Oven capacity and a hotel contract at Anatolia Bakery
Anatolia Bakery produces 1,200 loaves a day for local retailers using two ovens. Each oven can bake 400 loaves per eight-hour shift; the bakery runs two shifts, but changeovers and cleaning consume 90 minutes per oven per day. A hotel group offers a contract for 600 extra loaves per day, five days a week, at €0.85 per loaf; the current average price is €1.10. The bakery's contribution margin is 35%. Overtime is already 12%, and the ovens are the bottleneck. Quality checks are visual, and customer complaints about underbaked loaves rose from 0.8% to 2.1% last quarter. The operations manager wants to accept immediately; the finance manager warns that the contract price may not cover the true cost. The bakery has space for a third oven but no capital approval until next year.
1. Calculate the bakery's realistic oven capacity and determine whether the hotel contract can be fulfilled without a third oven. State your assumptions.
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Each oven runs 8 hours = 480 minutes and produces 400 loaves, so output is 50 loaves per oven-hour. Two ovens × two shifts = 32 oven-hours per day. Cleaning and changeover use 90 minutes per oven per day = 3 oven-hours, leaving 29 oven-hours. Capacity = 29 × 50 = 1,450 loaves per day. Current output is 1,200, leaving 250 spare. The contract needs 600, so the shortfall is 350 loaves per day.
Ways to close the gap: add a partial third shift of 7 oven-hours; reduce changeover by 30 minutes per oven, recovering one oven-hour (50 loaves); improve yield; or outsource part of the contract. Overtime at 12% suggests labour is already stretched.
Judgement: do not accept the full 600 immediately. A phased commitment of 250–300 loaves is feasible with a partial shift and shorter changeovers, subject to labour availability and a quality trial. The full 600 requires a third oven, outsourcing, or a longer operating day.
2. Evaluate the financial attractiveness of the €0.85 contract. Include an incremental contribution calculation and identify the information that is missing.
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Revenue is 600 × €0.85 × 5 = €2,550 per week. At the existing 35% contribution margin, contribution is €892.50 per week, or about €46,410 per year over 52 weeks. However, the 35% average may not apply: overtime premium, extra energy and lower yield at higher volume could reduce it. Incremental fixed costs - a partial-shift supervisor, maintenance and possibly delivery - must be deducted. If those costs are €500 per week, contribution falls to €392.50 per week, still positive but thin.
The contract price is below the €1.10 average. It is acceptable only if it uses otherwise idle capacity and does not displace full-price sales. Missing data include variable cost per loaf at the higher volume, the overtime wage premium, changeover cost, contract penalties, seasonality and the hotel's payment terms.
Judgement: negotiate €0.90–0.95 or a smaller initial volume. Accept only if incremental contribution exceeds incremental fixed costs and a quality trial is passed; otherwise reject or outsource.
3. Recommend operational controls to protect quality while increasing volume.
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Introduce statistical process control on oven temperature and baking time, with hourly temperature logs and calibrated probes. Add random batch checks for core temperature, weight and colour. Require a 30-minute first-batch approval before the hotel order is released. Track complaints per 1,000 loaves with a target below 1%, and use root-cause analysis for underbaked batches.
Schedule contract batches at the start of a shift, not at the end when ovens are cooling. Reduce changeover by pre-scaling ingredients and preparing tins in advance. Reserve a 10% capacity buffer and do not run ovens above rated load. Train relief staff and separate trial batches from normal production.
Governance: a daily 10-minute production meeting and a weekly KPI review covering yield, complaints, overtime and on-time delivery. Judgement: quality, not only oven hours, is the binding constraint. Run a four-week trial of 200 loaves per day before accepting full volume; a rejected hotel batch would damage reputation more than the contract is worth.