New Bakery Proposal

Bay Area Bakery Company Case

New Bakery Proposal

Bay Area Bakery Company was a regional baker and distributor of bread and operated six bakeries, shown on the map in Figure 1. The manager of transportation and customer service for Bay Area Bakery Company was asked to prepare a report outlining the effect of the proposed San Jose, California, baking facility on the company's physical distribution system. The problem centered around the fact that marketing territories served by the Santa Cruz and Stockton bakeries had increased rapidly in population, necessitating consideration for locating and equipping a new baking plant at San Jose.

Varying costs of labour, ingredients, and operations affected the total cost of baking a standard quantity of bread at each of the locations. This average cost for each of the bakeries is shown in Table 1, along with the daily capacity at each location. The full line of the company's goods was baked at each of the six locations.

Bay Area sold its products at an average delivered price of $3.00 per cwt. and maintained uniform delivered prices on comparable quantity orders throughout its marketing territory. Average daily sales from each bakery for each major center of consumption are shown in Table 2.

To control physical distribution costs closely and to maintain tight control over the freshness of baked items, Bay Area operated its own fleet of privately owned local delivery trucks and over-the-road units. It was the transportation and customer service manager's job to minimize transportation costs from each of the baking plants to market areas. Within the limitations of the company's operations, he had achieved levels of costs shown in Table 2. He had also prepared an analysis of projected delivery costs between all company baking facilities and market areas, as shown in Table 3, included in this projection were those costs of delivery which could be expected between the proposed plant at San Jose and other market areas.

Table 1 Bay Area Bakery Baking Costs and Capacities

Bakery Plant Locations

Baking Costs ($s per cwt)

Daily Baking Capacity (in cwt) Plant Value ($s)

Santa Rosa 19 500 150,000

Sacramento 17 1,000 300,000

Richmond 16 2,700 810,000

San Francisco 17 2,000 600,000

Stockton 18 500 150,000

Santa Cruz 21 800 240,000

Total 7,500 2,250,000

San Jose 17 1,200 4,000,000

Table 2 Current Bay Area Bakery Operating Strategy

Major Market Areas Bakery of Origin Quantity (in cwt)

Production Costs ($s)

Transportation Costs ($s)

Santa Rosa Santa Rosa 300 5,700 600

Sacramento Sacrament 500 8,500 750

Richmond Richmond 600 9,600 600

Berkeley Richmond 400 6,400 400

Oakland Richmond 1,100 17,600 1,320

San Francisco San Francisco 1,300 22,100 1,300

San Jose Santa Cruz 600 12,600 1,260

Santa Cruz Santa Cruz 100 2,100 200

Salinas Santa Cruz 100 2,100 280

Stockton Stockton 400 7,200 600

Modesto Stockton 100 1,800 260

Total 5,500 95,700 7,570

Table 3 Estimated Delivery Costs Between Bakeries and Market Areas

From Bakery Plant Locations ($s per cwt)

To Major Market Areas Santa

Rosa Sacramento Richmond San

Francisco Stockton Santa Cruz San Jose

Santa Rosa 2.00 4.40 3.20 3.20 4.20 4.80 4.20

Sacramento 3.90 1.50 2.90 3.60 2.50 4.50 3.90

Richmond 2.00 2.40 1.00 1.40 2.60 2.60 2.00

Berkeley 2.00 2.40 1.00 1.40 2.60 2.60 2.00

Oakland 2.20 2.60 1.20 1.20 2.60 2.40 1.80

San Francisco 2.20 2.80 1.40 1.00 2.80 2.60 2.00

San Jose 3.70 3.90 2.50 2.50 2.90 2.10 1.50

Santa Cruz 4.80 5.00 3.60 3.60 4.00 2.00 2.60

Salinas 5.60 5.60 4.20 4.40 4.60 2.80 3.20

Stockton 3.70 2.50 3.10 3.10 1.50 3.50 2.90

Modesto 4.80 3.60 4.00 4.00 2.60 4.20 3.60

A major reason for the suggested new baking plant at San Jose was the especially rapidly growing market which the area represented. It was expected that this market would double in the next 5 years, compared to an expected 10-percent increase in other markets (except in San Francisco which was likely to remain constant) during the same period. Also, the inefficiencies involved in serving San Jose from the Santa Cruz bakery could be relieved by the construction of a more efficient bakery in the growing San Jose market.

A bakery with daily capacity of 1,200 cwt. was planned. It was estimated that a facility of this size would cost $4 million fully equipped, and would be able to turn out bakery products at an average cost of $17 per hundred pounds. The expected 5-year increase in demand is shown in Table 4.

Table 4 Projected Daily Demand Bay Area Bakery

Demand (in cwt)

Major Market Areas Current Five Years Growth

Santa Rosa 300 330 110%

Sacramento 500 550 110%

Richmond 600 660 110%

Berkeley 400 440 110%

Oakland 1,100 1,210 110%

San Francisco 1,300 1,300 100%

San Jose 600 1,200 200%

Santa Cruz 100 110 110%

Salinas 100 110 110%

Stockton 400 440 110%

Modesto 100 110 110%

Total 5,500 6,460 117%

Discussion Questions

1. As manager of transportation and customer service for Bay Area Bakery Company, would you agree with the proposal to build a new baking facility in San Jose? Formulate and solve a mathematical programming model(s) to support your opinion. Make any necessary assumptions regarding inflation and future building and production costs.

2. If you do not agree with the proposal, what action would you recommend for consideration by other members of the company's top management group? Is the current distribution pattern optimal?

3. If we project similar market growth for 10 years, what effect will this have on the decision about whether and when to build a new plant?

4. What additional factors would have to be taken into consideration before reaching a final decision in this matter?

Adapted from J. L. Heskett, L. M. Schneider, R. M. Ivie, and N. A. Glaskowsky, Jr. (1973), Case Problems in Business Logistics