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Service Process DesignService Process DesignBenihana of Tokyo

Cost Structure Basics

Business model: the restaurant as a process

Inventory & risk pooling

Maximizing ROI thru designing for short flow time

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Need to look at Cost Structure

Fixed costs are independent of unit volume produced.– Capital Equipment, Brick & Mortar, Energy, Administrative

Overhead

Variable costs are dependent on unit volume produced.– Materials

Warning: Sometimes the division between these two classes is fuzzy– Labor, Energy in refinery, Data can be per record or per database

Cost structure allows us to separate all operating costs into 2 types:

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Cost Structure vs. Revenue Graphs

0

5

10

15

20

25

0 5 10 15 20

unit sales (000s)

$M

illio

n

Dell PC:

FC = $1M;

VC/unit = $1K/unit

• Assume that the target Profit for Dell $100/unit at target sales of 10,000 units

Per-unit cost at target sales volume?

Target price?

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Cost Structure vs. Revenue Graphs

0

5

10

15

20

25

0 5 10 15 20

unit sales (000s)

$M

illio

n

Microsoft Visual C++:

FC = $10M;

VC/unit = $100/unit

• Assume that the target Profit for both Dell & MS is $100/unit at target sales of 10,000 units

Per-unit cost at target sales volume for VC++?

Target price for VC++?

(20,21)

(0,1)

DELL TCDELL Revenue (20,24)

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Breakeven Utilization: Dell & MicrosoftBreakeven Utilization: Dell & Microsoft

What is the breakeven volume for Dell?

What is it for Microsoft?

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Contribution Margin RatioCost structure determines the sensitivity of profit to sales uncertainty:

Downside Upside Swing(Sales=0) (Sales=20K)

Dell

MS

Defn: Contribution Margin Ratio is the percent marginal (economic) profit per unit. Or CMR = (Price – VC/unit)/Price

Dell’s CMR: MS’s CMR:

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Operating LeverageAnother, more inclusive, measure of the sensitivity of profit to sales uncertainty is the operating leverage:

Defn: Operating Leverage is the ratio of contribution margin to profit @ a planned volume; Or OL = (P-VC/unit) / (unit profit) @ a planned volume

Dell’s OL:

MS’s OL:

Warning: Operating leverage is sometimes defined differently!

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Closing the Loop with ROI If the time horizon is short enough and cost of capital low enough:

Project Duration in Years

where = Cost Margin Ratio, = price,

= quantity sold, FC = fixed cost of project,

= Salvage Value of investment

CMR Q P FC SVAnnualized ROI

FC SV

CMR P

Q

SV

s at end of project

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The Big Picture

To improve ROI through improved business models requires excellent process design tailored to the intended market.

Benihana’s business model was revolutionary. Much of this was due to its outstanding process design combined with a novel re-conceptualization of restaurant marketing.

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Benihana of Tokyo – SynopsisBenihana of Tokyo – Synopsis

What is the Benihana value proposition?

Who is their target market segment?

What are some critical success factors from a customer point of view?

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Cost AnalysisCost Analysis

What are the fixed costs?

What are the variable costs?

Will Benihana have a higher or lower operating leverage relative to conventional restaurants?

Benihana Average of

Labor Costs 10-12% 30-35% Op. Expenses

Food Costs 30-35% 38-48% CGS

Bevrg. Costs 20% 25-30% CGS

Rent 5-7% 5-9% Op. Expenses

Promotion 8-10% 0.75-2.0% Gross/Op. Exp.

Construction higher lower

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Cost FactorsCost Factors

1) Lower labor costs:

2) Lower food costs:

3) Lower beverage costs:

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Cost Factors (continued)Cost Factors (continued)

4) Lower rent:

5) Higher advertising and promotion:

6) Higher construction costs:

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An Aside on Inventory

Assume on any day Benihana would like have at most a 1% chance of running out of any particular ingredient. If demand is normally distributed then, from the cumulative normal distribution we will need the mean plus 2.32 standard deviations of demand for this ingredient to achieve a 99% “service level.”

Assume mean demand for beef is 100#/day, the standard deviation is 30#/day. How much beef should they have on hand in their inventory after receiving their daily order in the morning? How much filet?

Assume that they discontinue filet and that all of those customers order beef instead. Assuming the demands are independent, how large a beef inventory should they have on hand now?

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Dining in Under an HourDining in Under an Hour

(Note: FT = L/thruput. This is known as Little’s Law.)

What does the dining process look like?

1. Seating

2. Assemble drink order/Give menu

3. Present drinks/Take order

4. Chef setup

5. Food preparation

6. Eating

7. Dessert

8. Deliver check

9. Collect money

10. Return change/Get credit card signature

Dining time =

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Dining in Under an HourDining in Under an Hour

What makes a 45 minute dinner possible?

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Takeaway

When designing a process,

there is NO substitute for deep

process knowledge!!!

But there are some common

principles that often work to

maximize ROI…

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Benihana Business Model

Limited Menu Minimize Flowtime Minimize Waste Minimize Inventory Minimize Space Highly Motivated & Trained Workforce

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Service Process DesignService Process DesignBenihana of Tokyo

Cost Structure Basics

Business model: the restaurant as a process

Inventory & risk pooling

Maximizing ROI thru designing for short flow time