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UST 0712-005

RONALD LAU
STEPHEN SHUM
KENNY YIU

Arome Bakery: Replenishment of Fresh Bakery Products

Stock replenishment is like an art: on one hand you want to make sure there is
enough bread and cakes for every customer coming in at all hours; on the other
hand, you do not want to over order and end up throwing all the unsold items away.
There is a delicate balance between the two.
Sarah Cheng, assistant operations manager of Arome Bakery 1

Arome Bakery was one of the leading bakery chains in Hong Kong. It operated 55 stores
in the city, and registered sales growth of over 10% between 2009 and 2011. Sarah Cheng joined
Arome Bakery in mid-2011 as the assistant operations manager. Within one year, Sarah managed
to reduce the average return rate of unsold products, one of the key performance metrics in the
bakery industry, from 7% to about 5%.

As a member of Aromes senior management team, Sarah felt strong pressure from both
upstream and downstream. Suppliers had increased ingredient costs a number of times during the
past 18 months, citing a constant rise in raw material costs. Consumers, on the other hand, were
reluctant to pay extra given the abundance of choice in the highly competitive bakery market. To
stay ahead of Aromes competitors, Sarah knew she had to further enhance the bakerys internal
control system.

One of the key areas with potential for further improvement was the product return rate
for unsold products. With all the available historical sales data broken down by store and by
product, Sarah decided to devise a systematic and scientific approach to stock replenishment for
all the stores.

The Bakery Market in Hong Kong


Bakeries in Hong Kong mainly offered Western- and Chinese-style bakery products
including specialty buns, bread loaves, and cakes. The bakery market in Hong Kong was

1
Sarah Cheng, interview by author, Hong Kong, 18 May 2012.

Kenny Yiu prepared this case under the supervision of Professor Ronald Lau and Professor Stephen Shum solely as a basis for class
discussion. The authors have disguised certain data to protect confidentiality. Cases are written in the past tense; this is not meant to
imply that all practices, organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are not
intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation.

To order copies or request permission to reproduce materials write bmcase@ust.hk or visit www.bm.ust.hk/cbcs

2012 by the Hong Kong University of Science and Technology. This publication may not be digitized,
photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong
University of Science and Technology.

Last edited: 7 November 2012


HKUST Business School Thompson Center for Business Case Studies

dominated by a few bakery chains that operated central baking factories with stores across the
city. There were also a large number of mom-and-pop stores that operated small bakeries at the
backs of their stores. Supermarkets and convenience stores had also entered the bakery market
and included fresh bakery products in most of their outlets.

Maxims Bakery was the largest player in the market with 160 stores in the city. It was
part of the Maxims Group, the largest food and beverage group in Hong Kong, founded in 1960.
Other major players included Saint Honore with 90 stores, Yamazaki Baking Company with 37
stores, and A-1Bakery with 20 stores. Kee Wah Bakery, a traditional Chinese pastries producer
with 51 stores, had also entered into the Western-style bakery market in the late 1990s.2

Arome Bakery
Arome Bakery was founded in 1986 as a Japanese-style bakery by the Yu family, which
engaged mainly in property development and construction in Hong Kong. 3 In 2008, Maxims
Group acquired 100% of Arome Bakery. Although the company was still operating under its own
Arome brand, many aspects, including procurement and production, were gradually integrated
into the Maxims system. For instance, Arome closed down its central bakery in 2009 and shifted
all of its production to the Maxim Groups central bakery factory in Tai Po.

Arome Bakery operated 55 stores in Hong Kong and had a total of 240 employees. Stores
usually opened between 6:30 a.m. and 8:00 a.m., and closed between 8:00 p.m. and 10:30 p.m.,
depending on the location of the store. Management of the bakery was independent from
Maxims, and the structure remained rather flat and relatively straightforward. The senior
management team included a general manager and an assistant operations manager. Each store
was run by a store manager or a store supervisor (in the case of smaller stores). The store
managers and supervisors reported to eight district managers, each of whom oversaw the
operations of about six to ten stores in their respective areas in Hong Kong. The district managers
in turn reported directly to the assistant operations manager.

Major Products
Bakery products at Arome could be divided into four major categories: specialty buns,
sliced loaf bread, specialty cakes, and large cakes for occasions [see Appendix 1 for product
categorization]. Arome Bakery was famous for its mango cake series that featured slices of fresh
mango or floating mango syrup filled inside the cakes. Festival-related products such as rice
dumplings and moon cakes were also offered during special seasons. To provide convenience to
customers, most stores also carried packaged beverages such as bottled water, fruit juice, and
milk.

The types of products being carried in each store were different and depended largely on
the location of the stores. For example, stores located in commercial and industrial areas usually
had higher sales during morning and noon hours as customers purchased bakery products for
breakfast and lunch. These stores usually carried a larger variety of specialty buns, with a limited

2
Maxims Group, Company Overview, http://www.maxims.com.hk/en/about/cat_01_a.asp, accessed June
2012.; Saint Honore Cake Shop Limited, About Saint Honore, http://www.sthonore.com/en/about.html, accessed
June 2012.; Yamazaki Baking Company Limited, Company, http://www.yamazaki.hk/en/company.php, accessed
June 2012.; A-1 Bakery Company Limited, Business Introduction, http://www.a-
1bakery.com.hk/eng/aboutus/businessintro.php, accessed June 2012; Kee Wah Bakery Limited, Kee Wah Stores,
http://en.keewah.com/stores/kee-wah-stores.html, accessed June 2012
3
Sarah Cheng, interview by author, Hong Kong, 18 May 2012.

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HKUST Business School Thompson Center for Business Case Studies

selection and quantity of specialty cakes. Some of these stores did not even open on Sundays due
to low customer traffic. Stores located in residential areas or inside Mass Transit Railway (MTR)
stations, on the other hand, usually had more uniform sales patterns for all types of products.

Stock Replenishment
Replenishment of bakery products was conducted at the store level on a daily basis. The
head office would provide store managers with a basic order quantity for each type of product in
each category for different days of the week. This set of basic order quantities for each store was
derived from historic sales data of the store, and was reviewed on a regular basis for adjustment if
necessary. Based on the sales volume from the same day in the previous week, the actual stock on
hand (for products that could still be sold on the day after), the weather, any special festivals or
public holidays, together with his or her own experience, the store manager would make
adjustments to the basic order quantity for each product.

Each day, the store manager would place his or her adjusted order via the companys
online database system for bakery products. Orders were delivered at the store within the next
two days, depending on the production lead time of individual products. Arome Bakery operated
its own delivery fleet of 19 trucks with cold storage capability. Usually, each store would receive
three deliveries per dayearly morning (immediately before store opening), late morning, and
early afternoon [see Exhibit 1 for order and delivery times]. The central baking factory would
produce according to the quantities ordered by the store managers. If no adjustment to the basic
order quantity was made before the latest order time, bakery products would be delivered to the
store according to this basic order quantity.

All point-of-sale terminals at the stores cash registers were connected to the companys
online database system. Information such as total sales volume and quantities of each type of
product was available for downloading by the district manager on the next day [see Exhibit 2 for
daily sales volume for the stores in Aberdeen and the Jordan MTR station in June 2012].
However, the time of sales for each type of product was not captured in the system.

One of the key tasks for the store managers or supervisors was to monitor the stock levels
of their stores at all times during business hours. Store managers and supervisors whose stores
were within proximity were encouraged to communicate closely with each other on their
respective stock levels. If one store had a shortage of a particular product, managers or
supervisors of neighboring stores with higher stock levels were encouraged to transfer products to
the store with a shortage.

Return of Unsold Items


Like many other food items, bakery products had very short shelf lives. Unsold products
were returned to the central baking factory for disposal.

At the end of each business day, each store would conduct an inventory check. The
numbers of unsold products were recorded and submitted to the assistant operations manager
using the companys online database system on a daily basis.

Specialty buns and loaf bread had to be sold on the same day of delivery. Unsold items
would be returned to the central bakery factory. Specialty cakes and large cakes, as they were
refrigerated, could be stored overnight for sales on the next day, but they had to be packed for
return if they were not sold on the second day.

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UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products
HKUST Business School Thompson Center for Business Case Studies

The unsold items were put into plastic trays for delivery staff to pick up during the first
delivery in the early morning on the next day. Handwritten return slips tallying the number of
each returned item were also included in the trays for checking purposes at the central baking
factory.

As a general guideline of the company, store managers and supervisors were advised to
aim for a product return rate of 5% or below in terms of the total sales amount for all products
combined on any particular day. The actual daily product return rate for different stores, however,
could range from 2.8% to 9.8%. The actual quantity of items returned would also be examined in
parallel in some cases, since percentage of sales might not be very meaningful, especially in
smaller stores with low turnover.

In an attempt to stimulate sales and minimize the number of returned items, Arome
Bakery had introduced various discount or promotion schemes for some products after a certain
hour of the day. But it soon became apparent that a considerable number of customers would
deliberately delay their purchase to take advantage of the discounts and promotions. Overall sales
volume had increased, yet there was no clear impact on the product return rates.

The Consequences of Over-ordering


It was Arome Bakerys company policy to keep operating cost elements within the
management team, that is, district managers and above. Costs, including product costs, staff costs,
and rental expenses, were not available to store managers and supervisors. At the company level,
nevertheless, returned items were booked at cost and were charged as expenses on the profit and
loss account of each store accordingly, which was directly linked to the personal assessment of
the store manager and supervisor (see Exhibit 3 for average selling price and average product
cost).

A group meeting was held every month for all store managers and supervisors as an
exchange to share operation-related issues as well as the latest market trends. During the monthly
meeting, the managers or supervisors whose stores reported the top three highest product return
rates would be identified in front of the team. Managers or supervisors whose stores consistently
reported high product return rates would then be interviewed by Sarah to discuss possible reasons
and be provided with guidance.

Sarah knew that there were many factors that could affect the sales volume of any
product. Coming from an operations background, she was determined to find a systematic and
logical method to resolve the difficulties in finding the right order quantity for various products.
She took the sales data for the Aberdeen store and the Jordan store 4 from an operational report,
believing that these two stores would respectively provide representable sales trends for stores
located in residential areas and commercial districts.

Sarah also wanted to design an incentive program that had a closer connection to the
financial performance of the store to reward superior ordering practices. At the same time, Sarah
was asking herself whether there was a need to equip store managers and supervisors with more
cost-related information in order to give them a stronger sense of accountability.

4
The Jordan store was located in one of the busiest MTR stations in Hong Kong.

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UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products
HKUST Business School Thompson Center for Business Case Studies

APPENDIX 1: DIFFERENT CATEGORIES OF BAKERY PRODUCTS*

Category 1 Specialty Buns Category 2 Sliced Loaf Bread

Category 3 Specialty Cakes Category 4 Large Cakes

* Product pictures for illustration purposes only; not all products pictured are actual products of
Arome Bakery.

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UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products
EXHIBIT 1: TIME FOR PLACING ORDERS AND DELIVERY TIME

Category Order by Delivery Time

Specialty Buns
9:30 pm on first day First delivery on third day
Sliced Loaf Bread

Specialty Cakes 4:00 pm on first day Second delivery on second day


Large Cakes 9:30 pm on first day Third delivery on second day

Source: Mui Chiu, district manager, Arome Bakery, interview by author, Hong Kong, 25 May
2012.

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EXHIBIT 2: JUNE 2012 SALES VOLUME FOR SPECIALTY BUNS FOR
ABERDEEN STORE AND JORDAN MTR STORE**

Day of Week June Aberdeen Store Jordan MTR Store


Thursday 1 966 2,542
Friday 2 1,047 3,010
Saturday 3 927 1,626
Sunday 4 952 1,677
Monday 5 1,033 2,754
Tuesday 6 1,315 3,900
Wednesday 7 1,219 3,480
Thursday 8 1,232 3,569
Friday 9 1,399 4,198
Saturday 10 1,216 2,283
Sunday 11 1,216 2,238
Monday 12 1,388 4,029
Tuesday 13 1,230 3,406
Wednesday 14 1,250 3,561
Thursday 15 1,145 3,193
Friday 16 1,213 3,489
Saturday 17 1,034 1,870
Sunday 18 1,083 1,967
Monday 19 1,222 3,390
Tuesday 20 1,118 3,094
Wednesday 21 1,292 3,360
Thursday 22 1,128 3,109
Friday 23 1,044 2,912
Saturday 24 1,007 1,938
Sunday 25 901 1,571
Monday 26 1,107 3,046
Tuesday 27 1,140 3,206
Wednesday 28 1,231 3,554
Thursday 29 1,272 3,808
Friday 30 1,052 2,992

EXHIBIT 3: AVERAGE SELLING PRICE AND AVERAGE PRODUCT COST**

Average Selling Price Average Out-of-Factory Cost

Specialty Buns HKD 7.80 HKD 3.12

** Disguised data.

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UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products