Case Study on Franz Berger Case Study

Excerpt from Case Study :

Franz Berger is quality assurance manager and master brewer at Brewing Partner Ltd.(BPL), a Beijing- based management services organization. BPL had been established by the China Investment Group (CIG) with the precise mission of helping the two local breweries, Dragon and Golden Spring, "realize their aggressive return on invested capital targets." One of the main tools in achieving these goals was through an improved product that could begin to rival some of the Western beers that had appeared on the Chinese market (Fosters, Budweiser, etc.). These beers, even if commercialized at a much higher price than the local beers, had become serious competitors through their higher quality and Western fame.

In his attempt to achieve an increased quality of the product, the quality assurance manager, Franz Berger, implemented several measures aimed at improving monitoring and control of the production process. Among these, he introduced several testing programs, as well as sampling methods that were to keep track of everything from alcohol and pH levels to microbiological control and taste tests. In spite of obvious successes and accomplishments, Berger insisted that the improvements were still minimal after two and a half years on the job. This was mainly because much of the improvements had been counter balanced by several problems that had appeared related to the malt house or to the specific Chinese way of management (I am referring here to the fact that many of the production facilities were overcrowded, due to strict governmental policies regarding firing people, etc.). For Franz Berger, however, the main concern related to quality and quality related to the production facilities, hence, to the malt house.

Because the malts represented the catalysts of transforming starch to sugar, the malt production was a key stage in beer production. However, a brewery generally had to options as to malt production: it could either make it itself within its own facilities or it could buy it from an outside producer. Even if the tendencies of the late 20th century had been towards a certain decentralization of business (not only regarding beer production and the beer market), Dragon had decided to produce the malts internally and had built the malt house in 1988 with mostly local equipment.

The malt house that Dragon had built consisted of two separate buildings, each with a specific purpose. The first building was used in the cleaning process, for cleaning grain entering the malt house and the processed malts. The pother building was used for the "steeping, germination and kiln drying operations."

However, since its beginnings in 1988, several problems had appeared and these are some of the questions and problems that Franz Berger has to answer. The first problem related to the dust collectors systems. There were 12 such systems in the malt house and their purpose was to collect the dust from the malt house into special towers where the dust was bagged. The problem with these systems (as well as the problem with many of the malt house components, as we shall see) was that the ventilation fans had not been balanced over for a long period of time. Thus, they vibrated excessively and it could happen that the dust was actually blown back into the malt house rather than to the cyclone towers.

Another problem regarded the gear boxes and electrical motors attached to the collection systems. Because of a large amount of sludge that had gathered in the gear boxes, these had become largely inefficient. As for the electrical motors, because dust had blocked their ventilation outlets, they were heating up very easily. Additionally and even more worryingly, there were many loose and unprotected wires in the malt house and this could have been extremely dangerous, because the dusty and dry atmosphere was a regular place for starting a fire.

A third problem that Franz Berger faced was "the unacceptable state of the cleaning room." Funnily enough, the room itself where the cleaning process of the produced malts was carried out was completely dirty and badly maintained. Dust had created the proper premises for the apparition of rodents and insects, not to mention a flammable condition. Birds and mice seemed to have made the cleaning house their second home and it was obvious that these were not proper working condition for any production facility, not to mention a cleaning house.

Another important issue that Franz Berger was facing related to the security of the workers. Because of the improper conditions that I have described above, the danger of fire was always present. Additionally, the combination of dust and static electricity could be a potential cause for an explosion, not to mention the fact that the workers themselves had no notion of work protection and safety rules, seeing that cigarettes butts could be found within the malt house.

From my point-of-view, there is also a problem related to efficiency. The calculated optimal number of annual operating days was, in Berger's opinion, 330 days, while the other 35 days could be allocated to maintenance and holidays. However, the current utilization was of only 100 days, less than one third of the projected utilization.

As it is, Berger had several solutions in plan, to which I could add a few of my own. The first solution that Berger could use was to refurbish the malt house. This would mean repairing much of the used material such as gear boxes, electric motors and ventilation fans. This operation would mean a whole month during which the cleaning house would have to be shut down and thoroughly sanitized and an additional month of work on the equipment, during which one of the cleaning systems could remain available. This solution meant a fixed cost of 2.5 million Rmb and an additional variable cost of 425,000 Rmb per year for spare parts purchases. The advantage of such a solution was given by the fact that the cleaning house could subsequently operate for another six years before a total change of equipment was needed. However, we can't help to consider this a rather 'patching' solution, because, in fact, the problem is not really attended to, but patched up for another couple of years.

The second solution that Berger could use meant complete re-fitting with equipment. AS in the first scenario, the cleaning and sanitizing process would still have to take place, which would of course mean shutting all operational activity within the cleaning house for a whole month. The replacement of equipment would mean that the cleaning house would still work at half its potential over the next eight to twelve weeks. The cost of such a re-fitting action was of 7.5 to 10 million Rmb, to which an additional annual variable costs of 100,000 Rmb would have to be added for spare parts. Opposite to the previous solution, this solution's main advantage was certainly given by the fact that the new equipment would mean at least 20 years of life span and all problems would be swept aside for this period of time (of course, not the usual maintaining and cleaning processes).

A third solution that Franz Berger could use was leasing the malt house to a foreign maltster. The maltster would then carry full responsibility for cleaning, sanitizing, refurbishing and upgrading the equipment. Additionally, it would have to provide a full supply of malt for Dragon, while it was free to commercialize the remainder. However, as it was, this alternative solution posed several problems for Berger, related basically to asset evaluation and to the fact that many of Dragon's cost evaluations were unreliable. Leasing the malt house for a certain price, yes, easy to say, but what could that price be? Of course, Berger had similar prices from recent transactions that he could use and knowledge of the fact that building a completely new malt hosue was evaluating on the Chinese market between $7 and $8 million. It was, nevertheless, a hard evaluation to be done.

An additional solution that can be presented to Franz Berger came to my attention when reading about the options that a beer producer had regarding the malts: it could either produce it internally or it could purchase it from an outside vendor. Given the present day condition of the malt house, the costs related to refurbishing or refitting the place, as well as the general business trend towards decentralization, would it be wrong to assume that a possible viable solution would be to sell the malt house and proceed in the following years to buy better malts, produced by foreign producers in much better conditions? It would seem to me that for the first couple of years, the purchase related costs could even be supplied from the price obtained for the malt house. Unfortunately, not enough data is available for us so that we can further investigate this solution, but, in many ways, it is similar to the leasing solution, with the exception that property rights are fully transferred to the buyer. In this sense, it is most probable that…

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