Archive for the ‘Blocher Ch 08’ Category

Starbucks Baristas Told “Two Drinks at a Time”

October 13th, 2010 Comments off

Starbucks continues to tweak policies and procedures for its employees to heighten the quality of its coffee while still efficiently using the time available to employees.  Last year, there was an article about the time-and-motion studies that were being undertaken by the coffee giant to squeeze extra seconds out of the preparation of each cup of joe, but an article today seems to put the brakes on that by outlining a new poliicy that requires more specialized work such as steaming milk for each drink individually and never working on more than one drink at a time. 

The new methods have “doubled the amount of time it takes to make drinks in some cases,” according to Erik Forman, a Starbucks barista in Bloomington, Minn., who says his store began making drinks under the new guidelines last week. Longer lines have resulted, says Mr. Forman, who is a member of the IWW Starbucks Workers Union.

Startbucks insists that eventually these kinds of policies will actually speed up the process of making drinks, but the employees quoted seem to the the opposite will be true. 

Starbucks insists the new procedures will eventually hasten the way drinks are made and lead to fresher, hotter drinks. Steaming milk for individual drinks, for example, “ensures the quality of the beverage in taste, temperature and appearance,” the company documents state, while focusing on just two drinks at a time “reduces possibility for errors.”

Instead of focusing on these changes in terms of time savings, if I were Starbucks I would put all of the focus on increased quality.  If people want fast coffee there are plenty of outlets for that (like McDonalds) but Starbucks should focus on differentiating itself to again be the town gathering place that just happens to serve coffee as well.  Their stores should cater to the “experience” rather than the product.  In other words, the experience should be the product. 

Over the last few years, Starbucks has been applying to the coffee counter the kind of “lean” manufacturing techniques car makers have long used as a way to streamline production, eliminate wasteful activity and speed up service. The company has deployed a “lean team” to study every move its baristas make in order to shave seconds off each order.

That team discovered that many stores kept beans below the counter, leading baristas to waste time bending over to scoop beans, so those stores ended up storing the beans in bins on the top of the counter. To boost the freshness of the coffee and to bring back some of the “theater” that had been lost, the baristas also started grinding beans for each batch of coffee, instead of grinding the day’s beans in the morning.

While they seem to be trying to focus on the quality and atmosphere, I thnk they risk confusing people as to where they fit into the marketplace by also discussing the time it takes to make each drink.  The article from last year (linked above) indicated a desire to go in that quality-focused direction. and today’s article mentions it too, but I’m not sure it offsets the dissatisfaction from the employees quoted in the article.  Of all the parties that need to be convinced that this is the right move, I’d say the #1 group is the employees.  Without their buy-in with the new policy it is likely to be ignored or followed in such a way that employees (and eventually customers) are dissatisfied.

At Starbucks, Baristas Told No More Than Two Drinks. Julie Jargon. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 13, 2010. pg. B.1

How Tim Hortons will take over the world

September 24th, 2010 Comments off

This is a great article that highlights a lot of the topics we cover in class.  It is quite long, but worth your time if you have 15-20 minutes to read and think about a variety of things including:

  • The strategic decision made by Tim Hortons to take control of coffee roasting by moving that operation in-house.  Like we discussed in the early chapter of the Blocher textbook, sometimes controlling quality (probably the biggest factor for this company), delivery schedules, etc. necessitates a move in-house even when it may cost more.

If you were a Tim Hortons devotee back then, you might have noticed that the coffee in, say, Halifax didn’t taste quite the same as it did in the chain’s spiritual home base of Hamilton. That’s because the chain bought its coffee from third-party roasters. Then-CEO Paul House decided the company needed to take control of the consistency of its brew, and to that end built a lab at the firm’s Oakville HQ.

  • The tweaks necessary when a successful company moves to new markets.  In Canada, Tim Hortons is the king of the market.  The article references, though, difference between Western Canada and Eastern Canada and then spends a lot of time looking at ways that they are trying to crack the American market as they expand into new areas in the East & Midwest.

In 2008, Tim Hortons undertook what David Clanachan, Tim Hortons’ jovial head of U.S. and international operations, calls “a deep dive,” surveying tens of thousands of people about what would get them through the door of a Tim Hortons. The company built a full-sized model store in a warehouse in Oakville, spending months testing and refining the concept before rolling it up, so to speak, to the gates of Troy.

The result is a cross between the likes of Starbucks and the Tim’s Canadians know. “Not that I’m gonna hang around, write poetry and sing songs,” says Clanachan, “but I am gonna feel comfortable.”

  • The focus on quality as a competitive advantage as highlighted by the frequent “cupping” sessions that even involve some senior executives.  The management team realizes that without quality, Tim Hortons has no competitive advantage:

Consistency is key—both Schroeder and West never tire of that axiom. Achieving it is tricky, since coffee from a particular mountainside will not taste the same from season to season. Flavours change depending on the weather: too much rain or too little, more sun or less. The mercurial nature of the bean means that Tim’s coffee team is constantly revising the secret blend to maintain its trademark flavour.

  • The breakeven-point ramifications of the “Always Fresh” program where the cost of individual products (the article mentions donuts) is higher on a per-unit basis, but the hope was that the benefits of not running out of goods and with not having to discard stale product would offset this.  It seems like that hasn’t happened, at least in the eyes of some franchisees.

For 37 years, standard Tim Hortons stores were equipped with in-store kitchens, where staff bakers produced batches of fresh, hot doughnuts twice a day. Shortly after Joyce sold his Tim Hortons stake in 2001, the company brokered a deal with Ireland’s IAWS Group to build the $75-million Maidstone facility. Then-CEO House promised franchisees that the conversion—which cost store owners between $35,000 and $50,000—would boost their bottom line. Instead of letting unsold doughnuts go stale during downtimes, operators would be able to zap new batches as needed, in a glorified microwave oven. Voilà—“fresh-baked” in two minutes. And though the cost of producing one doughnut would change from eight or nine cents to 12 cents, that increase would be offset by a reduction in operating costs—no highly paid bakers on the payroll, less discarded product.

  • The value-chain relationships between Tim Hortons and its franchisees.  There are pending lawsuits between the parties and it is interesting that two groups that are so dependent on each other find themselves locked in these kinds of battles.

Still, it’s clear some franchisees have become disillusioned with Always Fresh. Arch Jollymore, a former high-ranking executive at Tim Hortons (and Joyce’s cousin), is seeking certification of a class-action lawsuit against the company. At issue: the impact of the Always Fresh conversion on franchisee margins. Jollymore and his wife, Anne (who owns a store in Burlington in her own right), are alleging breach of contract, negligent misrepresentation, and breach of the duty of good faith and fair dealing. They are seeking damages of $1.95 billion.

  • The decision to centralize or decentralize decision-making.  Most franchise systems rely on strict centralization with standard signage, colors, marketing,etc.  Tim Hortons is selectively decentralizing certain things:

De Nardo leads a tour of Riese’s four other Tim Hortons counters at Penn Station, proudly pointing out the New York-only promotions—the only instance of non-standard advertising allowed in the chain. “It’s the New York mentality. We like to be a little on the edge.” Whenever he can, he steers clear of earnest in favour of funny. “Hell,” he says, “it’s doughnuts and coffee.” Hence Tea and Timbits (T&T—it’s dynamite!) and $5 dozens after 5. “And for New Yorkers, $5 is basically free.”

  • The impact of sourcing raw materials globally and the potential cost changes due to weather in parts of the world where coffee is grown:

“Central and South America are coming off the worst crop in 44 years,” West says as he slaps a sack of beans. And Colombia was deluged with rain for 16 months straight, diminishing crops. That has helped drive standard-grade coffee to a 12-year high of $1.75 (U.S.) per pound. The top-quality beans Tim Hortons buys—West says they compete with Starbucks for the finest Arabica beans on the market—are much pricier.

To read more (and please do!), visit this link: How Tim Hortons will take over the world – The Globe and Mail.

Experience Curve

September 15th, 2009 Comments off

economist_logoIn chapter 10, we look at many cost behaviors and one thing that influences costs is experience gained by companies.  Typically, the more experience a company has producing a particular product, the lower their costs.  The Economist has a short piece this week adapted from one of their publications that hits the highlights of the experience curve.  A related piece explores the growth matrix which you may have run across in another course or two.

The experience curve. Sep 14th 2009. From

Growth share matrix. Sep 11th 2009. From

Billable Hour Under Attack

August 25th, 2009 Comments off

This article focuses on Law Firms, but I imagine that Accounting Firms will be feeling the same pressure to change their pricing model from “billable hours” to other ways of charging for their services.  That doesn’t mean that there still can’t be a profit margin factored in, of course, but it will mean that people that want to charge so much for certain types of services will need to really understand what their costs are so that they aren’t surprised at the end of the month/quarter/year to find out that they didn’t charge enough.  For example, it will be imperative that things like fixed costs and variable costs are well understood.

With the recession crimping legal budgets, some big companies are fighting back against law firms’ longstanding practice of billing them by the hour.

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

‘Billable Hour’ Under Attack — In Recession, Companies Push Law Firms for Flat-Fee Contracts. Nathan Koppel, Ashby Jones. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 24, 2009. pg. A.1

An earlier item from the Journal of Accountancy referred to the practice in CPA Firms as “Value Pricing” in a similar context:

Starbucks “Lean” Movement is Not Related to Skim Milk

August 3rd, 2009 Comments off

The Japanese concept of “lean manufacturing” has made it to Starbucks.  The coffee-shop company is doing all it can to outlast the economic difficulties presented by the general state of the economy as well as sharper competition from the likes of McDonald’s, where these same kinds of techniques have been in place for some time.  Recall that in Chapter 10 we mentioned “time-and-motion studies” in relation to the determining how costs behave.  Once the behavior is understood, measures can be taken to reduce the costs where possible.

Latest Starbucks Buzzword: ‘Lean’ Japanese Techniques. Julie Jargon. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 4, 2009. pg. A.1

Midsize Law Firms Gain Clients at Expense of Giants

July 6th, 2009 Comments off

This post will be the first of three today based on articles all found on page B1 of The Wall Street Journal.  This one has to do with the adaptability of smaller organizations in times of economic turmoil and it specifically mentions having lower fixed costs as a key advantage.  The article focuses on law firms, but it would be very easy to extrapolate the information here to other industries including accounting firms.  It’s an interesting predictament the smaller firms find themselves in because lowering their prices now to attract business may make it awfully difficult to raise them later and they risk turning their business model into that of “commodity seller” where the buyers will always seek out the lowest price.

Midsize Law Firms Pick Up Clients As Companies Turn From Pricey Giants. Chris Herring. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 6, 2009. pg. B.1

Airline-Sector Woes Slam India’s Highflier

July 4th, 2009 Comments off

Another airline story from Asia, this time about Jet Airways from India.  Until a couple years ago, Jet seemed unstoppable.  They modernized air travel in India and enjoyed market share of nearly 50% in 2003, but it has since fallen to less than half that.  Uncontrolled costs and external factors have taken their toll and this article sums up a lot of things we have talked about in class including cost control, fixed vs. variable costs, quality/cost/time issues, competition, compensation and staffing issues, etc.

Airline Sector’s Woes Slam a Highflier. Daniel Michaels. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 2, 2009. pg. A.1

Fixed Costs Chafe at Steel Mills

June 12th, 2009 Comments off

Here is a real world example where the impact of having a structure of very high fixed costs, such as in steel production, can be very difficult to manage in tough economic times.  Normally when demand falls, prices also fall (recall the supply-demand curves from your Economics courses).  The problem for steel mills is that producing fewer units of steel causes them to have to spread their very high fixed costs over fewer units so they feel the need to actually raise prices so as not to lose money (or not to lose as much money at least).  Raising prices causes demand to fall further still and that could lead to some companies being eliminated from the marketplace which could cause prices to stabilize as the remaining producers are able to operate nearer to full capacity.

I think this is a great example of the impacts of fixed vs. variable costs structures that we have discussed in class.

“Unlike mill increases announced in recent years, this is obviously not driven by increasing global demand, but rather by fixed costs being proportioned across significantly lower demand,” the company said in a letter to customers.

Corporate News: Fixed Costs Chafe at Steel Mills — Capital-Intensive Producers Are Raising Prices Despite Weak Demand. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 10, 2009. pg. B.1

General Motors and the Long Road to Bankruptcy

June 4th, 2009 Comments off

The auto industry gets a lot of attention in this course…most of it negative and most of deserved.  The Economist made the General Motors bankruptcy its cover story this week in most of the world and published several pieces about the long decline of GM that led to this point.  Although the current economic situation is easy to blame, at best better times would likely have only delayed the collapse of the once dominant car maker.  The story of the GM collapse can be related to many parts of our course from working with the value chain (unions, customers), to quality concerns, to fixed/variable costs management, to closing under-performing segments earlier, etc.

The filings lodged at 8am with a court in Manhattan were testimony to the size and complexity of the 101-year-old company and to the scale of the problems that had finally overwhelmed it. Until 2008, when it was overtaken by Toyota, GM was the world’s biggest carmaker, producing well over 9m cars and trucks a year in 34 different countries. It has 463 subsidiaries and employs 234,500 people, 91,000 of them in America, where it also provides health-care and pension benefits for 493,000 retired workers. In America alone, it spends $50 billion a year buying parts and services from a network of 11,500 vendors and pays $476m in salaries each month.

The decline and fall of General Motors. Detroitosaurus wrecks. Jun 4th 2009. From The Economist print edition

The bankruptcy of General Motors. A giant falls. Jun 4th 2009. From The Economist print edition

“Value Pricing” in CPA Firms

June 2nd, 2009 Comments off

We talk extensively about pricing in HDFRI Chapter 12 and one of the key concepts in that chapter is the recent adoption by many companies of a practice called “target costing.”  In target costing/pricing, a company estimates the value perceived by a customer given the nature and features of a proposed product and then tries to determine what price a customer would pay for that product.  The company then works “backwards” from that price to the “target cost” necessary for the company to sell the product for that price while still earning their desired rate of return.  This is the opposite of cost-based pricing where the company looks at their costs and then determines the price based largely on that.

The Journal of Accountancy this month explores a similar philosophy change in some CPA Firms (a service industry) where clients are no longer billed according to the number of billable hours worked by their accountants, but instead by the specific service being performed.  There is also a sidebar about pricing at Ben & Jerry’s that is a good example of the thought process that can come into play when determining prices.

Pricing on Purpose: How to Implement Value Pricing in Your Firm. By Ronald J. Baker.  The Journal of Accountancy, June 2009.

A Lesson in Value Pricing Ice Cream: From an Accountant. By Ronald J. Baker.  The Journal of Accountancy, June 2009.