Caroline Hansen

Colton Herinckx
Peggy Spangler
Xuetong Yao

PS 1 Solution Group 5:

Problem Description: The espresso shop in Samaritan Health has been operating at a loss for
the past few years. Clinical Dietitian Manager Jessica Davis is interested in making changes so
that the shop will break even (generating a profit is not the primary goal as most customers are
employees).

Parts of the Solution Ideas Pros Cons

Problem

Labor cost is too high Change store hours Labor costs will A small amount of
so its only open decrease sales will be lost
when most sales Employees will be Employees may not
occur less bored spend all 8 hours in
the same location

Opening employee Allot half an hour to Labor costs will Employees may feel
doesnt need a full open (rather than a decrease rushed when opening
hour full hour) Employees wont be
paid to do nothing

2.5 workers per day Reduce to 2.25 (or Labor costs will With fewer
is excessive even just 2) workers decrease employees, those
per day Likely less hassle working may need to
overall work harder

Choose a solution and generate a small written plan for the solution, with details about how it
might work.
a. List and describe all the resource and logistical parts to your solution

The first step of our plan is to change the espresso store hours to reduce labor costs. While this
will reduce sales, the combination of the reduction in labor cost and the addition of
advertisements should help meet the breakeven. Our proposed hours would be 6:30 AM to 2:00
PM. If food is left over that wouldnt keep until the next day, it could be bussed back to the cafe
and sold there to reduce food wastes. Since the hours would be changing, the hours of
employees would also change. Under our plan, X1 would begin work at 6:00 AM and end at
2:30 PM. X2 would begin at 6:30 AM and end at 3:00 PM. If necessary, X3 would be reassigned
to work for the hours needed to prepare foods (should be considered 0.25 FTE rather than 0.5
FTE). X1 and X2 were scheduled in a way so that using X3 to cover breaks becomes
unnecessary. Ideally, we would like to move away from using X3 at all and instead use X1 and
X2 to pick up the work X3 covered.
The second step is to increase the number of transactions per day. While this will be difficult
since hours are being cut, we hope to compensate for lost sales by putting up signs in the
hospital to alert guests to the existence of the espresso shop. Our estimations show that an
additional 21 transactions per day would increase sales enough to lead us to breaking even
(see calculations and reasoning below).

b. Describe how aspects of the organization would be impacted by the plan and how
they may need to be addressed.

While this would decrease the espresso shops sales, the decrease in labor cost should move it
closer to a break-even point (see calculations below). In addition, the advertisements should
draw more customers, leading to an increase in sales. Likely the largest impact this plan will
have is on the cafe; looking over the responsibilities of X3 as it currently stands, it seems as
though this employee splits time between the espresso shop and the cafeteria. With proper
planning, X3 should be able to spend 25% of his/her time (at most) working for the espresso
shop and 75% of his/her time working for the cafeteria. This will decrease the labor cost of the
espresso shop and increase labor cost of the cafeteria (as they will be gaining 25%-50% of a
worker per day). As employees adjust, we would like to remove X3 altogether and reassign
him/her to the cafeteria. While this is less than ideal, the cafeteria should be operating at a profit
and be able to absorb this small cost.

The other main cost of this plan would be the fee upfront to create signs or ads for the espresso
shop. These expenses should be fairly minimal and were not included in the calculations below.

c. Generate and include the process to implement and evaluate the plan.

The implementation of the plan should simply be to change the hours of the espresso shop and
reassign X3 as a 25/75 worker rather than a 50/50 worker (with the end goal of moving away
from using a 3rd worker altogether). As far as evaluation goes, the cafe could be evaluated on a
monthly and/or yearly basis; since the goal isnt to generate a profit, the espresso shop can be
considered successful if it isnt operating at a (notable) loss.

Additionally, signs and/or ads should be created to alert visitors to the location of the espresso
shop.

d. Do some analysis on the problem, as discussed in class (Break Even)

Break Even Analysis (Previous Year)

Initial Numbers
Sales 2016 = $136,156.36
Food cost at 40%FC = $54,462.54
Labor cost 2016 = $100,474.18 (This is for 2.5 FTE and includes 35% Benefits)
 Break Even Analysis
Break even = Fixed Cost/ 1 - (variable cost/selling price)
$136,156.36 = Desired labor cost / 1 - ($54,462.54 food cost/$136,156.36 sales)
Desired labor cost = $81,693.82

Wage Breakdown
$100,474.18 Labor Cost/ 52 weeks = $1932.20/ week for labor
$1932.20/2.5 FTE (or 100 hours) = $19.32/hr average labor including benefits

Estimating the Needed Reduction in Labor Cost

$100,474.18 (current labor cost) - $ 81,693.82 (desired) = $18,780.36
$18,780.36 / $19.32 per hour = 972 hours/year excess labor
972 hr / 52 wk = 18.7 hour reduction needed per week
18.7 / 5 = 3.74 hours less per day of labor to break even (assuming sales did not
change)

Break Even Analysis (Projected Year w/ Changes Implemented)

Projected Sales Loss (Due to Hours Changing)
~500 lost sales per month (estimated from Transactions.xlsx file)
500 x 12 months/year = 6000 sales/year lost
Average transaction = $4.15
6000 x $4.15 = $24,900 lost from total sales/year

Projected Sales Gained (Due to Advertisement of Espresso Shop)

Estimated that an additional 21 transactions/day will make up for loss of sales
21 transactions/day x 5 days/week = 105 transactions/week
105 transactions/week x 52 weeks/year = 5460 transactions/year
Average transaction = $4.15
5460 transactions/year x $4.15 = $22,659

Projected Labor Cost Reduction (Due to Hours Changing)

2.0 FTEs x 8 hours/day = 16 hours/day in total labor
16 hours/day x 5 days/week = 80 hours/week
80 hours/week x 52 weeks/year = 4160 hours/year
4160 hours/year * $19.32/hour = $80,371.20 labor cost/year

Adjusted Values
Sales = $136,156.36 - $24,900 + $22,659 = $133,915.36
Food cost at 40%FC = $53,566.14
Labor cost = $80,371.20

Projected Break Even Analysis

Breakeven = Fixed Cost/ 1 - (variable cost/selling price)
$133,952 = $80,371.20 / 1 - ($53,566.14 / $133,915.36)

Shortcomings
$133,952 (sales needed to break even) - $133,915.36 (projected total sales) =
$36.64
 While we didnt manage to break even, we reduced the espresso shop to operating at a
loss of under $40/year. This could be easily corrected by barely adjusting the price of a
popular item on the menu, reducing food cost percentage of that item and allowing the
shop to break even. Although, we do not have information on percentage of sales from
various items being sold, the average ticket price of $2.92 for 2014, $3.24 for 2015, and
$4.15 for 2016, seem to indicate that customers are buying more of lower priced items
such as coffee rather than higher priced items such as BBQ chicken sandwich. If further
labor cost cuts are needed, an analysis of sales of various items may reveal items that
could be dropped from the menu which would decrease food preparation labor costs.

The table below shows proposed labor hour shifts with 2.0 FTE. As can be seen, Break
number 2 would fall during a busy time and lead to the espresso bar operating with 1
employee for 30 minutes each day. This could be a potential problem leading to
increased wait times which may hinder the movement towards reduction of labor to
2.0FTE. Although our plan works out on paper, we would need to actually implement our
proposed changes and adjust accordingly to move toward a break even point.

Proposed Labor Hour Shifts

6 7 8 9 10 11 12 1 3
AM 6:30 AM 7:30 AM 8:30 AM 9:30 AM 10:30 AM 11:30 PM 12:30 PM 1:30 2 PM 2:30 PM

Brk Brk
#1 Lunch #2
X1 15 - 30 15
6am-2pm x x x min x x x x min x x min x x x x x
Brk Brk
X2 #1 Lunch #2
6:30am-3 15 - 30 15
pm x x x x min x x x min x x x x min x x x x
Red=busy times x=working in espresso/deli counter
Break #2 falls within the busy timeframe.