Wild Dog Coffee is a small coffee house offering espresso visitors a limited choice for breakfast, lunch, and dinner. So far, the company has only one branch office, but it is in the interest of management to open a new point. Expanding a business always involves risks, as it requires significant financial investments without guarantees of success. For this reason, risk and profitability analysis should be conducted before opening a new location. The purpose of this research paper is to provide an analytical overview of procedures for improving business expansion and demand management.
The efficiency of Advertising Impact on Demand
Looking through the monthly charts of the advertising campaign, one can come to an ambiguous conclusion. During the period under review, $7,800 were spent, and 7,280 pounds were processed. On the one hand, one can see an unambiguous correlation between the increase in financial investments and the number of coffee beans used to make espresso. Thus, in recent months, it was invested in 450 dollars more than in the first month, and this has affected sales: the number of sold pounds increased by 412. On the other hand, for unknown reasons, the change in financial investment was not logical. Figure 1 shows that after the first month, advertising money increased, but immediately after a sharp drop to $ 1000, which is only 66 percent of the previous month.
The decrease in advertising investments in the third month was reflected in the number of pounds sold. By the third month, sales fell by 28 percent compared to the pounds used in the second month. Then there was a gradual increase in sales and a two-month financial stagnation. However, the stability of investments was sufficient for the sale of espresso because with the same amount of investment in the advertising campaign, by the sixth month, the number of sold pounds was 1399, while by the fifth month only 1322. Thus, the Wild Dog Coffee Company managed to increase sales by 5.8 percent at the same advertising cost.
Forecast for the Seventh Month
Linear regression models are designed to produce a forecast of continuous numerical variables. Regression is a conditional mathematical expectation of a continuous dependent variable with observed values of independent variables. Linear regression is based on the hypothesis that the sought dependence is linear (Rahmawati, Rahadi, & Damayanti, 2018). Using a linear regression model to assess and predict the cost of pounds of coffee beans makes sense because the dependence of the number of beans on the financial costs of advertising is conventionally linear, which is shown in Fig. 2
Among other things, Figure 2 shows a graph of the linear trend for the analyzed dependence and using MS Excel tools, and a mathematical expression was built for this line. The amount of money spent on advertising is used as a variable, and the number of beans is used as a dependent value. Substituting instead of a variable value 1350, we receive, that the expected quantity of sales will make 1252.695 pounds of coffee beans or 20043.12 ounces. The results allow management to design the necessary production volumes for a more accurate inventory.
Interpretation of Results
For subsequent analysis based on the predicted number of pounds of beans for the seventh month, the table into the original job. According to this information, Wild Dog Coffee Company prepares espresso, each of which requires 1.5 ounces of beans. Considering the expected 20043.12 ounces, the company will prepare 13362.08 cups of coffee for the seventh month. The coffee shop operates for 14 hours daily during the month: this means that the company’s employees need to prepare 32 cups of coffee per hour.
The number of pounds of coffee beans required for the seventh month is calculated based on the average performance of the Wild Dog Coffee Company. If employees were to prepare 446 cups of coffee per day, the company would require about 669 ounces of beans, equivalent to 41.81 pounds of espresso every day for the seventh month.
It is difficult to draw an unambiguous conclusion about the impact of commercial advertising investments on beverage sales. It is possible to notice precisely that an increase in investments promotes the growth of the quantity of sold coffee, however, as the practice of the fifth and sixth month shows, change of sales does not necessarily directly depend on spent sums. Advertising costs actively affect the success of sales but are not the only factor of influence (Worley, Williams, & Lawler, 2016). Therefore, planning a new branch opening or designing future sales should not rely solely on a linear regression model.
Inventory Management Analysis
Inventory management is an integral part of the overall policy for managing the current assets of a coffee house. The main objective is to ensure a smooth production and sales process while minimizing total inventory maintenance costs (Hayes, 2019). The ultimate goal is to generate profit and ensure operational stability. An important issue is the necessary amount of insurance reserves that the coffee house creates in case of unforeseen supply disruptions or possible upsurges in consumer demand.
The company’s management needs to solve some paradox, as insurance reserves worsen the financial results of production activity but provide the company with stability and liquidity. Wild Dog Coffee Company is not a large company with significant production and storage spaces, so the issue of storage of the most optimal quantities of grains is critical. Also, virtually all of the company’s assets and its success depend only on the successful sale of espresso made from beans.
Stock management strategies
Each production unit monitors its inventories acquired, returned, and issued within a specified period using the inventory accounting system. There are two types of inventory systems: continuous inventory system, in which the stock movement is recorded continuously, and periodic inventory system, which from time to time, updates the inventory records only after the physical counting of the stock (Sanders & Reid, 2019). There is an interesting difference between the two systems: generally, if a company has chosen a continuous inventory system, the movement of goods is controlled by computers while people control the periodic inventory system. Thus, it is not difficult to conclude that the type of periodic inventory is more typical for companies with small capacities.
Characteristics of the Periodic Inventory System
The periodic inventory system is a method of evaluating the company’s reserves for accounting in the financial statements, where the physical evaluation of reserves is made at specific intervals or periods. This method of accounting is characterized by conducting the inventory at the beginning of the period. If Wild Dog Coffee Company decides to use this type of inventory accounting, the number of beans will be controlled periodically, for example, every seven days, in order to be able to make up for potential shortages. The most significant advantage of periodic inventory is the fact that it allows the company to record the actual stock situation. Also, the periodic inventory method does not require the daily recording of stock movements, which significantly facilitates the company’s production capacity.
In addition to the apparent advantages, the system of periodic inventory of inventories has critical shortcomings. The fact that the company does not need to conduct daily control is both a disadvantage because, in this case, there is insufficient control of information. If stock records are carried out once a week, and as a result of a seasonal surge, all the stored coffee was sold on the second day, Wild Dog Coffee Company will face the problem of stopping production for a while until a new batch is delivered. What is more, financial reporting takes time, as stock is not monitored continuously.
Characteristics of the Continuous Inventory System
The apparent shortcomings of the periodic inventory are compensated by the continuous inventory method. Under this system, the inventory is counted every day or every week, and the inventory assets are adjusted accordingly. In this way, the entire inventory can be checked without much interference to the ordinary operation of production. To ensure accuracy, physical inventories are checked at regular intervals and then compared with the data recorded. If there is a fault due to a loss, it can be easily detected, and corrective action is taken immediately.
Since perpetual inventory is implemented through software, there are certain risks for the business associated with software malfunction. Breakdowns or glitches in the work of the program can adversely affect the life of the company, creating a critical situation. Also, regular inventory requires significant resources, so it is more expensive. Permanent inventory systems may be prone to errors due to over- or under-estimates. This may be due to theft, breakage, scanning errors, or moving inventory without tracking, resulting in moving errors.
Recommendation for a Demand Management System
For a small coffee house like the Wild Dog Coffee Company, a continuous inventory system that allows recording a shortage of goods quickly is more appropriate. Consumption of beans for the seventh month is projected at 1,252,695 pounds, although this number could potentially increase to 1,400. Taking into account the cost of one pound of espresso beans, the minimum amount of money spent to purchase the necessary number of pounds is 1,1274.26 dollars, and the maximum is 1,600. The total number of packs, which Wild Dog Coffee Company uses for the seventh month, varies from 51 to 56. In this case, ordering above the sold quantity, the coffee house risks losing at least $ 1125 for five unused packs of beans. For this reason, management should think about the continuous periodization of inventory.
A vital issue for the financial efficiency of the business is the delivery problem. According to the supplier’s terms and conditions, the minimum quantity that can be delivered free of charge is two packs. The calculation of the cost of a cup of coffee with and without free delivery is presented in Table 1. The analysis of the presented table shows the benefits for the company if it decides to use the strategy of buying several cups of coffee with free delivery.
Table 1. Comparison of two types of procurement strategies (created by the author).
Workflow Scheduling
Description of the First Scenario
According to the first work schedule scenario, part-time workers will be transferred on weekends, while full-time barista and employees will work on weekdays. One barista will be transferred from part-time to full-time to free the second barista. It is proposed to hire a new employee who will work full time. This schedule is useful in that it relieves the load on current employees and does not require overtime work. During the whole week, the coffee shop will not have a period when the change takes place, because the employees have intersections on the working schedule. However, the company will have to hire a new employee, which will increase costs instead of reducing them.
Description of the Second Scenario
The second scenario involves gaps in the schedule, which will lead to the stagnation of the coffee shop and a drop-in sale. This is solved by hiring two new employees at once: barista and non-barista. Partially busy employees, except one, will be transferred to the weekend, and full-time barista and barista employees will work in shifts on weekdays. As in the first scenario, there is no overtime, but the second scenario shows high financial costs for hiring new employees.
Staffing Plan
The second scenario described is more expensive: the company will have to pay $780 more, which may hurt financial well-being. The first scenario involves eight employees, while the second scenario involves nine. It turns out that the same job can be done with fewer employees and for less money. For this reason, the Wild Dog Coffee Company should pay attention to the foreground. The saved money can be spent by the company to buy goods or pay bonuses to employees.
References
Hayes, A. (2019). Inventory management. Web.
Rahmawati, D., Rahadi, R. A., & Damayanti, S. D. (2018). Business valuation for small medium enterprise. International Journal of Business, Economics and Law, 17(2), 8-15.
Sanders, N. & Reid, D. (2019). Operations management: An integrated approach, 5th edition. Web.
Worley, C. G., Williams, T., & Lawler, E. E. (2016). Creating management processes built for change. MIT Sloan Management Review, 58(1), 77–82.