Cafe Monte Bianco

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The figures leave no doubt regarding the non-viability of the analysed manufacturing allocation proposal. Moreover, the fact that the company currently has only two customers for private brand sheds considerable uncertainty over the sustainability of the analysed allocation as the company would need to get more clients in a short period of time to distribute all production, and avoid increasing inventories.

However, the analysis reflects the potential profitability of allocating production to a mixture of both private brands and premium brand.

Proposed manufacturing allocation: a profitable combination

In order to determine which can be considered a good allocation strategy, a gross margin per volume analysis has been made. On exhibit 4, it can be seen that the best gross margin per volume corresponds to producing 2 million kilograms of coffee A, highlighted in yellow. However, our recommendation is to reduce the risk of a volatile premium coffee market, reducing the maximum exposure of the company to a 26.67% of the whole production. We presume that it is critical to keep making business on the premium sector for two main reasons:

- The company has been present on the premium market for all of its history, therefore abandoning this segment would go against the corporate mission and would superimpose the loss of a competitive advantage grounded upon the company’s experience and positioning on this market.

- The private label market is more stable and contracts secure covering fixed costs, but the margins are so low in comparison with the premium market that would make no sense to abandon a market share of it.

Therefore, the proposed allocation strategy consists on manufacturing 1.6 million kilograms of coffee AA and 4.4 million kilograms of private label coffee. Exhibit 5 depicts the projected cash flows for our proposed solution. It is important to highlight that the company will need only 3.1 billion on short-term finance during the first two quarters to compensate the impact on cash and accounts receivables derived from the implementation of the new strategy. From the third quarter and on, the company will require no further finances as cash incomes derived from direct premium coffee sales and accounts receivables payments will be enough to cover COGS and operative expenses.

Comparing the income statement of our proposal (exhibit 6) with the income statement of exclusively manufacturing private brands (exhibit 1), it can be seen that from a negative profit of 600 million derived from the company proposal, we have projected 14.5 billion profit to ours. Despite increasing all operating costs derived from the manufacturing and distribution of the premium brand, the gross margin of this segment is high enough to sustain its operative structure.

In conclusion, we are convinced that mixing both types of manufacturing will maximize annual profits while reducing the risk derived from the premium market volatility.

Exhibit 1

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Exhibit 2

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Exhibit 3

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Exhibit 4

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Exhibit 5

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Exhibit 6

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