The Regional Bakery Chain's Capacity Decision
Hearthside, a bakery chain with 22 shops across three counties, has seen revenue grow 9% annually for four years while operating margins slipped from 11% to 6.5%. Its central production kitchen runs at 94% utilisation on a single shift. Management is weighing a £2.4m second oven line against outsourcing part of the artisan bread range to a wholesaler. Customer surveys show bread freshness ranks highest among reasons customers choose Hearthside, but a recent mystery-shopper exercise found 14% of morning visits met an empty bread shelf by 10am. Staff turnover among bakers is 28%, and two experienced bakers left last quarter citing night shifts. The board wants a recommendation within six weeks, before the lease renewal on the current kitchen site is signed.
1. Identify the strategic issue at stake and explain why the capacity decision cannot be resolved on cost grounds alone.
Read the worked answer
The strategic issue is not simply how to add capacity; it is how to protect the freshness-based differentiation that underpins Hearthside's positioning while restoring margin. Cost comparison alone fails for three reasons.
First, the two options have different strategic consequences. A second oven line keeps production in-house and preserves control over recipes, bake timing and freshness, which the survey identifies as the primary reason customers choose the chain. Outsourcing transfers control of the very attribute that drives choice, so a cheaper option may erode the demand it is meant to serve.
Second, the 14% empty-shelf figure is a revenue symptom, not just an operational one. Lost morning sales are invisible in the accounts, so a cost-based appraisal understates the return on in-house capacity.
Third, the 28% baker turnover and night-shift departures suggest the existing model may not scale without changing how work is organised. The board should frame the decision as: which option sustains freshness credibility at a margin the business can defend?
2. Recommend an analytical approach the board should use in the six weeks available, and justify the sequence.
Read the worked answer
A staged approach suits the time constraint.
Stage one (week 1–2): quantify the demand gap. Estimate lost sales from empty shelves using mystery-shop data and till records, and model revenue at 9% growth against the 94% utilisation ceiling. This establishes the size of the prize.
Stage two (week 2–3): build a like-for-like comparison. For the oven line, include capital cost, depreciation, energy, additional baker headcount at current turnover assumptions, and the cost of addressing night shifts. For outsourcing, include unit costs, quality risk, and potential price sensitivity if freshness perception falls.
Stage three (week 3–4): scenario analysis. Test a downside case where growth slows to 3% and a case where outsourcing damages the brand, so the board sees the range of outcomes rather than a single point estimate.
Stage four (week 4–6): qualitative appraisal against the lease deadline, including workforce implications and reversibility. Sequencing matters because the lease decision is irreversible and should not pre-empt the capacity choice.
3. The finance director argues the lease renewal should be signed now to avoid disruption and the capacity question settled later. Evaluate this position.
Read the worked answer
The finance director's view has surface appeal: signing removes uncertainty and protects continuity. But it inverts the logic of an irreversible commitment.
Signing the lease locks the business into the current site, which constrains the physical footprint available for a second oven line. If the analysis later favours in-house expansion, the lease may make it impractical or force a costly relocation. The lease therefore forecloses one of the two main options before the evidence is in.
A better approach is to seek a short extension or a conditional agreement that preserves optionality for the six weeks needed. This is a classic commitment-versus-flexibility trade-off: the cost of a short delay is likely small relative to the cost of a wrong irreversible decision.
The board should also note that delaying the capacity decision does not remove the underlying problem. Empty shelves and margin erosion continue to cost money each week. The recommendation should therefore be to secure flexibility on the lease while compressing the analysis, not to defer the substance.