Operational Risk Management Case Study

Bon Apetit is a bakery business located in Eastville, Pretoria. When the owner, Ray Pane, purchased the business three years ago, it consisted of a single site with baking facilities and a retail store and cafe. Based on market research with the bakery's retail and cafe clientele, Ray began to change and expand the product offerings to increase the volume of sales and margins. He also began a new line of business, wholesaling to local restaurants and high-end grocery stores within a 20-kilometer radius of the bakery.

Based on the success over the past three years (see Exhibit 31.1), Ray has made a strategic decision to expand his wholesale business, with the goal of tripling profits over the next three years (see Exhibit 31.2). He expects to accomplish this by:

1. Covering a larger territory (i.e., expanding to a 120 km radius) for wholesaling to local restaurants and independent grocery stores across the entire Greater Pretoria Area, and

2. Introducing a new business line, white label products that he can supply to major supermarket chains. To realize this strategy, Ray has leased and outfitted a separate baking facility to be primarily dedicated to supplying the wholesale business. Ray also hired a full-time vice president of sales and marketing (see Exhibit 31.3 for a summary of the Bon Apetit management team) to take over from him on the wholesale side.

3. Finally, he purchased a second previously owned delivery truck and hired a full-time distribution manager. Growth in the first three years is attributable to enhancement of product offerings and continual drive to find efficiencies in operations.

In year 4, the new baking facility will open. It is expected that it will take several years to add new wholesale customers and wholesale products. Therefore, there will be unutilized capacity in the new facility. It is anticipated that expanding the wholesale business will, at least initially, require an increased level of product development, marketing, sales, and distribution.

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Exhibit 31.3

The Bon Apetit Team

Ray Pane, President and CEO

After a successful legal career, Ray decided to pursue his dream of being an entrepreneur. He has a passion for fine food and is committed to providing his customers with high quality, wholesome, and artisanal products.

Janice Sweet, Manager, Accounting

Janice is a Chartered Professional Accountant who came to Bon Apetit with five years' experience in several finance roles at a furniture retailer. She joined Bon Apetit halfway through its third year of business. She is the company's first in-house accountant. Prior to her joining, the accounting was done by an external bookkeeper on a contract basis. Janice has begun to introduce more systematic accounting processes. She is also working with Ray to develop more forward-looking reporting, including projections and forecasts of revenues and costs.

Joe Silkwood, Vice President, Sales and Marketing

Joe was hired near the end of year 3 when Ray decided to expand the wholesale business. Joe is a classic salesman; he's outgoing and optimistic. He has nearly 10 years' experience in the grocery business.

Rick Kneader, Manager, Baking Operations

Ray hired Rick as the head baker for the retail bakery at the beginning of year 1. Rick is a true artisan who successfully developed the new products that have been responsible for the increases in sales in the cafe and retail bakery in its first three years of business. He also runs a tight ship and has managed costs well, despite shifting to products with

higher-cost ingredients. With the opening of the new commercial baking facility in year 4, Ray has received a promotion to Manager of Baking Operations for both the retail and the commercial facilities. He will now spend less time working with his hands and more time overseeing junior bakers while managing the expenses at the commercial baking facility.

Mohammed Sharif, Manager, Distribution

Mohammed has been hired by Ray to manage distribution to the expanding roster of wholesale customersboth restaurants and other retailers. He has worked in the trucking field for 15 years. He will expand and supervise the existing team of drivers who were hired in year 2 to distribute product to wholesale customers. Ray has also made it clear that he expects Mohammed to find efficiencies and reduce shipping costs.

Jelena Zarinovic, Manager, Retail Operations

Jelena has been with the company since it started. In fact, she worked for the previous owners. She is the only full-time retail sales employee. She is friendly and adored by customers and the many part-time sales associates. However, she is less interested in paperwork and is finding it challenging to learn the new accounting procedures that Janice is implementing.

1.1 How does Ray's strategic objective translate to the operational level, that is, what is his key operational objective(s) for the wholesale business line?