Reference no: EM133106808
Question - Case Analysis - Company Background and Case Summary - Laurentian Bakeries Inc. is a producer of different frozen baked products such as pizzas in Winnipeg, cakes in Toronto, and pies in Montreal. Toronto plant was responsible for over 40 percent of corporate revenues in fiscal 2004, and the other two plants, Montreal and Winnipeg, accounted for about 30 percent. The Company was established in 1984.
Danielle Knowles, vice-president of operations for Laurentian Bakeries Inc., was preparing a capital project expenditure proposal to expand the plant in Winnipeg for the expansion into the U.S. frozen pizza market. The per capita consumption of frozen pizza products in U.S. is three times of that in Canada because of the typical lower retail prices in U.S. for frozen pizzas. Sales of Canadian and America frozen and fresh pizza at Canada's grocery stores grew more than 410 percent between 1997 and 2001 from $45 million to $230 million. Laurentian holds 21 percent of the market share of frozen pizzas in Canada.
Management Style - The success of Laurentian Bakeries was, in part, the result of its management's philosophies. The foundation of the company's operations included a commitment to continuous improvement. The essence of continuous improvement is the use of the organization's human resources to produce a constant stream of improvements in all aspects of customer value, including quality, functional design, and timely delivery, while lowering cost at the same time (BPP Learning Media, 2017). This is true for the Laurentian Bakeries Inc. which was known for its better consideration for the human resource and its environmental impact.
Case Problem/Dilemma - There was an expansion opportunity in the United States for frozen pizza market. However if the opportunity to expand into U.S. frozen pizza market was taken, Laurentian would need extra capacity. There were at least four proposal considered in order for the company to achieve such capacity expansion. However, the three proposals were rejected due to reasons such as failing to provide immediately the needed capacity, failing to achieve cost reduction, and being too costly compared to other proposals. The only proposal to remain was the expansion of the Winnipeg plant. This type of project was considered as Class 2 project which had a 18 percent hurdle rate, as shown in the summary of Table I. Laurentian believed that the expansion of the
Winnipeg plant could better exploit economies of scale - meaning the larger the business, the lower its cost (Amadeo, 2017), and also to assure consistently high product quality.
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Type of Project
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Description
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Hurdle rate
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Class 1
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Cost Reduction
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20%
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Class 2
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Increase of Capacity for Existing Products or Establish a Facility for New Products
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18%
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Class 3
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Equipment or Facility Replacement
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15%
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Class 4
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Necessary R&D, Product Improvement, Quality Control, And Concurrence with those in Authority
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N/A
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Table I - Type of Project and its Hurdle Rate
The expansion proposal of Winnipeg would require half a year to finish and would incur four main expenditures totaling $5.2 million. Three areas of environmental concern are also to be addressed in the proposal to ensure both conformity with Laurentian Capital Allocation Policy and compliance with regulatory bodies and local by- laws.
The review committee would be following the procedures set out in
Laurentian's Capital Allocation Policy which also includes the project's net present value as the basis for reviewing the recommendation.
The Capital Allocation Policy requires that all projects be consistent with business strategies, support continuous improvement, consider the human resource and environmental impact, and provide sufficient return on investment. Overall, the purpose of the policy is to reinforce the management philosophies.
Required - Provide the financial analysis for the planned Winnipeg expansion.