years and the balance sheet summarizes the financial position of the restaurant. All of these decision support tools will help evaluate whether the owner of Legal Harborside should move forward with the investment.

3.5. Selected decision support tools for functional area #5

SWOT analysis is a useful tool to combine with internal and external factors to analyze the strength, weakness, opportunity and threat in human resource management, so that company can appropriate adjust the labor and salary assignment. The strengths are 1) company give high salaries for talents and promise them to have a salary increase in future years, 2) the employees are professional and dare to innovate that can provide high quality of products and attract new customers, 3) have the positive working environment and an easy rapport that increase the working motivation to provide better work. The weaknesses are the limitation of salary expenditure for general employees which means company cannot afford high salaries for every employee and the limitation of employees for producing the productions in order to save more money. Also, the company has the opportunities. There is also existing a treat that the critical employees unpredictable quit if other company gives them attractive conditions and benefits.

4. Evaluation of the results of the business simulation (for the selected functional areas and the selected decision support tools)

4.1. Functional area #1: Comparison based on selected business parameters for two different decision cycles (before and after the application of the selected tools)

Based on the simulation to forecast the number of orders, revenue, and profit for each of the craft beers at Legal Harborside. For our current best pricing strategy, the simulation application has predicted the scenario that is most likely to happen after implementation of this strategy.

In the simulation application, the BR01-01 represents Pilsner (retail); BR01-02 represents Bavarian Lager (retail); BR01-03 for Light Wheat; BR01-04 for Red Wheat; BR01-05 for Pale Ale; BR01-06 for Bock Dark; BR01-07 Pilsner (wholesale); BR01-08 Bavarian Lager (wholesale); BR01-09 for Special Offer; BR01-10 for Lobster Hurricane; and BR01-11for Boston Pier Mojito.

Among all the 11 types of brew beer (9 brands), the two types that brings most revenue are BR01-02 (which contributes to the 17.14% of the revenue) and BR01-01 (which contributes to the 15.17% of the revenue) (7). The two that are most profitable are also BR01-02 (which contributes to the 19.65% of the profit) and BR01-01(which contributes to the 17.39% of the profit) (8). Based on the simulation, BR01-02 and BR01-01 are the most popular ones because the demand and supply are the highest.

(7)(8)

The simulation also points out some possible threats to us. For BR01-09 (Special Offer) BR01-10 (Lobster Hurricane) and BR01-11 (Boston Pier Mojito), the number of orders is very low, even equal to 0 for BR01-10 and BR01-11. Therefore, we may need more evaluation for these three types of brew beers and have a low stocking at the beginning to see their actual sales performance in the first couple weeks. If they are not sold well and same as what has been predicted in the simulation application, then we may reconsider our strategy or removing it from our menu.

SWOT analysis

Similar to what has been identified in the marketing research, our simulation application also shows some supporting result to prove our advantages and also identifies some potential weaknesses, opportunities and threats.

Strengths: Lower material and labor cost Better access to technical support Big customer size Prime Location Less competitor	Weakness: Higher other cost Less operational experience More management effort Equipment setup time
Opportunities: More ideal stocking strategies Reduce other cost	Threat: Emerging other competitors Customers losing interests

Weaknesses:

Higher other cost: Since we have a large stock, we are exposed to a higher other cost such as low quality, damage and waste if compared with other restaurants that only offer small volume of self-made beer.

Less operational experience: Although we are close to technical support, we are still new to operating Legal Harborside with self-made brew beer.

More management effort: Since we are new to operating Legal Harborside with self-made brew beer, we may face more challenges during first couple months and need more efforts to conclude a corresponding management strategy.

Equipment setup time: Since the stocking is large, the set-up time will be longer and more complicated. Since we are open to 11pm or midnight 7 days a week, the installation time may be tight and may affects the installation process.

Opportunities:

More ideal stocking strategies: After we launched our self-made brew beer, we have an opportunity to conclude a wise strategy for stocking and managing our 9 types of brew beer.

Reduce other cost: With the better stocking and managing strategy, and becoming more experienced in managing, we are capable of reducing the other cost, increasing the profit margin and reducing the price.

Threat:

Emerging other competitors: Now we are facing the challenge of emerging competitor. Since the cake of current market is big, so more restaurants are joining and may become a threat to Legal Harborside.

Customers losing interests: We are not sure whether the customers’ interest in brew beer will be increasing in the future, or the interest is just temporary. Therefore, we are facing a threat that the interest is temporary and may be diminishing at certain point in the future.

Break-Even Analysis

Based on what we have tested in the simulation application, we come out with the BEP as followed. Our pricing strategy will make our investment breakeven in 3.9 months with the sale for $351,487, please refer to Appendix B.

4.2. Functional area #2: Comparison based on selected business parameters for two different decision cycles (before and after the application of the selected tools)

To analyze all alternatives thoroughly, we should consider the decision tree carefully. The best case scenario of adding new cocktails to the menu is that the two drinks will generate additional 97,000 dollars and the worst case is that we will lose 7,900 dollars from its ingredients cost. We assigned the probability of successful launch as 0.6 and fail launch probability as 0.4. The EMV calculation of the successful launch is 55,100 and the EMV of fail launch is 5,270. We can conclude that the decision tree supports the alternative of offering new cocktails to the customers whereby the best case scenario will generate additional 97,000 dollars revenue to the restaurant.

For What-if analysis, by comparing the two scenarios 1) the case where yeast is not reusing and 2) yeast washing process is implementing, What-if analysis shows that the restaurant can gain a slightly higher margin from the innovation process and the cost reduction can enhance the break-even period. The change in variable cost for implementing the yeast washing process also determines that by reducing 1 cent material cost on all items, the overall expense reduces by $2,949 and improving the break-even period from 3.91 to 3.90 months.

4.3. Functional area #3: Comparison based on selected business parameters for two different decision cycles (before and after the application of the selected tools)

Cut-off point and excess demand comparison. From decision support tool system in MS Excel, there is no good way to determine the exact cut-off point formula. But it is clear that when the cut-off point changed, supply changes as well. Table 4-1 shows the cut-off point——excess demand numerical relationship (see Appendix). A certain type of beer is selected, with the cut-off point changing, we can see how the supply number change correspondingly. After running several cycles, a general conclusion can be drawn: the lower the cut-off point, the higher the supply.

Since the sum of excess demand should be minimized, cut-off point is relevant to the supply, the projected demand is fixed, we can realize our goal by changing our cut-off point. Below is the result from our best cycle, cycle 14.

The cut-off point data used in cycle 14 is: BR01-01 Pilsner 0.8, BR01-02 Avarian Lager 0.8, BR01-03 Light Wheat 0.6, BR01-04 Red Wheat 0.6, BR01-05 Pale Ale 0.6, BR01-06 Bock Dark 0.6, BR01-07 Pilsner (wholesale) 0.8, BR01-08 Avarian Lager (wholesale) 0.8, BR01-09 Special offer 1, BR01-10 Ster Hurricane 0.5, BR01-11 Boston Pier Mojito 0.5. The excess rate from FY-1 to FY-3 changed from 6% to 3%, showing that our decision of changing the cut-off point is doing well in balancing demand and supply.

Although the parameter (excess demand) in cycle14 indicates that our decision is pretty reasonable and the result is acceptable, but running next cycle for different inputs is a useful way to reach a valid conclusion. Compare to cycle 14, the cut-off point data used in cycle 15 is: BR01-01 Pilsner 0.8, BR01-02 Avarian Lager 0.8, BR01-03 Light Wheat 0.8, BR01-04 Red Wheat 0.8, BR01-05 Pale Ale 0.8, BR01-06 Bock Dark 0.8, BR01-07 Pilsner (wholesale) 0.8, BR01-08 Avarian Lager (wholesale) 0.8, BR01-09 Special offer 1, BR01-10 Ster Hurricane 0.5, BR01-11 Boston Pier Mojito 0.5.

The excess rate from FY-1 to FY-2 changed from 12% to 6%, but again rose to 7% in FY-3. An ideal production cut-off point management should lead to decreasing excess rate. The result from cycle 15 indicates that the current cut-off point may lead to an unstable demand-supply scenario.

Further, refer other parameters to evaluate the result from two cycle: Break-even point and profits (before taxes). In cycle 14, with mentioned inputs, the break-even point is 3.9, profits before taxes are 372,243 (FY-1), 517,981 (FY-2), 674,314(FY-3). In cycle 15, the break-even point is 3.68, profits before taxes are 335,790 (FY-1), 536,287(FY-2), 661,428(FY-3). (Complete screen capture refers to Appendix). Although break-even point is smaller in cycle 15, which means in approximately three and half month, the restaurant’s expense equals income and start earning profit from then on. But take profits into account, the most important parameter in simulation, cycle 14 is still a better decision, since the total profits in three years is higher than that of cycle 15. In conclusion, cycle 14 inputs is the optimized choice.

4.4. Functional area #4: Comparison based on selected business parameters for two different decision cycles (before and after the application of the selected tools)

Break-even analysis exhibits that the owner will break-even in roughly 4 months or when revenue is $351,487, see Appendix B. From this point forward, the restaurant will start becoming profitable. Expected profits from our analysis are $372,243, $517,981, and $674,314 for FY-1, FY-2, and FY-3 correspondingly, see Appendix C for more details. These numbers illustrate that the Brewpub system is indeed a lucrative investment, so we recommend the owner to install the brewery system at his restaurant.

To further understand the positive results of investing in a Brewpub system, we will use Discounted Cash Flow method to evaluate this investment. According to Wall Street Journal, Boston Beer Company has a discount rate of 8.5% (2018). For this reason, our discount rate is 25% since we have higher risks in comparison to established breweries. Using these assumptions, the NPV is $1,375,730 and the IRR is 187%, see below for a detailed explanation. Based on this analysis, the NPV is greater than 0 which entails that the investment will be profitable and the IRR is greater than our weighted average cost of capital, which also suggest that the project should be accepted because we expect to receive earnings from this investment.

4.5. Functional area #5: Comparison based on selected business parameters for two different decision cycles (before and after the application of the selected tools)

The two cycles are choosing by business simulation that are cycle 14 and 16. In the cycle 16, the staffing setting up number of employees and how salary assigned shows in appendix 1, the surplus for critical salesmen and general salesmen are negative which means the company cannot afford this much salary for employees based on the current operating business status and also for future two years. For critical workers and general workers, the surplus for them is still positive which means in current operating status, company still have extra money to afford their salaries except in FY-3 which has negative surplus. Also in appendix 3 the compensation costs increase from FY-1 to FY-3 are not very stable because compare to FY-1 to FY-2, the increase from year 2 to year 3 number is too high which means company pay much salaries for employees or hire too many employees. To improve the current situation, the staffing use two tools to analyze the company current human resource situation find out that the growth rate for critical employees should increase based on the current rate because the company should retain the talent by using appreciate salaries. Increasing the growth rate for critical employees will decrease the number of general employees to balance the limited salaries expenditure. Specifically, the position of general salesmen could be eliminating after year 1 and critical salesmen could take place of them because once the business stay stable after year 1 and increase the salary growth rate to 5% in year 2 and 10% in year 3, the critical salesmen can work by themselves. The critical workers such as brewers are the key of producing beers, so they will regard as a talent, so the company decides to increase the salary growth rate to 10% in future two year to keep their motivation for the job. Once the company’s business become stable and more customers are willing to come to the restaurant, more general workers should be hired to provide a better service. The cycle 14 result shows in appendix 2, although the surplus is negative for salesmen in first, the salary assignment becomes more suitable before the two tools using. Also in appendix 4, after using the tools, the increase compensation cost from FY-1 to FY-3 growth stably, the decrease compensation cost directly influence the fixed cost becomes less, so that it can make more benefits in other areas. The internal employee’s salary adjusting has less influence for the whole business, but it is also very important for company to retain the talents for beer producing and innovating.

5. Summary of the results, recommendations, and conclusions

5.1. Summary of the results

5.2. Recommended strategy

Based on our analysis on the profit margin and revenue share of each brew beer products, we have come up with some recommendations for the operation and management:

1. For the products that are predicted to have low sales, such as BR01-09 (Special Offer) BR01-10 (Lobster Hurricane) and BR01-11 (Boston Pier Mojito), we should have a low stocking at the very beginning, even though it may increase the average total cost of them. We should not give them up but must to very cautious about its potential performance. We recommend testing them in the first week and see their performance to determine whether to continue or not.

2. For the top-sellers which also have a higher profit margin, we should try to expand it sales. We should make use of their advantage of popularity to increase the sale. For example, when a customer is not intending to purchase our brew beer, but they have the ability to purchase, we should offer them some samples for free and may increase the opportunity of future purchases. This action could also let them know our products and they may come for it at next time. In this way, we are not making revenue only by our brew beer but also by attracting them to come back in the future.

3. In the first two weeks, since we have just introduced our brew beer, it may take a long time for our customers to notice our new self-made brew beer. However, our simulation application predicts the sales performance by an ideal situation. So, we should try to let our customers be aware of our new products at he very beginning to match the predicted results and our breakeven point. Here we recommend offering some coupons for the brew beer before we start offering the brew beer and be well prepared. We can also let our waiters and waitresses to introduce our brew beer to our current customer and tell them the expected launch date. A pre-awareness of our products could enable the sales performance of our self-made brew beer to be better than without it.

4. We should conclude our operational and managerial experience frequently and adjust it with any updated changed and situations.

5.3. Implementation plan for the selected strategy

5.4. Conclusions this part!!!!!

List of references

o List of tables and graphs

o List of appendices and exhibits

References

Carneiro, Joana. (2018). What Makes Craft Beer so Popular with Millennials?. LinkedIn. Retrieved from https://www.linkedin.com/pulse/what-makes-craft-beer-so-popular-millennials-joana-carneiro/

The Boston Beer Company. (2018). 2018 Annual Report. Retrieved from https://www.bostonbeer.com/static-files/00b47161-8fbc-4568-8482-e307c1763709

Appendix A

Appendix B: Break-even Analysis

Appendix C: Projected Financial Statements

Appendix 1

Appendix 2

Appendix 3:

Appendix 4: