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'Economy of Scale', can you apply it to your cake business?

post #1 of 25
Thread Starter 
I found this article today and I think it hits home.

http://www.nytimes.com/2012/09/09/magazine/whats-a-4000-suit-worth.html?_r=1&pagewanted=all


Also, here is a very brief explanation of Economies of Scale:

http://www.investopedia.com/video/play/what-is-economies-of-scale#axzz25nmYqCWq
post #2 of 25
interesting read!
Failure is not an option!!
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Failure is not an option!!
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post #3 of 25
Super interesting, thanks for sharing.
post #4 of 25
Brillante post AZ - even for us over here... the artical was so well written

I am sure we all know of a few *Frews*.... in the caking world.

Bluehue
post #5 of 25
I read that same article yesterday, it was very interesting. There may be something of a parallel between bespoke hand-tailoring and the super-premium segment of cake decorating (where custom cakes are thousands of dollars instead of hundreds and specific skillsets like architecture, engineering, and art are needed), but IMO it is easier for the rest of the cake decorating market to structure their processes for maximum efficiency.

Not being able to leverage economies of scale is not necessarily a bad thing...the problem with bespoke suits is that while supply is very low, demand is also very low, which means there is no upward pressure on prices. The product itself is also durable and lends itself to outsourcing fairly easily, unlike cakes.

That said, if you are interested in expanding your business over the long term (or your state requires a commercial kitchen) this is a critical concept that needs to be baked into your business plan. Without processes designed to take advantage of economies of scale it will be next to impossible to make a profit while meeting payroll and paying for your commercial kitchen.

A comparison could be made to new cake decorators severely undercutting the market and offering an alternative that's "good enough" for the majority of customers (similar to Greenfield's made-to-measure suits or even suits from China, although their lower prices are driven by true cost advantages instead of mispricing). If market prices are too low, no amount of efficiency will enable your business to flourish and expand unless you change your target market.
post #6 of 25
I didn't read the article, but economies of scale are an ongoing part of my business model.

For example, when I went into business two years ago, I paid more for just about everything. My prices and my profits were based on those numbers. As I have found alternatives over time, My profit margin has increased with no real changes in the way I do business.

When I did the business plan for my retail store, I based costs and profit on my current expenses and knew that I was happy with the numbers as they were. Today I met with a restaurant wholesaler and he gave me my new wholesale proces on the same premium ingredients that I now use with a savings of about 35%. That savings is pure profit, as it directly relates to the cost of my ingredients.

The idea of economies of scale is to cut costs, not through cheaper products, but through a lower cost on the same quality.

Another example is my rent on the retail space. I could just have a bakery, as this alone will justify the rent, but I wasn't satisfied with that. Out of the same space, three separate businesses will be run, each with the ability to justify all expenses and rent alone. So by upping the output of the square footage, two of the three businesses are essentially pure profit less direct expenses of the product.

Another example would be cost structure on high volume orders. My corporate accounts send cupcakes to many clients in one order. I give a small discount, but because of the high volume of only one product, my overall profit is up because the labor expense is down.

Economies of scale is a path to pure profit because it involves you doing the exact same thing at a lower cost.
post #7 of 25
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post #10 of 25
Great post AZCouture.

I'm glad you brought up the topic as I feel it ties in to an issue I've been thinking about. I figure I'll go ahead and share it here.

For an order I have next week I'll be making 6 dozen cupcakes in 6 different flavors with accompanying SMBCs i.e. one dozen of each flavor. I couldn't help thinking: It takes me just as much time/utilities/activities (clean up e.t.c) to make one batch of cupcakes (24) as it does a half batch (12), so for each dozen, I'm using say 100% input to create only 50% of the possible output. It keeps nagging at me that I need to find a way to be more efficient.
post #11 of 25
Quote:
Originally Posted by vgcea

For an order I have next week I'll be making 6 dozen cupcakes in 6 different flavors with accompanying SMBCs i.e. one dozen of each flavor. I couldn't help thinking: It takes me just as much time/utilities/activities (clean up e.t.c) to make one batch of cupcakes (24) as it does a half batch (12), so for each dozen, I'm using say 100% input to create only 50% of the possible output. It keeps nagging at me that I need to find a way to be more efficient.


One possible solution would be to make an entire batch for each and freeze half (either the batter or the finished cupcakes).

This might require more work, but if you structure your recipes so only incremental changes are needed to change flavors (i.e. adding extracts), you could make an entire batch of your base recipe, then separate half out before baking and make the necessary additions.
post #12 of 25
Quote:
Originally Posted by vgcea

For an order I have next week I'll be making 6 dozen cupcakes in 6 different flavors with accompanying SMBCs i.e. one dozen of each flavor. I couldn't help thinking: It takes me just as much time/utilities/activities (clean up e.t.c) to make one batch of cupcakes (24) as it does a half batch (12), so for each dozen, I'm using say 100% input to create only 50% of the possible output. It keeps nagging at me that I need to find a way to be more efficient.


One possible solution would be to make an entire batch for each and freeze half (either the batter or the finished cupcakes).

This might require more work, but if you structure your recipes so only incremental changes are needed to change flavors (i.e. adding extracts), you could make an entire batch of your base recipe, then separate half out before baking and make the necessary additions.
post #13 of 25
Quote:
Originally Posted by jason_kraft

One possible solution would be to make an entire batch for each and freeze half (either the batter or the finished cupcakes).

This might require more work, but if you structure your recipes so only incremental changes are needed to change flavors (i.e. adding extracts), you could make an entire batch of your base recipe, then separate half out before baking and make the necessary additions.



That is a great idea Jason, thank you. Three of the flavors have a similar base, so I'll probably be able to knock those out together.
post #14 of 25
Thread Starter 
Quote:
Originally Posted by vgcea

I couldn't help thinking: It takes me just as much time/utilities/activities (clean up e.t.c) to make one batch of cupcakes (24) as it does a half batch (12), so for each dozen, I'm using say 100% input to create only 50% of the possible output. It keeps nagging at me that I need to find a way to be more efficient.



That is a good point. I think about things like that a lot too. It is just as much work for a two tier to serve 12, as it is for 24, and even 50 for that matter. Not a big difference in ingredient cost either. Heck, a 50 serving cake with minimal detailing has the potential to be a LOT less work than a cake to serve 12. So much to consider. Reaaaaaally makes me want to take some business classes and see where I'm doing ok, and where I might have some 'duh!' moments.

I'm always in the black, I don't waste product, my customer base is steady...but I know I can do better.
post #15 of 25
Quote:
Originally Posted by AZCouture

It is just as much work for a two tier to serve 12, as it is for 24, and even 50 for that matter. Not a big difference in ingredient cost either. Heck, a 50 serving cake with minimal detailing has the potential to be a LOT less work than a cake to serve 12.


I came to the same conclusion, which is why I put together a sliding scale of per-serving prices, with high prices per serving for small cakes and lower per-serving prices as cakes get larger. The price drop is less than the cost savings in order to maintain increasing margins as you scale up.
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