The directors of The Healthy Eating Group (HEG), a successful restaurant chain, which commenced trading in 1998, have decided to enter the sandwich market in Homeland, its country of operation. It has set up a separate operation under the name of Healthy Sandwiches Co (HSC). A management team for HSC has been recruited via a recruitment consultancy which specializes in food sector appointments. Homeland has very high unemployment and the vast majority of its workforce has no experience in a food manufacturing environment. HSC will commence trading on 1 January 2013.
The following information is available:
1 HSC has agreed to make and supply sandwiches to agreed recipes for the Superior Food Group (SFG) which owns a chain of supermarkets in all towns and cities within Homeland. SFG insists that it selects the suppliers of the ingredients that are used in making the sandwiches it sells and therefore HSC would be unable to reduce the costs of the ingredients used in the sandwiches. HSC will be the sole supplier for SFG.
2 The number of sandwiches sold per year in Homeland is 625 million. SFG has a market share of 4 per cent.
3 The average selling price of all sandwiches sold by SFG is $2.40. SFG wishes to make a mark-up of 331 =3 per cent on all sandwiches sold. 90 per cent of all sandwiches sold by SFG are sold before 2 pm each day. The majority of the remaining 10 per cent are sold after 8 pm. It is the intention that all sandwiches are sold on the day that they are delivered into SFG's supermarkets.
4 The finance director of HSC has estimated that the average cost of ingredients per sandwich is $0.70. All sandwiches are made by hand.
5 Packaging and labeling costs amount to $0.15 per sandwich.
6 Fixed overheads have been estimated to amount to $5 401 000 per annum. Note that fixed overheads include all wages and salaries costs as all employees are subject to fixed term
employment contracts.
7 Distribution costs are expected to amount to 8 per cent of HSC's revenue.
8 The finance director of HSC has stated that he believes the target sales margin of 32 per cent can be achieved, although he is concerned about the effect that an increase in the cost of all ingredients would have on the forecast profits (assuming that all other revenue/cost data remains unchanged).
9 The existing management information system of HEG was purchased at the time that HEG commenced trading. The directors are now considering investing in an enterprise resource planning system (ERPS).
(a) Using only the above information, show how the finance director of HSC reached his conclusion regarding the expected sales margin and also state whether he was correct to be concerned about an increase in the price of ingredients.
(b) Explain FIVE critical success factors to the performance of HSC on which the directors must focus if HSC is to achieve success in its marketplace.