Executive Summary For “premium” chocolate maker Scharffen Berger (SB), quality is king. Their distinct process creates a “taste experience” second to none, an unparalleled quality that must be maintained despite apparent capacity issues. To satisfy the rising market’s demand for its product, it must address three primary issues related to capacity: bottlenecks, expansion, and economies of scale. The current bottleneck in the Conche (output=1,344 kg. /day) will be remedied with the installation of the ball mill, however other bottlenecks will be created starting at the Melangeur.
A cost-benefit analysis has determined a need for a second melangeur as well as added Roasting time from 8 hours/day to 12-13 hours/day to keep up with the demand. Other costs will include additional labor for operations as well as machine maintenance due to increased wear. Regarding expansion, SB should consider outsourcing the vast majority of the tempering and molding processes. Not only will this help increase capacity, but it could also eliminate redundancy. Currently, 65% of this process is handled by co-packers without any loss of quality, according to COO Jim Harris.
In order to deal with the redundancy of re-tempering and re-molding the chocolate, a cost benefit analysis of transporting the liquid chocolate to co-packers for tempering and molding is necessary. Through economies of scale, SB should negotiate for short-term contracts with their co-packers, which would give them process management capacity flexibility. With any unforeseen decreased demand, SB could reduce capacity by bringing the co-packer processes back in-house. We feel attention put into these key areas will help keep SB on top of the “premium” chocolate market.
Evidence to support these arguments follows. Brief Summary of Key Problems and Issues SB had reached a point of strategic inflection. By 2005, the premium chocolate segment of the chocolate industry had a projected annual growth rate of 15-20% between 2000-2010. With a mass-market retailer seeking a contract, Harris predicted a tripling of demand in the next few years, with demand increasing by 30% before the year’s end. Fearing an inability to respond to the excess demand and grow with their customer needs, Harris worried that SB could lose their existing customers. When Harris started at
SB, the maximum capacity was approximately 18 conches per month. By improving efficiencies and increasing production time, he helped SB reach a maximum production capacity of 29 conches per month. By 2005, Harris understood that to increase capacity further, they needed new equipment while maintaining or improving the quality of the chocolate. A new ball mill would replace most of the refining work done by the existing conche. Previously, the refining and aeration work completed by the conche took 40-60 hours. With the addition of the new ball mill, the same process would take approximately 15 hours.
Since the new ball mill should relieve the current bottleneck in the process at the conche, Harris started to look for the next bottleneck in the process. He focused on the molding process. The two last steps in the production process before packaging are tempering and molding. Harris noted that 65% of the molded chocolate went to co-packers who re-tempered and re-molded the chocolate before packaging it. Looking for new areas to increase capacity, Harris considered the benefits of outsourcing a majority of the tempering and molding to the co-packers.
Product and Process Characteristics SB’s main objective is to increase the company capacity with the same level of “unwavering quality”. According to Harris, SB’s “core competency is in making the best chocolate in America,” and that other companies that are better equipped and more efficient in packaging chocolate should do so. Below is a comparison table of the SB’s products and production process, along with new production recommendations. Brand & Product CharacteristicsCharacteristics of Process oAmerica’s finest dark chocolate Chocolate of the highest quality possible from the finest cacao bean oA blend of 9 varieties of beans oSolid chocolate with “desired level of stability, glossy surface, smooth feel in the mouth, and snap” oHigh price oProvides a “taste experience” like fine wineoFrom “beans to bars” oTesting various beans for flavor oProcessed in small batches oFlavor enhancement of each individual bean through a unique roasting process. oChocolate nibs extracted by the winnower oA unique old fashion mixing and refining process (Melangeur & Conche) oPartial In-house tempering & molding for final product testing &quality control
Process Flow (Please refer to Eexhibit 1 for Process Flow diagram) Stage 1—Bean Cleaning: Current 8 hours/day operation of this stage, SB is capable of cleaning 6,144 kg of beans/day, which would yield 4,547 kg of chocolate nibs that in turn can be transformed into 7,488 kg of Semi-sweet (62%) chocolate/day. Stage 2—Roasting: Current 8 hours/day operation of this stage, SB is capable of roasting 1,600 kg of beans/day, which would yield 1,184Kg of chocolate nibs that in turn can be transformed into 1,950 kg of Semi-sweet (62%) chocolate/day.
Stage 3—Winnower: Current 8 hours/day operation of this stage, Scharffen is capable of cracking 3,600 kg of beans/day, which would yield 2,664 kg of chocolate nibs that in turn can be transformed into 4,388 kg of Semi-sweet (62%) chocolate/day. Stage 4—Melangeur: Current 16 hours/day operation of this stage, Scharffen is capable of mixing 1,472 kg/day of chocolate nibs, sugar, and other additives, which would yield 1,472 kg of chocolate paste to make Semi-sweet (62%) chocolate/day.
Stage 5—Conche 1 and 2: Current 24-hours/day operation of this stage, SB is capable of refining 1,344 kg of chocolate liqueur/day, which would yield 1,344 kg of Semi-sweet (62%) chocolate/day. Stage 6—Tempering: Current 16-hours/day operation of this stage, SB is capable of tempering 3,200 kg of Semi-sweet (62%) chocolate/day. Stage 7—Molding: Based on the current 16 hours per day operation of this stage, SB is capable of molding 2,240 kg of Semi-sweet (62%) chocolate. Bottleneck Bottleneck (Please refer to Eexhibit 2)
As illustrated by the Process Flow diagram (Exhibit 1), current Production bottleneck occurs during the refining process (stage #5), where maximum output is at it’s lowest rate due to the limitation of the conche machines, which is operated 24 hours/day and limited to process approximately 480,000 kg of Semi-sweet (62%) chocolate per year (see Current Process scenario). In addition to examining the current process, four “what-if” scenario analyses were conducted to explore and identify potential bottleneck areas.
Based on the 1st scenario, if only the ball mill is purchased, SB would reach a Peak Capacity of 790,000 kg per year, with Effective Capacity at 525,000 kg per year. (Note: Effective capacity was calculated assuming 16 Hrs/day is the maximum operation time for any stage, except stage 5, which is currently operating 24 hrs/day. ). Under this Scenario (1), the low utilization rate would be caused by a new bottleneck that would take place in the mixing process (stage #4), due to the Melangeur’s limitation, which is currently maxed-out at (approximately) 1,500 kg of 62% chocolate during its 16 hours of operation per day or 525,000 kg per year.
Under the 2nd scenario analysis, if a ball mill and a 2nd melangeur were purchased, Peak Capacity would reach 1. 2 million Kg per year. At the same time, SB’s Effective Capacity could reach 800,000kg per year. However, given the current 8 hrs/day operation time of the “Roasting” machine, SB would only be able to reach a maximum output of 700,000 kg per year, which limits them to an 87% maximum efficiency rate.
Furthermore, based on the 3rd scenario analysis, assuming that BSB purchases the ball mill, added a 2nd Melangeur, and increased roasting hours to 12-13 hrs/day, they could achieve a 100% efficiency rate, and their potential actual output could match their potential Effective Capacity of 800,000 kg per year. Under this scenario, the new bottleneck would occurs in the Molding stage. Finally, based on the 4th scenario analysis, which assumes resolving the bottleneck in the 3rd scenario in addition to the other assumptions, Peak Capacity could reach 1. million kg/year, and over 1 million kg/yr Effective Capacity with a possible 100% efficiency rate. However, under this scenario, the Melangeur would become the bottleneck once again. Cost Benefit Analysis (Please refer to Exhibit 3) In evaluating the investment potential of purchasing equipment to enhance and increase capacity, three cost benefit analyses were conducted. In Analysis #1Example 1, illustrated in exhibit #3, purchasing the ball mill alone, would cost $300,000, but would increase capacity to allow up to $10. 95 million/yr in sales capacity per year. This reflectsing a $952k increase from the current maximum $10 million/yr sales capacity. Based on the industry’s 40% contribution, the $952k in added sales would translate to $380k in added contribution to SB. Consequently, the investment payback period would be 9. 5 months, and within the first year of investment SB would realize an $80k net added contribution. On the otherIn Analysis #2, investing in a ball mill in conjunction with a second Melangeur, would cost $350k, and add $4. 5 million/yr in sales capacity, compared to the current $10 million/yr. This added sales capacity would yield $1. million/yr in contribution, and the investment payback period would be 2. 3 months. As a result, SB would realize a $1. 4 million in net gains on their investments within the first year. Based on ourthe Ccost Analysis results, the $300k investment in the ball mill would be beneficial for SB, given the assumption that quality would not be compromised. However, in order to maximize the return on their investment, and realize its true potential, the $50k investment in a second Melangeur is strongly recommended. Additional changes needed to increase capacity by 150% Current Effective Capacity is 480,000 kg per year.
In order to increase it by 150% (1,200,000 kg per year), SB must do the following in addition to purchasing a ball mill: 1)Increaseing the roasting process from 8 hours/day to 13-15 hours/ day. 2)Purchase at least one additional Melangeur. It is important to note that, if the new melangeur has equal or less output capacity than the existing one, the current 16 hrs/day operation time of the melangeur might need to be increased to 18-20 hrs/day. If such an increase in operation is not possible, a third melangeur might be needed to reach the 150% increase in capacity. )Outsource more of the Tempering and Molding stage would be necessaryFinally, since increasing the Tempering and Molding capacity for this process is not an option, outsourcing a more of this process would be necessary. Expansion Concerns There is one particular area of concern related to the capacity expansion plan set forth earlier: the reliance on old, possibly irreplaceable machines. SB will grow more reliant on the old machines as efficiency increases and capacity expands. For example, the existing roaster is a 50-year-old machine, and the existing melangeur is over eighty years old.
Both were made in Germany. The management cannot replace or add either a roaster or melangeur easily or quickly. By adding a newly manufactured machine, the quality may drop. After years of searching, SB management found an acceptable replacement to the conches with the new ball-mill. As the plan to increase capacity depends on increasing the hours of the roasting machine and adding new melangeurs, the management must begin to find either old machines to purchase or preferably new machines with updateable technology that will maintain the existing quality.
Potential Use of Co-packers in Tempering and Molding Processes With increased demand and new bottlenecks caused by the ball mill, co-packers could provide necessary added capacity at SB. However, concerns about retaining quality and conflicting supplier objectives need to be addressed. SB tempers and molds all its chocolate in-house. Largely considered an art by the industry, tempering is what gives the chocolate the smoothness, its shiny finish, and the sound of the chocolate when it is broken into pieces. In 2005, SB sent 65% of its chocolate to co-packers for packaging.
There, the chocolate is re-tempered and re-molded for sale, but this is repeating a step that incurs additional time and cost. In order to eliminate redundancy, Harris suggested transporting the chocolate in a liquid form to co-packers who could then temper and mold the chocolate for the first time. And iIft would follow that the co-packers could handle not only the initial temper and mold process, then perhaps they could take onbut also a bigger part or all of the 35% capacity of the process currently handled in-house.
Since SB is working with co-packers already, we can assume that the co-packers are qualified, and meet their rigorous standards. By outsourcing more of the tempering and molding processes, SB can eliminate the molding bottleneck and the re-temper/re-mold redundancy. One of the risks for SB in outsourcing is losing control over quality. As a premium product, quality is what distinguishes it from its competitors. The in-house “Bean-to-Bar” processes are what allow these chocolate makers to produce the highest quality chocolate.
By outsourcing more100% of the tempering and molding, SB may lose track of a critical step in making their chocolate. With their inherently smaller profit margins, the suppliers may look to cut costs by “cutting corners. ”. To retain their quality and their “Bean–to-Bar” model, SB can retain a small part of the tempering and molding process in-house, but at the same time they should to consider placing QC staff on-site with their co-packers to test for flavor and texture daily. Another risk to outsourcing would be conflicting objectives with their suppliers.
The suppliers may strive for longer contracts with set prices whereas SB will want a short-term commitment, focusing more on adjusting their production rates to match demand. SB must use economies of scale to get favorable contract terms with their co-packers. In this way, SB could return to producing the tempering and molding process in-house if demand drops off or an important co-packer goes out of business down the roadin the future. Conclusion and Recommendations Given the above observations and calculations, the Scharffen Berger Company is not operating at capacity.
In order to increase capacity by 150%, we recommend; the purchase of the new ball mill and a second melangeur with an increase in its daily operation hours from 16 to 18 hours. Additionally, an increase in roasting from 8 hours/ per day to 12-13 hours would be needed. Finally, SB should outsource more of its in-house tempering and molding process to its current third-party co-packers. Having said that, the above recommendation must be implemented with special care to maintaining SB’s reputation of “America’s finest dark chocolate,”, superior quality, and brand differentiation model.