HTL is a regional bakery supplying supermarkets, cafés and school canteens. It has opened a second production site to meet new demand for frozen rolls. The ...
Question 1 Report
HTL is a regional bakery supplying supermarkets, cafés and school canteens. It has opened a second production site to meet new demand for frozen rolls. The purchasing manager says that ordering flour, yeast and boxes in larger quantities should lower input prices. The operations manager is concerned that the two sites may order different ingredients, hold too much stock and make inconsistent products. HTL is considering a central purchasing team and a standard recipe system. These options could require extra administration, but the business expects its market share and cash receipts to grow.
(a) State two examples of purchasing economies of scale that HTL could obtain. [2]
(b) Define managerial economies of scale. [2]
(c) Analyse how a central purchasing team could increase HTL's profit. [4]
(d) Analyse why operating two production sites could lead to diseconomies of scale. [4]
(e) Discuss whether HTL should use a standard recipe system at both sites. [4]
Answer Details
(a) Two purchasing economies of scale are bulk discounts on flour or packaging and lower delivery cost per unit from larger orders. Greater bargaining power with suppliers is also valid. [2 marks]
(b) Managerial economies of scale are cost advantages gained when a larger business can employ specialist managers who improve decisions, efficiency or control. [2 marks]
(c) A central purchasing team can employ specialist buyers who negotiate lower prices. This lowers material cost per roll. It can also coordinate orders, preventing duplicate or emergency purchases. If selling prices and sales are maintained, the lower unit cost increases profit. [4 marks]
(d) Two sites can create slower communication. One site may use the wrong ingredient or recipe, while differing stock records can cause stock transfers or waste. Extra checking, transport and rework raise average cost, producing diseconomies of scale. [4 marks]
(e) A standard recipe system can ensure consistent quality, protect HTL's brand and simplify training and production, reducing waste. However, local managers may need flexibility for local customers or available ingredients, and enforcing one system can add administration. HTL should use it if the quality and cost savings are greater than the loss of flexibility. [4 marks]
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