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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 Arome’s 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 Arome’s competitors, Sarah knew she had to further enhance the bakery’s 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.

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University of Science and Technology.

Last edited: 7 November 2012

which engaged mainly in property development and construction in Hong Kong.hk/en/company. The senior management team included a general manager and an assistant operations manager.com.yamazaki. 18 May 2012. Supermarkets and convenience stores had also entered the bakery market and included fresh bakery products in most of their outlets. accessed June 2012. A-1 Bakery Company Limited. Hong Kong. accessed June 2012 3 Sarah Cheng.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. and the structure remained rather flat and relatively straightforward. and 10:30 p. and large cakes for occasions [see Appendix 1 for product categorization]. For instance. “Kee Wah Stores.keewah. 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.. Arome Bakery operated 55 stores in Hong Kong and had a total of 240 employees.2 Arome Bakery Arome Bakery was founded in 1986 as a Japanese-style bakery by the Yu family. sliced loaf bread. the largest food and beverage group in Hong Kong.m. 2 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products .” http://www. with a limited 2 Maxim’s Group. Saint Honore Cake Shop Limited. Kee Wah Bakery. depending on the location of the store.” http://en.com/stores/kee-wah-stores. Although the company was still operating under its own Arome brand.maxims.php. many aspects. Yamazaki Baking Company Limited. It was part of the Maxim’s Group. The types of products being carried in each store were different and depended largely on the location of the stores. and closed between 8:00 p. Maxim’s Group acquired 100% of Arome Bakery.com. These stores usually carried a larger variety of specialty buns.” http://www. Major Products Bakery products at Arome could be divided into four major categories: specialty buns.m. Arome Bakery was famous for its mango cake series that featured slices of fresh mango or floating mango syrup filled inside the cakes. accessed June 2012. Arome closed down its central bakery in 2009 and shifted all of its production to the Maxim Group’s central bakery factory in Tai Po.m. Each store was run by a store manager or a store supervisor (in the case of smaller stores).asp. “About Saint Honore.. had also entered into the Western-style bakery market in the late 1990s. interview by author. and 8:00 a. There were also a large number of mom-and-pop stores that operated small bakeries at the backs of their stores. each of whom oversaw the operations of about six to ten stores in their respective areas in Hong Kong. Yamazaki Baking Company with 37 stores.php.hk/eng/aboutus/businessintro. a traditional Chinese pastries producer with 51 stores.. and A-1Bakery with 20 stores.m. specialty cakes. “Business Introduction. and milk. including procurement and production. Kee Wah Bakery Limited. The store managers and supervisors reported to eight district managers. most stores also carried packaged beverages such as bottled water. 3 In 2008. Festival-related products such as rice dumplings and moon cakes were also offered during special seasons. Management of the bakery was independent from Maxim’s. “Company Overview. Other major players included Saint Honore with 90 stores. Stores usually opened between 6:30 a.. To provide convenience to customers.” http://www.html.html. accessed June 2012. For example. fruit juice.hk/en/about/cat_01_a. The district managers in turn reported directly to the assistant operations manager.sthonore. founded in 1960.. accessed June 2012. Maxim’s Bakery was the largest player in the market with 160 stores in the city.” http://www.com/en/about.a- 1bakery. “Company. were gradually integrated into the Maxim’s system.

Each day. bakery products had very short shelf lives. Stock Replenishment Replenishment of bakery products was conducted at the store level on a daily basis. Unsold products were returned to the central baking factory for disposal. the store manager would place his or her adjusted order via the company’s online database system for bakery products. Arome Bakery operated its own delivery fleet of 19 trucks with cold storage capability. Some of these stores did not even open on Sundays due to low customer traffic. on the other hand. each store would conduct an inventory check. Orders were delivered at the store within the next two days. Based on the sales volume from the same day in the previous week. each store would receive three deliveries per day—early morning (immediately before store opening). the time of sales for each type of product was not captured in the system. The central baking factory would produce according to the quantities ordered by the store managers. Usually. managers or supervisors of neighboring stores with higher stock levels were encouraged to transfer products to the store with a shortage. 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]. and early afternoon [see Exhibit 1 for order and delivery times]. 3 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products . bakery products would be delivered to the store according to this basic order quantity. Return of Unsold Items Like many other food items. All point-of-sale terminals at the stores’ cash registers were connected to the company’s online database system. 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. Stores located in residential areas or inside Mass Transit Railway (MTR) stations. If one store had a shortage of a particular product. Specialty cakes and large cakes. usually had more uniform sales patterns for all types of products. could be stored overnight for sales on the next day. The numbers of unsold products were recorded and submitted to the assistant operations manager using the company’s online database system on a daily basis. the actual stock on hand (for products that could still be sold on the day after). At the end of each business day. as they were refrigerated. and was reviewed on a regular basis for adjustment if necessary. Store managers and supervisors whose stores were within proximity were encouraged to communicate closely with each other on their respective stock levels. If no adjustment to the basic order quantity was made before the latest order time. the store manager would make adjustments to the basic order quantity for each product. However. late morning. but they had to be packed for return if they were not sold on the second day. together with his or her own experience. Specialty buns and loaf bread had to be sold on the same day of delivery. depending on the production lead time of individual products. 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. any special festivals or public holidays. Unsold items would be returned to the central bakery factory. This set of basic order quantities for each store was derived from historic sales data of the store. the weather.HKUST Business School Thompson Center for Business Case Studies selection and quantity of specialty cakes.

In an attempt to stimulate sales and minimize the number of returned items. believing that these two stores would respectively provide representable sales trends for stores located in residential areas and commercial districts. Costs. district managers and above. At the company level. Overall sales volume had increased. she was determined to find a systematic and logical method to resolve the difficulties in finding the right order quantity for various products. 4 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products . could range from 2. The actual daily product return rate for different stores. nevertheless. But it soon became apparent that a considerable number of customers would deliberately delay their purchase to take advantage of the discounts and promotions.8%. 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). 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. At the same time. The Consequences of Over-ordering It was Arome Bakery’s company policy to keep operating cost elements within the management team. Coming from an operations background. As a general guideline of the company. yet there was no clear impact on the product return rates. Arome Bakery had introduced various discount or promotion schemes for some products after a certain hour of the day. 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. Sarah knew that there were many factors that could affect the sales volume of any product. returned items were booked at cost and were charged as expenses on the profit and loss account of each store accordingly. 4 The Jordan store was located in one of the busiest MTR stations in Hong Kong. especially in smaller stores with low turnover.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. that is. Handwritten return slips tallying the number of each returned item were also included in the trays for checking purposes at the central baking factory. 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. the managers or supervisors whose stores reported the top three highest product return rates would be identified in front of the team.8% to 9. 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. were not available to store managers and supervisors. however. since percentage of sales might not be very meaningful. and rental expenses. During the monthly meeting. The actual quantity of items returned would also be examined in parallel in some cases. including product costs. 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. staff costs. She took the sales data for the Aberdeen store and the Jordan store 4 from an operational report.

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. 5 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products . not all products pictured are actual products of Arome Bakery.

interview by author. 6 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products . Arome Bakery. 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. 25 May 2012. Hong Kong.

231 3.399 4. 7 UST 0712-005 Arome Bakery: Replenishment of Fresh Bakery Products .206 Wednesday 28 1.216 2.967 Monday 19 1.140 3.554 Thursday 29 1.569 Friday 9 1.145 3.12 ** Disguised data.542 Friday 2 1.677 Monday 5 1.230 3.561 Thursday 15 1.007 1.390 Tuesday 20 1.216 2.626 Sunday 4 952 1.480 Thursday 8 1.808 Friday 30 1.489 Saturday 17 1.193 Friday 16 1.360 Thursday 22 1.238 Monday 12 1.044 2.272 3.047 3.198 Saturday 10 1.232 3.052 2.406 Wednesday 14 1.046 Tuesday 27 1.992 EXHIBIT 3: AVERAGE SELLING PRICE AND AVERAGE PRODUCT COST** Average Selling Price Average Out-of-Factory Cost Specialty Buns HKD 7.034 1.094 Wednesday 21 1.80 HKD 3.870 Sunday 18 1.754 Tuesday 6 1.029 Tuesday 13 1.571 Monday 26 1.128 3.118 3.213 3.938 Sunday 25 901 1.109 Friday 23 1.900 Wednesday 7 1.315 3.107 3.283 Sunday 11 1.388 4.033 2.083 1.292 3. 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 2.219 3.010 Saturday 3 927 1.222 3.250 3.912 Saturday 24 1.