How do you operate a popular restaurant in NY?

I must confess that I am a fan of Balthazar. For those who have not heard the name, it is a french brasserie in the SoHo neighborhood of New York. I think their onion soup is sublime, fries are delicious, and profitroles are absolutely the best. However, this is an operations blog, so, here fittingly comes an article from the NY Times magazine, nicely describing why Balthazar is so good.

For starters, I knew that the restaurant business is extremely competitive and labor intensive, but this article is eye-opening in a few aspects. First off, the restaurant is literally a 24 hours a day operation:

For now, everything is quiet at Balthazar. The last guests from the night before left just a few hours ago, and the nighttime porters are still finishing their thorough scrub of the restaurant. But the delivery trucks are starting to arrive all over again, idling on Crosby.

Second, the sheer volume of the food they serve is impressive:

By the end of the day, the rotating staff of six cooks behind the line will have produced 111 steak frites, 90 French onion soups, 88 Balthazar bar steaks, 69 burgers, 68 omelets, 62 goat-cheese tarts, 56 chicken paillards, 51 chicken clubs, 48 seared salmon fillets, 46 heirloom-tomato salads, 45 sides of fries, 44 chicken-liver-and-foie-gras mousses, 43 duck confits, 40 grilled dorades, 39 steaks au poivre, 39 eggs Norwegian, 38 steak tartare appetizers (plus 16 entrees), 32 escargot, 32 moules frites, 29 grilled trout — the list, pulled from the P.O.S. terminals, goes on and on and on.

 

The day referred to in the article is a relatively slow one with 1247 people eating there (normally it is 1500). Mind you that the restaurant has only 180 seats, so the table turnover is essentials. Accounting for less than 100% utilization, each table has to be turned about 10 times, multiplying that by 90 minutes average dining time means that all tables are completely busy for 15 hours a day!

Third the margins – here we can get only an estimate, but it is impressive:

During the busy season, Balthazar spends $90,000 a week on food to feed some 10,000 guests.

So the cost of food is $9 per customer. Average check I reckon, is no less than $50. That does amount to a quite a markup, that allows decent pay for waiters, food runners and bus boys.

The key to all of this – is, not surprisingly, a careful process design: Continue reading

Advertisements

The new world approach to orange juice

The world of winemaking has two big philosophies: the old world wine (usually French), and the new world wine (California, South America, Australia, etc.). The former emphasizes the region of wine, while the latter highlights the grape variety. Aiming to achieve the consistent taste year after year, grapes of the new world wines are often sourced from different regions and blended appropriately. Basically, the same approach, but elevated to the next level, goes into production of orange juice by Coca Cola, as the recent Bloomberg Business Week article describes (hat tip to Jonathan Baird for sharing the link). The picture below pretty much explains it all.

comp_coke06__01__950popup

There are some interesting aspects of the OJ production process that I think Coca Cola has borrowed from the Toyota production system. First, they emphasize working together with growers, so that oranges are grown to the exact specifications. Coke even instructs farmers when to pick oranges. And after that, juice from different batches is blended to achieve the right level of sweetness and acidity. All of that is done so that the taste of the juice is as consistent as possible.

Interestingly, while the approach works for a large bottler, like Coca Cola, it might also present an opportunity for smaller Old World style juice producers. Think Chateau de Miami OJ style. Maybe we’ll even see Coca Cola and the likes adopt regional juice varieties in the future.

When should you not outsource?

Among the outcry about America losing its manufacturing jobs, two iconic companies, prominently featured in recent WSJ and NYT, prove that manufacturing is still possible in the good-ol’-America. One of them is Harley Davidson, the maker of big smooth-riding bikes, the other is Watermark, Brooklyn-based manufacturer of high end bath faucets. Both of them face stiff competition from Asia. Both of them could outsource, but did not. Why?

The answer is, of course, in understanding their strategies and core competencies. Harley is an American legend for more than 100 years. And so is Watermark, boasting its Brooklyn chic design. This is what the customers are willing to pay premium for! Ironically, many of the customers are in Asia. China with its growing highway network is getting a taste of riding, and liking it better on a Harley; the builders and buyers of luxury condos in Shanghai prefer to have unique faucets from Brooklyn. Going through the recession neither of the companies made a move to make their products cheaper. High price together with their “Made in USA” brand are driving demand for them.

It does not mean that companies did not have to trim some fat in their operation. Harley streamlined their production process, cutting workforce by 2000, but at the same time making sure that the remaining 1000 are better trained and flexible enough to perform multiple operations. Their inventory is down and production volume can be adjusted relative to demand. Some clever technology is in use at Watermark as well: 3D printing is used to speed up prototyping and cut lead times.

Now, could they have done the same overseas? Quality and quantity-wise – probably, yes. Would they be able to market their products so well? Probably, no. Interestingly, even Apple has “Designed in California” brand on their product. Had they have to drop it, by how much would they have to reduce their price?!
And since it’s Friday, I can’t help but notice another, rather peculiar, commonality in their day-to-day operations. Both companies routinely submerge their products in the water. That clearly better be done here in the States!

Jobs creation in the Apple ecosystem

Being the largest public company it is hard to avoid scrutiny of business decisions. The story has begun a couple of months ago with the series of articles about work conditions at the Apple contract manufacturers in China and the impact of Apple’s outsourcing on the US economy. So here comes another batch of numbers related to the Apple’s jobs creation, this time from Apple itself.

Continue reading

Labels and supply chains

Interesting information you can get from reading product labels. And I am not talking about food ingredients. What I am talking about is how long does it take from the moment a product is manufactured until it is sold? Or even, how long can a manufacturer afford this lead time to be? Lead times are tricky and rarely reported by firms. Longer lead times mean more working capital and pose challenges for forecasting, because firms have to decide how much to produce well in advance. In fact, in this paper I argue that retail sales forecasts (and inventory budgeting) for the next year are done 6 to 12 months before it starts. Anyways, because lead times are so tricky, I always welcome first hand data that documents them.

In this case the data comes from two product labels – one from Ikea and the other is CB2. Both related to furniture bought by me in the beginning of February. It turns out that Ikea manufactured that product (it was a chair) on May 26, 2011 in Mexico. Moreover the cover for that chair was made on the 16th week in 2011 (that is around Apr. 20). The chairs from CB2 were made in Taiwan by vendor Elegant Products and shipped from there on Aug. 4, 2011. Which gives almost 9 months lead time for Ikea and 6 months for CB2. Again these are the lead times after the product is manufactured. Actual decision about manufacturing them had to be done before that.

Give or take, it seems that Ikea’s lead times are about 50% more than CB2’s. And it makes sense, given that Ikea’s assortment rarely changes (aside from seasonal items) and CB2 tries to follow the contemporary trend.

 

How do you make money forecasting?

In the Operations management class that I teach this semester this week is dedicated to forecasting. While we mostly focus on methods, for example, time series and causal models, it is also important to think about business aspect of forecasting. That is – how do you make money doing it?

Suppose you are interested in predicting an election outcome.Traditionally, companies like Gallup or Rasmussen run surveys and polls, and this can be quite expensive. If you can substantially reduce costs, then you can lower price and compete successfully with bigger companies. How? Continue reading

How do you compete on cost?

Many companies make a point of competing on cost – making stuff cheaper than their competitors. One example would be an airline called Ryanair. Its CEO Michael O’Leary in this BBC interview has some interesting things to say about flying and his vision of what  air-travel should be.

He seems pretty determined to make flying cheaper, but also it seems that Ryanair’s model is actually to build revenues from the ground up. You start with a rock bottom price, say 1 pound for flying standing, but then you add fees for carry on, printed boarding passes, priority boarding, assigned seating, etc. In this respect another company, from a totally different industry, welding equipment manufacturer Lincoln Electric has a totally different approach. Continue reading

iPhone – jobs creator or loser?

Here is a fascinating video posted by New York Times about iPhone and how it helped to increasingly transform our economy from manufacturing to services. It is thought provoking and I do not entirely share author’s point of view. I agree, we lost manufacturing jobs and, indeed, service jobs create less supporting jobs around them. However, in my view, this particular example of iPhone is an exception from the general trend.

Consider all the app-development business that started, iTunes market, iCloud – I suspect that the jobs multiplier for iPhone is much bigger than 1.7! And why is the Apple worth more than Exxon? Because all of these generated businesses feed back into Apple. That’s I think is a genius of Steve Jobs and Apple’s strategy – to create an ecosystem that is closed loop but grows from within.

Will globalization help Ford manage inventory?

So here we go again – car inventory at Ford is growing, specifically, new Focuses and Fiestas. WSJ reported on this recently and so did my colleagues at Kellogg. The graph of inventory is indeed telling, so I’ll repost it here.

We know what such inventory stockpiles usually leads to – lower prices. This time, though, it can be different.

Continue reading