The BizCafe baked goods decision

The baked goods special decision

The baked goods decision in BizCafe came along for us after period 3. You know that 30% of your customers will buy baked goods. You have three options:

• Purchase an oven to make baked goods in the shop
• Buy baked goods from a local bakery
• Do nothing

First of all, doing nothing is the worst option. You'd be passing up the opportunity to add a revenue stream with no risk of a loss. There are no benefits from that, so don't even consider it.

The options

So you really have two options. Either way, you sell the baked goods for $2.00 at a rate of 30% of your coffee cup sales.

• Buy the oven
• Initial outlay of $4,000
• Cost per baked good: $0.50
• Must hire an additional employee to work the oven
• Smell of baked goods improves the ambience of your cafe, which attracts customers and increases cup sales
• Buy baked goods from a local bakery
• Cost per baked good: $1.00

I was not satisfied with the calculation method presented in the game, nor with any of the calculations I found in the reports on the internet, so I figured it out for myself.

A screen capture from the video on the Special Decision page

Time remaining is crucial

First, you know that if you buy the oven, you're digging yourself a $4,000 hole compared to going with the supplier. So the question is--when you look at the other factors, what happens? You make more profit per baked good with the oven, you sell more coffee with the oven, but you have to pay an additional employee. Will the benefits be enough to make up for the $4,000 outlay? The supplier is the safer route; the oven is the risky route.

I don't know how this played out in other simulations, but in our game, there were five periods after week 3 to earn revenue from baked goods. When I did my first set of projections, I discovered that having five weeks left made the decision especially difficult:

• After four weeks, it's not worth buying the oven
• After six weeks, it's definitely worth buying the oven
• After five weeks, it depends!

What it depends on is this: How big of a sales increase will you get from the improved ambience in your cafe? With my first projection, I determined:

• If you get an increase in coffee sales of more than 88 cups per week from the improved ambience, then it's worth buying the oven
• If you get an increase in coffee sales of 88 cups or less per week, then it's not worth it

The kicker--you have no way of knowing just how much of an increase you get from the improved ambience.

Here's how to make the calculations. You need to account for each of these factors, and run the numbers both ways, oven vs. supplier, then plot them out for each of the remaining weeks:

• Coffee sales volume
• Will be higher with the oven, but you don't know how much
• Price of coffee
• Baked goods sales volume
• 30% of coffee sales volume either way
• Will be higher with the oven because your coffee sales will be higher
• Baked goods profit
• $1.00 per baked good with the supplier
• $1.50 per baked good with the oven
• Coffee sales revenue
• Will be higher with the oven
• Number of servers
• Will be one more with the oven than supplier
• Wages
• Staffing cost
• Will be higher with the oven by the cost of one server per week
• "Total profit"
• Your revenue from coffee and baked goods sales, minus the staffing cost

With "Cumulative net income", you start $4,000 in the hole with the oven; you start at $0 with the supplier. Then, for each week, you add that week's "total profit" to your running totals.

The bottom row subtracts the difference between the two scenarios. As you can see in the graphic above, the difference between the two scenarios starts out in favour of the supplier, but diminishes with each passing week, because the additional coffee sales and better margins on baked goods that come with buying the oven outweigh the added cost of additional server. (By the way, the cell next to the "winner:" cell uses an IF function to return "supplier" if the difference is greater than zero, "oven" if the difference is less than zero. Another fun Excel technique!) 

Why the 88-cup difference makes the difference

The sales boost from the oven

I kept coffee price and server wages the same for both options. Then I adjusted the difference between the coffee sales volumes to see how the numbers played out. (To make that easier, I created a cell that contained a value for the difference, plotted out the sales volume for the supplier, then for the oven value I used a formula that added the difference to the sales volume for the supplier for each week.)

The greater the boost in sales, the more it favours buying the oven. Based on my first calculation, with each additional cup sold, it tilts the choice in favour of buying the oven by $26.20. All other factors equal, projecting a moderate increase in sales with an 88-cup difference between the two options, you'd be $5.93 more profitable if you used the supplier.

However... I copied these cells, and ran another projection. How do the numbers play out if there is a greater increase in sales over the subsequent five weeks compared to the initial scenario?

So here, the 88-cup difference yields a $102.07 benefit if you buy the oven! An 84-cup difference was the threshold between the two options in this scenario. I ran it again with even higher demand, and the threshold was reduced to a 77-cup difference.

I also ran a bunch of scenarios where I compared coffee price differences. The general trend I found was that if you bought the oven, and kept your coffee price higher than you would have had you used the supplier, this tilted things in favour of buying the oven.

So what do you do?

It's a tough call. A lot of it depends on the situation in your particular game. Once the game was over, I went back to my "OvenDecision" worksheet, and plugged in the actual sales figures and prices that we used over the last five weeks of the game. What did I see? 

The 88-cup difference, spot-on. If our actual sales were more than 88 cups per week higher because of our improved ambience, then it was worth it to buy the oven. Our actual sales ended up roughly matching my initial projection. 

The thing is, once you choose one path, you have no way of knowing how things would have turned out had you chosen the other path. You live with your choice.

We kept our Best Ambience award!

In our case, it came down to three things, not related to the projections:

• My father once told me that he had a tennis coach who said that when you're winning, you can take risks, but when you're behind, you have to play conservatively. We were ahead in cumulative net income by $1,522 at that point. In most of the scenarios I ran, the differences between the two options swung by a few hundred dollars either way; nothing of a magnitude that would cost us a $1,522 lead. So that made me a little more open to taking a risk.
• I don't know how much of a difference winning awards makes, but I assume it's something. We had won Best Ambience during week 1, and had hung on to it up to that point. I didn't want to take the risk that some other shop would improve their ambience, and we wouldn't, and therefore we lose our award.
• Buying the oven fit our "premium" brand image.

So we bought the oven.

I would have written "oven-fresh" instead of
"delicious", but I didn't want our competition
to know whether we bought the oven.

Selling baked goods affects pricing strategy

With either option, selling baked goods will have an effect on your pricing strategy. In general, you get a greater sales volume with a lower price, but a higher price yields more revenue per cup, so you have to find a sweet spot when you set your price.

Once you start selling baked goods, you have to factor this additional revenue stream into the picture. After we bought the oven, it made sense to drop our price and attempt to increase our sales volume because the more coffee we sold, the more baked goods we sold. We added this factor to our weekly net income projections.

Maybe it wasn't worth buying the oven after all!

Also, as I mentioned in a previous post, boosting our ambience brought in more customers, but we didn't add enough staff to handle that increase. So if you buy the oven, make sure to add servers to accommodate that additional demand.

Admittedly, I didn't factor the cost of requiring additional staff into my initial baked goods decision projections. It wasn't until after the game was over that I considered--what if you factor in that boosting your coffee sales means that you need to hire an additional server to handle that increased demand on top of the additional server you need to work the oven?

Two-server difference instead of a one-server difference

Hmm... When you factor that in, it means it takes a sales boost of over 120 cups per week to make buying the oven worth it.

Again, there's no way of knowing what kind of sales we would have had if we didn't buy the oven. I don't know how that would have played out in terms of staffing and pricing decisions.

I will say this, though--the $4,000 outlay does not show up in net income figures. Looking at your competition's numbers, you have no way of knowing for sure whether or not they bought the oven. Your net income figures end up being higher if you buy the oven, because you're making an additional $0.50 in profit per baked good, but it's very hard to discern whether another team bought the oven from looking at all the factors that are visible to you.

Cumulative net income entering the
final week. A $4,215 lead, or a
$215 lead? We couldn't tell.

What that meant towards the end of the simulation was that I became determined to finish the game with at least a $4,000 lead in cumulative net income. That way, whether or not the second-place team bought the oven, we'd be guaranteed victory. I would have been very annoyed if we finished with a lead in cumulative net income, but lost because we bought the oven and the competition didn't. (Based on the final lead my instructor said we had in terms of cash in the bank, it sounds like they bought the oven.)

Conclusion

Buying the oven was a big risk, and fortunately for us, it didn't end up costing us in the end. But, all things considered, it seems like a much safer choice to go with the supplier. 

Run the numbers, think about what you can afford to do, and ask yourself--how much risk am I comfortable with?

(Image credit: https://www.videoblocks.com/video/wide-shot-of-small-business-coffee-shop-staff-taking-smiling-and-presenting-proudly-their-home-made-consumer-goods-in-cafe-happy-women-offering-muffins-khou0sw)