Scharffen Berger Case Study: Team 2 Analysis & Findings

Harry Kim, Andrew Bernier & Adrin Khachikian

Dr. Seung-Kuk Paik
SOM 686
September 16, 2015
Executive Summary:

Scharffen Berger’s past and future success hinges on the quality of its premium gourmet
chocolate and the perception of the brand among chocolate connoisseurs. It ensures a premium
product through rigorous taste-testing by its experienced staff of chocolatiers at each stage of
production (full outline in Appendix A).
Currently, the conche it uses to grind down the particles and aerate the chocolate takes 50
hours to complete a batch of 1400kg of semi-sweet chocolate (62%). The conche stage in their
production process is the bottleneck and causes each of the other processes to operate under
capacity. The current daily capacity is at 1,344kg of chocolate, equivalent to roughly 29 conches
per month and $10,440,000 in potential sales per year. 2004 sales were nearly $10MM
indicating they are selling nearly their maximum capacity.
By purchasing and introducing a ball mill into the production line, the time it takes to
grind down the particles will be significantly reduced so that they can grind & aerate 1,400kg of
chocolate in 15 hours as opposed to 50 hours. After increasing efficiency and maximizing output
of each of the other processes, the ball mill increases the design capacity of 3,360kg of chocolate
each day, a 150% increase in design capacity production.
The cost-benefit analysis is clear - spending $300,000 in equipment to increase capacity
to contribute $1.7MM in operating income in 2005 alone, is a smart investment. Current output
is at a 96% capacity utilization rate, or roughly 1,290kg per day. In order to increase production
by 150%, or roughly 3,225kg per day, introducing the ball mill alone will not reach the full
150% increase due to a learning curve and decreased capacity utilization rate.
After the ball mill is introduced, 2 more bottlenecks emerge: the melangeur and the
tempering/molding machines. Our recommendation is to purchase an additional melangeur and
vet potential high-volume co-packers for future use. Once sales projections reach a 142%
increase, we recommend using these co-packers with strict oversight and taste testing to ensure
quality control.
Question 1: Interaction between product quality and process quality

Operators measured quality control of the product by testing it throughout the process
stages through examining the look and texture, breaking it, and tasting it. They examined and
tasted the raw and fermented beans at the first stage of the test as the raw inputs before the first
process of washing. Subsequently, they tested the output product after each process. This tested
both the quality of the process but also the effect the raw materials had on that stage of the
process. It was through rigorous testing that they found the right recipe of beans for each of their
products. The quality of each process and its effect on the raw beans followed the progression
on Appendix A.
Currently, management is not using the ball mill in their process. They are gauging its
effects on the quality of their product and the benefits of use in their operations. When
management first tested the ball mill, the low quality of the product caused them to question the
process of the ball mill. They found that the inferior raw materials were mixed into their batch.
They tested three times afterwards using their own unadulterated batches of beans and found the
product from the output to be excellent. Adding a ball mill can possibly enhance the quality of
the product by reducing processing of the beans. The ball mill can help preserve bean quality by
decreasing the processing done in the conche, which can decrease flavor by over-processing the
beans.
Question 2: Current daily processes

The following diagram illustrates the current daily flow of processing 62% chocolate.
The current bottleneck occurs during the conche process, which is operating 24 hours per day at
full capacity. An increase in conche processing will allow for an increase in all other processes,
which are operating below maximum capacity.

BEAN CLEANER ROASTER WINNOWER MELANGUER

Input: 1400kg beans Input: 1250 kg beans Input: 1250 kg beans Input: 920 kg nibs
Output: 1344 kg beans Output: 1250 kg beans Output: 925kg nibs Output: 920 kg nibs
Waste: 56 kg Input capacity: 4,000 kg Waste: 325kg Input capacity: 2208
Input capacity: 19,200 kg beans Input capacity: 10,800kg kg nibs
beans Output capacity: 4,000 beans Output capacity: 2208
Output capacity: 18,432 kg beans Output capacity: kg nibs
kg beans 7,992kg nibs
 CONCHE TEMPERING & MOLDING PACKAGING
Input: 816kg nibs Input: 1,344kg chocolate Input: 1,344kg chocolate
528kg Other ingredients Output: 1,344kg chocolate Output: N/A- 1,344kg chocolate +
Output: 1,344kg chocolate Input capacity: 3,360 kg chocolate packaging
Input capacity: 816kg nibs Output capacity: 3,360 kg Input capacity: N/A
528kg other ingredients chocolate Output capacity: N/A
Output capacity: 1,344kg
chocolate
Currently, maximum capacity produces 29 conches per month with actual output ranged
between 26 and 29. Assuming the actual output to average between the high and low of 26 and
29 will produce 27.5. From here, we calculate the estimated capacity utilization rate of 27.5/29,
which is approximately 95%. The maximum capacity that can be produced is approximately 348
conches per year. At $30,000 sales revenue per conche, the maximum revenue Scharffen Berger
can produce from sales at maximum capacity is $10,440,000. With current year’s sales at
$10,000,000 we can assume that sales are at full capacity with this year’s actual capacity
utilization rate at 96%.

Question 3: Considerations for increasing production

The ball mill will relieve the current bottleneck during the conche process by increasing
its production capacity. This in turn will increase overall production through all other processes.
As demand for chocolate increases, Scharffen Berger can profit by meeting the increase in
demand. However, we must assess whether the ball mill cost of $300,000 justifies the
expenditure from increase in production and thus sales. An examination of the process flow with
the addition of only the ball mill will assess the maximum potential increase in production.

BEAN CLEANER ROASTER WINNOWER MELANGUER

Input: 3,200kg beans Input: 3,000 kg beans Input: 3,000 kg beans Input: 2,208 kg nibs
 Output: 3,072 kg beans Output: 3,000 kg beans Output: 2,220kg nibs Output: 2,208 kg nibs
Waste: 128kg Input capacity: 4,000 kg Waste: 780kg Input capacity: 2,208 kg
Input capacity: 19,200 beans Input capacity: 10,800kg nibs
kg beans Output capacity: 4,000 beans Output capacity: 2,208 kg
Output capacity: 18,432 kg beans Output capacity: 7,992kg nibs
kg beans nibs

CONCHE + BALL MILL TEMPERING & MOLDING PACKAGING

Input: 2,208 kg nibs
1429 kg Other ingredients
Output: 3,637 kg chocolate
Input capacity: 2,720kg nibs
1,760kg other ingredients
Output capacity: 4,480kg
chocolate
Input: 3,360kg chocolate
Output: 3,360kg chocolate
Input capacity: 3,360 kg chocolate
Output capacity: 3,360 kg
chocolate
Input: 3,360kg chocolate
Output: N/A
Input capacity: N/A
Output capacity: N/A

The addition of the ball mill increases the design capacity from 1,344kg of chocolate to
3,360kg of chocolate, a 150% increase. However, we must consider the change in the capacity
utilization rate. We must also address additional labor consideration that results from increased
production. In order to ensure quality control while evaluating outsourcing at higher quantities,
the recommendation is keep the 35% in-house / 65% outsourced packaging ratio in place in the
short-term. Although the ball mill provides the capacity to achieve an increase in output, an
accompanying increase in labor costs will be necessary to run the other machines in the process
chain (see Appendix B for full labor hours, cost breakout & projections).
A few assumptions will be made to assess our cost/benefit analysis. As a growing
business in a growing segment of the industry with increasing demand, experts project an
increase of sales over 50% for the next year, 2005. We will assume a 50% projected increase for
the first year. To project the years from 2006 to 2009, we will use regression based on sales from
1998 to 2004 and an expert’s projection for 2005 (See Appendix C). We propose the regression
model as our choice of forecast since we project a growth trend for the next five years (See
Appendix D). According to the regression model, we will have a 109% increase in sales by 2009.
With current contribution on sales at 40%, the increase in operating income would be
$2,000,000 if we met projected sales demand in 2005 at that rate. Using that rate as a base and
increasing the costs by adding the ball mill and labor of increased production, we will make the
following conservative estimate for operating income before tax with the ball mill. The purchase
of the ball mill costs $300,000, 6.67% of the $5MM projected increase in income in 2005. The
ball mill and the addition of labor, which will increase by projected $511,000, increases cost by
$811,000. This leaves operating income before tax to increase by $1,189,000 in the first year
alone. This justifies the purchase of the ball mill. As the trend indicates growth to continue for
the next five years, the addition of the ball mill will continue to allow Scharffen Berger’s
production capacity to meet the projected 109% increase in sales by 2009 and continue
increasing revenues further.
If the capacity utilization rate of 96% were held constant with the addition of the ball
mill, we can assume a 150% increase in production. However, there are three factors that will
decrease our capacity utilization rate with the addition of the ball mill. The first is the ball mill
itself will decrease capacity utilization because adding a process will increase complexity, the
learning curve of using a new machine, and also increase repair and maintenance. The second is
that there are now two bottlenecks in the operation, the melangeur and the tempering/molding
machines which will have a greater negative effect on production in repair and maintenance. The
third is time since there will be four machines being run 24 hours per day as another factor that
negatively affects production in repair and maintenance as there is more loss in downtime with
the machines. Based on these three factors, we will assume a 3% loss in capacity utilization rate
with the addition of the ball mill. The new capacity utilization rate will be 93%. This means that
the addition of the ball mill will not achieve the 150% increase in production by itself, the
capacity of increase in production will be 142%. We will need to address the next two
bottlenecks in the next phase of the process, the melangeur and the tempering/molding machines,
in order to reach the 150% goal.
In order to reach and surpass a 150% increase in production, we will address the next two
bottlenecks, the melangeur and the tempering and molding process. The first bottleneck, the
melangeur limits input into the conche + ball mill at 2208kg of nibs per day. The second
bottleneck, the tempering and molding process, limits the output of the conche + ball mill to
3,637kg of chocolate per day. So, if Scharffen Berger plans to meet an increase in demand of
150% or more, Scharffen Berger will need to remedy the problem by adding a second Melanguer
and researching effective ways to outsource tempering & molding, since buying a larger, faster
molding machine would be prohibitively expensive.

Question 4: Considerations
The expansion step that causes the greatest concern is outsourcing additional tempering
and molding to accommodate a 150% increase in production. Harris claims purchasing an
additional molding machine will be ‘prohibitively expensive’ so in the immediate future the only
other option is to outsource it. Outsourcing any part of the production process could be
devastating to the brand’s image if quality control is not in place. The recommendation to ensure
a high-quality product with co-packers is to carefully vet and test the tempering and molding
machines and processes of the potential co-packers in the anticipated high volumes. After
selecting approved co-packers who passed the test, Scharffen Berger should keep an experienced
Scharffen Berger chocolate maker on the production line at the co-packer’s facility while the
Scharffen Berger chocolates are being tempered and molded to ensure quality by taste testing
before product goes out the door.

Question 5: Evaluating use of co-packers in tempering & molding

As stated by Harris, it is cost-prohibitive to complete all molding and packaging in-house
given the current capital and technology available at Scharffen Berger. The capacity utilization
limits on the Scharffen Berger tempering & molding machines will be reached when meeting an
increase of greater than 142% in sales past our 2009 projection. Therefore, the use of co-packers
for the tempering and molding processes must be considered. Unfortunately, overall quality
control issues come up anytime a co-packer is used as they may not know the exact science and
art behind tempering chocolate to Scharffen Berger’s standards. Our recommendation to solve
these problems is two-fold:
● Short Term Plan: Purchase ball mill and make previously recommended shifts in
production to increase output to meet projected 2005 sales. Immediately begin to vet and
test quality of potential high-volume co-packers so Scharffen Berger can outsource
tempering and molding needs the moment they arise. Purchase new melangeur to
increase capacity utilization rate.
● Mid-Term Goal: Once sales are projected to reach an increase of greater than 142%,
move forward with approved and tested co-packers to temper and mold excess output.
 Ensure an experienced Scharffen Berger chocolate maker is onsite at the co-packer
during tempering process to taste-test quality before the product is shipped to retailers.
Run cost-benefit analysis on purchasing a new molding machine against future sales
projections. A complete vertical integration of 100% of Scharffen Berger up to the
tempering and molding processes is the long-term goal when sales and free capital
allows.
Conclusion:

In conclusion, Scharffen Berger’s core competency and product differentiation is the

ability to provide a gourmet chocolate from bean to bar. One of the ways they maintain quality
is by using experienced chocolate taste testers at each stage throughout their production process.
Currently, the bottleneck in their production line is at the conche stage. After testing the
ball mill’s output and being satisfied with the result, a cost-benefit analysis was run on the
$300,000 expenditure. If expert’s sales forecasts are correct, the ball mill will pay for itself and
provide an incremental $1.7MM in operating income the first year it is in use. We recommend
purchasing the ball mill immediately. After introducing the ball mill into the factory line, the
design capacity is increased 150%. However, due to a learning curve and maintenance time of
several machines, we estimate the capacity utilization rate to drop to 93%, providing an actual
production increase of up to 142%.
Looking ahead, after the ball mill is purchased, two more bottlenecks will emerge in the
Scharffen Berger factory - at the melangeur and at the tempering and molding machines. We
recommend purchasing the additional melangeur right away to nip this problem in the bud. To
solve the tempering and molding bottleneck, the recommendation is to source, vet and test
potential high-volume co-packers and keep the co-packers who pass the test on standby. Once
sales projections increase above 142%, the recommendation is to start using these approved co-
packers, with the caveat that a Scharffen Berger employee remain onsite at the co-packer’s
facility during the tempering process to taste test the product and ensure quality control before it
is shipped out to retailers.
 APPENDIX A
PRODUCT/PROCESS RELATIONSHIP

Product Process
Raw and fermented beans
Cleaner
Fermented beans
Roaster
Roasted beans
Winnower
Nibs
Melangeur
Chocolate paste
Conche + Ball mill (tested-not current)
Processed chocolate I (not-current)
Conche
Processed chocolate II
Tempering and molding
Processed chocolate III
Packaging
Packaged chocolate
 APPENDIX B
LABOR INCREASE & COST PROJECTIONS

Assuming experienced gourmet chocolate manufacturing labor is roughly $35/hr, an increase of

approximately $511,000 per year in labor will need to be accounted for by increasing capacity by
150%.
 APPENDIX C
SUMMARY OUTPUT OF REGRESSION MODEL
 APPENDIX D
FIVE YEARS SALES PROJECTION

Year Year # Actual Sales ($ millions) Sales Projection ($ millions)

1998 1 0.6 -2.6

1999 2 1.1 -0.5

2000 3 2.3 1.7

2001 4 3.1 3.8

2002 5 4.2 5.9

2003 6 5.8 8.1

2004 7 10.0 10.2

2005 8 15.0 (expert's projection)

2006 9 14.5

2007 10 16.6

2008 11 18.7

2009 12 20.9