LAS VEGAS -- Investment in a central baking facility can offer payoffs from one end of the cycle to the other, from production to sales.
That's what Ron Williams, bakery director at O'Malia Food Markets and O'Malia Bakery, Carmel, Ind., told attendees at BEMA Tech '95 here last month. Williams' presentation was part of a lineup of seminars that addressed issues affecting in-store bakeries.
The three-day educational program, sponsored by BEMA (formerly called Bakery Equipment Manufacturers Association), was held in conjunction with the exhibition of the North American Association of Food Equipment Manufacturers. Both trade organizations are based in Chicago.
Williams said that from its 25,000-square-foot central plant, the company supplies its nine retail stores with a wide variety of bakery items. It also wholesales its products to more than 400 other supermarkets in the Midwest.
Williams said broadening the market for O'Malia's centrally produced products beyond the captive universe of the chain's own stores was a natural step for the operation. "Wholesale has been a large part of our success," he said.
Even without building up a wholesale business, however, a central facility is a good bet for many retailers, he said. He presented an impressive list of potential advantages of centralizing bakery production, claiming it can:
· Increase sales.
· Solve store-level labor problems.
· Improve quality and consistency.
· Reduce production costs on mainline products with longer runs.
· Increase variety by consolidating lower volume items into a longer production run.
· Reduce total cost of packaging by consolidating purchasing in one high-volume location.
· Increase service at store level.
· Reduce vendor deliveries to stores and thus reduce costs associated with them.
Sales per man-hour at O'Malia's in-store bakeries average $65, which said Williams said is "very high, on average."
"It's because when my store people show up for work, they do not have manufacturing on their minds. They just serve the customer and sell. They have time for suggestive selling," Williams said.
"Normally, we use 100 to 115 man-hours per store per week to staff our in-store bakeries. And our percentage of store distribution ranges from 4% to 4.2%," he added.
O'Malia's plant supplies products to its stores at a price that allows them to take a 35% to 40% gross profit, Williams said.
Since most of the labor is invested at the central facility, the percentage of labor at store level is 8.5% to 9% of the retail price. Supply costs at store level are low, just 1% to 1.5% of the retail price.
While most of the supply and labor costs occur at the plant, its operation is so efficient that its own gross profit ranges from 60% to 65%, Williams said, depending on the type of promotion running. He added that there's opportunity for "really hot promotion pricing for various products because of economies of scale in purchasing."
A big cost saver, Williams said, has been the elimination of multiple deliveries to stores.
"There's always significant shrink involved when there are a lot of deliveries. [Errant] billing is one example. All of that can be better controlled at a central location," he explained.
Despite all the subsequent impacts on cost and profits, however, it was initially customers' demands for variety that spurred the company to go central, Williams said.
"About 15 years ago at O'Malia, we had a rack oven, a proofer and a mixer, and we ran scratch Italian bread. That was all. Then our customers started wanting French bread, and hot dog and hamburger buns. Next thing, they wanted muffins and cakes and doughnuts," he said.
"Since we're all for service, we tried to do the best we could, but we ran into the nightmare of untrained people and turnover. As a consequence, we had no consistency in products."
The company first built a 6,000- to 7,000-square-foot baking facility, which was adequate to meet its needs when there were only four O'Malia supermarkets. But as expansion began, it wasn't adequate anymore.
Now, at its 25,000-square-foot facility, the company produces 400 different line items and employs 40 to 60 full-timers, spread over three shifts.
Despite painting such a positive portrait of central production, Williams also warned retailers to prethink the whole process through before gearing up for it.
He said the topics that need to be closely examined include methods of production, efficient use of space and labor, and what's involved in managing wholesale accounts.
"First, decide what methods of production you want to use, and what you'll produce. You need to face up to the fact that you can't be the best at everything. There's always somebody out there who can produce a better product than yours or one of equal quality for less," he said. It might make sense to source some bakery products from a vendor, he pointed out.
In the plant, a combination of manufacturing methods such as scratch works best, using bases and mixes and frozen dough, Williams said.
"But whatever the combination, make sure your freezer capacity is sufficient," he warned. "The single most critical feature will be the size of your freezer, especially if you're going after wholesale business. That's the worst sore spot for us, compared to training, turnover, even equipment. Our freezer never seems big enough," Williams said.
On efficiency, Williams said, "Plan to use your plants for as many hours, weeks, months as you can. To get your return on investment, plan on a seven-day operation."
Keeping workers happy at the central location is less of a problem than at store level, he added. They are full-time, training them is easier and it's possible to make them happy by adjusting shifts, he said.
"We have a four-day, 10-hour-a-day work week for our late night shift, for example. It's always hard to find people to work the third shift, but the four-day week is attractive. It works for us. We don't even have to pay more money for that shift," Williams said.
"And we give the day shift every Sunday off. It used to be that all the stores wanted fresh bread on Monday. So we had to bake on Sunday. But why? Sunday is a big day in the supermarket. Why not have fresh bread then? Now, they [the bread crew] work on Saturday, but not Sunday," he said.
He said that solved a big labor problem. "I used to have 25% to 30% of the production people call in sick on Sunday."
Williams said since doughnuts have to be produced fresh every day, he alternates days off for the doughnut crew, but always gives them two days off together: either Friday and Saturday or Sunday and Monday.
He also stressed the importance of creating teamwork between store personnel and the plant. "Let [store-level employees] know what the plant can do for their customers, and train them on special orders," he suggested.
O'Malia's bakery managers, whether promoted from within or hired from outside, spend at least a week at the central plant before reporting to work in the stores.