Sara Tea Pty Limited (STPL) is a 100 percent privately owned business. Incorporated in 1972, the company manufactures and distributes four core products to Australian supermarkets, bakeries, cake shops, restaurants, and delicatessens. The company’s products include decorated maca-sponges (desert style cake that is a combination of a macaroon and a sponge), cheesecakes, celebration cakes, and assorted pastry products. The company’s mission is to ‘bring joy to all our consumers’.
The business supplies maca-sponges in three sizes. The large maca-sponge weighs 1.5kg in and serves up to 24 people. The medium maca-sponge serves 10-12 people and weighs 800 grams. The smallest, and the most popular, maca-sponge weighs 300 grams and serves 5-6 people. Maca-sponges can be purchased as simple base cakes or as decorated products. Sales of the undecorated maca-sponge cake account for approximately 95 percent of all sales.
Historically STPL was the first mass producer of maca-sponges in the world and by the year 2000 controlled 96 percent of the total Australian market. During STPL’s founding years, competitors tended to be small local delicatessens or bakeries that could not service a national market. In contrast, STPL was able to supply Australia’s two largest supermarket chains with high-quality maca-sponges in the volumes demanded by them. Further, the large volume of maca-sponges supplied by STPL (400,000 units in 2010, 520,000 units in 2011) allowed the business to establish reliable and efficient distribution networks. Additionally, the entrepreneurial flair of the business owner, Mrs Esmeralda Watson, enabled STPL to grow a large and efficient production plant. By 2011, the business occupied a factory and warehouse of over 5,000 square metres and operated 12 ovens capable of cooking 10 large maca-sponges each. The automation process within the production plant meant qualified chefs were no longer required to prepare the product which allowed the use of low-cost labour, particularly inexpensive teenage workers.
By 2015 the monopoly enjoyed by STPL had been eroded. Specifically, a new mass supplier of maca-sponges had entered the market and was competing with STPL on price and quality. This new competitor, Nona Pty LTD (NPL), claimed to have a superior packaging process that meant its products had a longer shelf life than STPL products. This was further supported by promotional literature that stated that they used qualified chefs and superior technology which utilised the latest cooking techniques.
The consolidation of the Australian sugar industry saw STPL’s four small sugar suppliers consolidated into a single sugar supplier, CRS Ltd. With the loss of competition amongst sugar wholesalers, the price that STPL paid for this major ingredient rose sharply.
The simultaneous reduction in the number of Australia’s small and medium supermarket outlets and the further consolidation of the market in the larger supermarket chains, namely Dangerway/Furworths and Holes/Lyer, diminished the ability of STPL to influence its major customers and made the firm more dependent on maintaining their relationship with these major retailers. As a result, during this period, STPL became a price taker rather than a price setter.
During 2017 Holes/Lyer and Dangerway/Furworths commenced installing bakeries into their supermarkets. These bakeries are capable of producing maca-sponges in-store and consequently, they promote them as baked fresh today. The supermarket chains however also continue to purchase maca-sponges from STPL and their competitor NPL.
Finally, the business has been significantly influenced by changing health and safety standards. Specifically, consumers are becoming more conscious about what they eat and where their food has come from. This issue has been magnified by the increased regulation of safe work practices and food handling processes. These pressures have generated significant additional costs for STPL as its factory and warehouse were not purpose-built food production facilities, having been converted from what was originally a crop chemical mixing plant.
STPL’s core operation is the production and distribution of maca-sponge bases to the Australian retail market. The business does not currently have a new product development process and has only sought to implement new products on an ad-hoc basis. For example, in 2014 STPL produced the first ‘Vegemite Maca-Sponge’ a vegemite flavoured maca-sponge. This product, however, proved unsuccessful and was quickly abandoned before there was any damage to the brand name. In 2015 the business imported a meringue making machine that adds colour and different flavours to products. Sales of these products have been very successful and STPL wants to continue investing in other machines that might add variety and value to their product lines.
Marketing is conducted through four sales representatives, each of whom is a relative of the business owner, Mrs Esmeralda Watson. These sales staff have had little formal training in marketing with the most senior of the sales team holding only a diploma in marketing. Mrs Watson’s nephew, Shaun Lamb, is the operations manager at the manufacturing plant with over 15 years’ experience in that role. In recent years, he has not been as motivated to work as he was when he commenced with STPL. He often comes in late and is very reluctant to adopt any ideas that staff or customers suggest.
The manufacturing plant operates on three 8 hour shifts. Cleaning and maintenance occurs over the weekend. Production begins with the addition of raw materials which are first measured and checked for quality. Whilst the raw materials are being weighed the machines are started to ensure the ovens are warmed up ready for the baking process.
Recipe ingredients are then loaded into mixing bowls and the automated process mixes the different batches. During the mixing process cooking trays and storage boxes are manually prepared. Once mixing is completed the mixture is then spread onto the cooking trays. After spreading, the trays are manually loaded into the ovens and cooked. Once cooking is complete the maca-sponges are manually removed from the oven and placed on cooling racks. After the maca-sponges are cool they are shrink-wrapped and boxed ready to be transported to the warehouse from where the products will be distributed to customers.
The various cooking processes on the factory floor are overseen by a core team of seven supervisors who have varied years of experience. The seven supervisors manage a staff of 60 people who are predominately teenagers. Staff turnover in the organisation is very high, with the average length of employment only 6 months.
STPL takes great care in using generous amounts of the best quality ingredients to make their high-quality products perfectly. The owner prides herself on going the extra distance to ensure that the ingredients used are sourced from Australia wherever possible, and if unavailable only from approved overseas suppliers.
STPL conduct their own distribution by road transport. STPL owns a fleet of 5 trucks that are fully serviced and maintained by in-house mechanics. Mr Sherlock Watson, Esmeralda’s husband, is the head of STPL Logistics and has progressively strengthened the performance of the company’s trucking fleet. Mr Watson has been so successful that the STPL fleet are now doing additional contract work, distributing products for other companies, and generating further income for the company. The management of the business has developed a goal for the coming years which it has encouraged staff to adopt. ‘Our company will be recognised for delivering superior quality products. We will bring joy to our customers’. STPL Management has set some aspirational goals they hope to achieve by the year 2025:
• We will be the leading supplier of maca-sponge products to Holes/Lyer and Dangerway/Furworths.
• Sales in Victoria, NSW and Queensland will be 60% of the total market share.
• We will have the largest product range supported by leading innovative processes ensuring profitability and satisfaction of customer’s needs.
• Our reputation will be built on delivering a quality service to our customers where they will be delighted in the products they consume.
• We will be recognised as an employer of choice with motivated and challenged employees.
• We will be identified by our corporate citizenship and sponsorship of eligible charities. Our ethical and environmental standards will set the standards for other organisations.
However, in 2019 STPL has the following issues to contend with:
• The factory and processing machines are ageing. This makes it difficult for STPL to compete with the output of competitors with newer technology.
• STPL has been affected by quality issues. In December 2019 there was a major product recall because of packaging issues.
• The original converted factory is consistently causing problems. Only one of the last five inspections passed the minimum standards and that was after three attempts. Closure by regulatory authorities has been threatened on three occasions.
• The majority of management are members of the owner/founder’s family. Family feuding and personal disputes have plagued any attempt at conducting strategic management discussions. These personal family issues have divided company management and distracted them from focussing on growing the business.
• SPTL has been unable to secure any long term contracts with Holes/Lyer and Dangerway/Furworths.
Mrs Watson has appointed you into the role of Management Accountant. You have been tasked with resolving the issues identified and enabling the business to grow to meet its 2025 aspirational objectives.
Question 1 (15 marks)
You have been asked to prepare a report for Mrs Watson on the strategic position Sara Tea Pty Ltd should pursue. The business wants to increase its market share in the baking area. You need to present a response at the next board meeting. Areas you need to address:
a) Identify STPL’s competitive advantage
b) Identify fours threats and four opportunities available to STPL
c) Identify four strengths and four weaknesses for STPL
d) Evaluate STPL objectives for their strategic plan.
e) Use Porter’s generic strategies to recommend a strategy for STPL?
Question 2 (20 marks)
STPL is considering acquiring Pie Smiles, a small chain bakery that specialise in making gourmet pies. A sales manager from Pie Smiles has provided the following forecast of sales:
- Using exponential smoothing with a weight of a =0.3, develop forecasts for years 2021 through to 2025. (3 marks)
- Using smoothing constants of 0.6 and 0.9, develop forecasts for the sales of pies. (3 marks)
- What effect did the smoothing constant have on the forecast for the sale of pies? (3 marks)
- Use a 3-year moving average forecasting model to forecast the sales of pies. (3 marks)
- Using the trend projection model, develop a forecasting model for the sales of pies. (3 marks)
- Which is the preferred method to predict the sales of pies: exponential smoothing with a smoothing constant of 0.3, a 3-year moving average or a trend line? In your response justify why you made that choice. (5 marks)
Question 3 (15 marks)
The purchasing manager Jack Cruise, who is also Mrs Watson nephew, has a very relaxed approach to purchasing ingredients. Jack places orders every week for the same amount of ingredients. He finds that this way if he doesn’t turn up to work there will still be a plentiful supply of raw materials. Jill has just started as Jack’s assistant and believes that ordering could be done more efficiently. She has devised the following table to prove her point:
|Cost per purchase order||$81.00||$81.00||$81.00||$81.00||$81.00|
|Carrying cost per package per year||$11.70||$11.70||$11.70||$11.70||$11.70|
|Quantity per purchase order||900||1,500||1,800||2,100||2,700|
|Number of purchase orders per year|
|Annual ordering costs|
|Annual carrying costs|
|Total annual inventory costs|
- Using Excel, complete the table. What is the economic order quantity (EOQ)? Comment on your results? (4 marks)
- Prepare a graphical analysis of the EOQ decision. (3 marks)
- STPL is about to introduce a Web-based ordering system for its customers that Jill estimates will reduce STPL’s ordering costs to $49 per purchase order. Calculate the new EOQ and the new annual ordering and carrying costs. (4 marks)
- Prepare a graphical analysis of the new EOQ decision and comment on the differences. (4 marks)