Service Process Design

Benihana 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

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

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

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Cost Structure vs. Revenue Graphs

25

Dell PC: FC = $1M;

$Million
20

VC/unit = $1K/unit
Assume that the target Profit for Dell $100/unit at target sales of 10,000 units

15

10

0 0 5 10 15 20

unit sales (000s)

Per-unit cost at target sales volume?

Target price?
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Cost Structure vs. Revenue Graphs

25

(20,24) (20,21)

Microsoft Visual C++: FC = $10M;

$Million
20

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

15

10

(0,1) 0
0 5 10 15 20

unit sales (000s)

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

Target price for VC++?

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Breakeven Utilization: Dell & Microsoft

What is the breakeven volume for Dell?

What is it for Microsoft?

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Contribution Margin Ratio

Cost structure determines the sensitivity of profit to sales uncertainty:
Downside (Sales=0) Dell MS Defn: Contribution Margin Ratio is the percent marginal (economic) profit per unit. Or CMR = (Price VC/unit)/Price Dells CMR: MSs CMR: Upside (Sales=20K) Swing

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Operating Leverage
Another, 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 Dells OL:

MSs 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:

CMR Q P FC SV Annualized ROI FC SV Project Duration in Years where CMR = Cost Margin Ratio, P = price, Q = quantity sold, FC = fixed cost of project, SV = Salvage Value of investments 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. Benihanas 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 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 Analysis
Benihana
Labor Costs Food Costs Bevrg. Costs Rent Promotion Construction 10-12% 30-35% 20% 5-7% 8-10% higher

Average
30-35% 38-48% 25-30% 5-9% 0.75-2.0% lower

of
Op. Expenses CGS CGS Op. Expenses Gross/Op. Exp.

What are the fixed costs? What are the variable costs? Will Benihana have a higher or lower operating leverage relative to conventional restaurants?
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Cost Factors
1) Lower labor costs:

2) Lower food costs:

3) Lower beverage costs:

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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 Hour

(Note: FT = L/thruput. This is known as Littles 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 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 Design

Benihana of Tokyo

Cost Structure Basics Business model: the restaurant as a process Inventory & risk pooling Maximizing ROI thru designing for short flow time
ANDERSON Core Ops