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Kitchen Made Pies has clearly been struggling over the past four years. Is this the beginning of the end or is there some hope left for Paul Dubicki? He obviously has a lot going for him right now (181). The economy has taken a turn for the worse. Fresh pie sales are slowing due to the rising popularity of in-store bakeries. They have also had credit problems with one of their top clients. However, I feel the biggest problem of KMP is their inability to control labor costs. Sales have actually been steady during these last four losing years. It has been their increased costs that have got them in trouble as of late. Can they improve their production techniques in order to increase efficiency and reduce costs?
Mr .Dubicki is intent on offering a wide range of pies. The trouble with this is the ridiculous amount of downtime the facility has every time they need to change the size or flavor on the machine. They spend 15 �0 minutes each time they change sizes. They lose another 4-5 minutes each time they switch flavors. This amounts to 16 minutes a day where nothing is being produced. The labor workers are still working and getting paid. The company just has nothing to show for it.
Mr. Dubicki’s biggest concern with purchasing a more efficient machine is obviously the up front cost of $150,000. The company is currently low on cash and is also having trouble getting credit from their bank. Their biggest customer, Dean’s Distributing (40% of sales) is also historically late with payments. The last thing on his mind is spending more on a company that is consistently losing money.
Sometimes you need to take a step back in order to move forward. Mr. Dubicki sees the short term costs of a new machine, but fails to see the long-term profits this move could bring. A more efficient machine would drastically reduce the hours needed for labor workers. They could produce the same number of pies with as many as 707 fewer hours worked per year. This would result in savings of $115, per year. The firm could simply lay off nine workers and still produce the same number pies.
Mr. Dubicki clearly has to do something fast. He seems to believe this problem will just go away. He makes way too many assumptions with little or no research to back it up. He is also very stubborn about changing the company’s ways. He believed customers would prefer fresh pies when in actuality these sold best through in-store bakeries. He also focused on high prices for high quality when he knew for a fact that customers were price sensitive. His biggest blunder I feel is ignoring the purchase of a more efficient machine. He guesses it would not work, but does not even bother to do a cost analysis.
The purchase of a new machine would be my number one priority. I suggest purchasing the machine and financing it over five to ten years if possible. This would lower the expenses to $0,000-$5,000 per year. This would more than be offset by the $115, they save in wages. This would have turned most of their losing years into profitable ones and cut a big chunk out of their 181 losses.
Mr. Dubicki keeps talking about volume. Volume is the key to success. I feel this approach is dead wrong. First of all he owns a mid-size company. This means he has neither the delivery capabilities of a large firm nor the local market advantage of a small firm. There has also been a drastic decrease of bakery sales (-1% in 181) in grocery stores. My biggest concern here is the company’s sales over the past 7 years. There is minimal change from year to year. In 175 and 176, the two most profitable years (ave. sales - $1,5,000), they actually sold less than in their worst year of 181 ($1,65,000).
The pie market clearly seems to be getting tougher. KMP has not been able to increase sales over the past seven years and they are actually considering dropping Dean’s Distributing (40% of sales). I feel this is one of those situations where you should not get too greedy. There is a limited market right now and it is only getting worse. I say make the best of what you have. There is no reason to believe due to past company history and the future of the industry that they can make money by selling more. They should go the other route and maximize profits by minimizing expenses. That would be my first step. They need to stop the bleeding and start to turn things around. Then they can worry about producing more pies and working on some kind of promotional campaign. If KMP can do this they may have a chance to get back to profitability.
181 Admin Cost assumptions
$4,100 - Paul Dubicki � owner
$5,000 - B. Britt � prod. Manager
$0,000 - C. Watson � off manager
$0,000 - L. Beard � sales manager
$84,000 - 6 office workers @ $14,000
$18,100
181 Labor Cost assumptions
7 Labor workers = 0 production + 1 driver + 6 maintenance (est)
= 81% production � 1% non production
$45,00 � actual labor costs
6,46 hours worked - $45,00 / $7.5 hr.
1688 hours per worker - 6,46 hours / 7 workers
5. hours per week - 1688 hours / 47 weeks
7. hours per day - 5. hours / 5 days
$5.0 - 7. hours worked x $7.5 / hour � ave daily pay
$1,45 / day - $45,00 / 5 weeks / 6 days = cost of running plant per day
7.8 workers per shift - $145 / 5.0 = # of workers per day
.5 production workers - 7.8 total workers .81
Downtime of Current Machinery
5 minutes - size changes (4in-8in-in) 17.5 mins per change
101 minutes - .5 ingredient changes 4.5 mins per change
16 minutes per day
1.6 hours per week
707 hours per year - # of hours that no pies are being made
New Machine (perfect machine � no downtime)
Cost = $150,000
Savings = $115, -- 707 hrs .5 production workers $7.5/hr
B/E = 1. years
New Machine (good-cuts down time by two-thirds)
Savings = $76,886 $115, (perfect) /
B/E = 1.5 years
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