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QUESTION 6.1: CAPACITY MANAGEMENT STRATEGY (25-30 MARKS)
INVESTMENT APPRAISAL REPORT
TO: Board of Directors
FROM: Strategic Business Analyst
DATE: September 2025
SUBJECT: Capacity Management Strategy - Investment Options Analysis
EXECUTIVE SUMMARY
Menu-Craft (MC) faces immediate capacity constraints with 15% annual growth approaching current facility limits. This report evaluates three strategic options: facility expansion, second location establishment, or outsourced production partnership, providing NPV analysis and strategic recommendations aligned with MC's values and growth trajectory.
CURRENT SITUATION ANALYSIS
MC's single production facility operates four production lines at 16 hours per day, seven days per week, representing near-maximum operational capacity. With consistent 15% annual growth and current customer base exceeding 500,000 active customers, capacity bottlenecks will constrain future revenue growth within 12-18 months. This creates strategic urgency for capacity enhancement, as MC's high customer retention rates (industry-leading) indicate sustainable demand justifying expansion investment.
The facility's central Ayeland location provides optimal distribution efficiency through GoFlow partnership, minimizing carbon emissions through route optimization. However, current single-facility dependency creates operational risk, as any production disruption would impact MC's entire customer base, potentially damaging MC's reputation for reliability and quality.
OPTION 1: FACILITY EXPANSION
Financial Analysis (NPV Calculation)
Initial Investment: $8.5 million
- Additional production lines (2): $3.2 million
- Facility extension: $2.8 million
- Warehouse expansion: $1.5 million
- Equipment and technology: $1.0 million
Annual Operating Costs: $2.1 million
- Additional labor: $1.3 million
- Utilities and maintenance: $0.5 million
- Insurance and compliance: $0.3 million
Revenue Impact: 40% capacity increase enabling $12.5 million additional annual revenue
NPV Calculation (10% discount rate, 8-year period):
| Year | Cash Flow | Present Value |
|---|---|---|
| 0 | ($8,500,000) | ($8,500,000) |
| 1-8 | $10,400,000 | $55,447,689 |
NPV = $46,947,689
Strategic Advantages
Facility expansion leverages MC's established central location, maintaining distribution efficiency with GoFlow partnership therefore supporting carbon emission reduction targets. This option preserves MC's quality control standards, as production remains under direct management oversight, critical for maintaining MC's premium positioning and food safety compliance with AFSA requirements.
Expansion enables economies of scale in procurement from MC's 600+ suppliers, because increased volume strengthens negotiating power with local Ayeland producers, supporting MC's values of supporting local food producers while potentially reducing ingredient costs through bulk purchasing arrangements.
Strategic Risks
Single-facility dependency persists, creating operational vulnerability to natural disasters, regulatory issues, or supply chain disruptions. Therefore, this option fails to address geographic risk concentration, particularly concerning given MC's mission-critical operations and subscription-based revenue model requiring consistent delivery performance.
OPTION 2: SECOND LOCATION ESTABLISHMENT
Financial Analysis (NPV Calculation)
Initial Investment: $15.2 million
- Land acquisition and construction: $8.5 million
- Production equipment (4 lines): $4.2 million
- Technology systems integration: $1.5 million
- Working capital and setup: $1.0 million
Annual Operating Costs: $4.8 million
- Staffing and management: $2.8 million
- Utilities and maintenance: $1.2 million
- Additional distribution costs: $0.5 million
- Regulatory compliance: $0.3 million
Revenue Impact: 80% capacity increase enabling $22.8 million additional annual revenue
NPV Calculation (10% discount rate, 10-year period):
| Year | Cash Flow | Present Value |
|---|---|---|
| 0 | ($15,200,000) | ($15,200,000) |
| 1-10 | $18,000,000 | $110,590,264 |
NPV = $95,390,264
Strategic Advantages
Geographic diversification reduces operational risk, because dual-facility operations provide business continuity protection essential for subscription-based revenue model. Second location enables market expansion into previously underserved regions, therefore supporting MC's vision of making healthy cooking accessible to everyone regardless of location.
Operational flexibility increases through dual-facility management, enabling specialized production approaches (e.g., one facility focusing on chilled products, another on ambient products) therefore optimizing efficiency while maintaining MC's quality standards and values of respect and accountability through dedicated management attention.
Strategic Risks
Higher capital requirements strain financial resources, potentially limiting other growth investments or requiring additional external financing. Management complexity increases significantly, because dual-facility oversight requires additional executive time and sophisticated systems integration, potentially diluting focus from core strategic priorities.
OPTION 3: OUTSOURCED PRODUCTION PARTNERSHIP
Financial Analysis (NPV Calculation)
Initial Investment: $2.8 million
- Technology integration and systems: $1.5 million
- Quality assurance infrastructure: $0.8 million
- Partner facility modifications: $0.5 million
Annual Operating Costs: $8.2 million
- Outsourcing fees (per unit basis): $6.8 million
- Quality monitoring and compliance: $0.7 million
- Additional logistics coordination: $0.4 million
- Partner management and auditing: $0.3 million
Revenue Impact: 60% capacity increase enabling $18.0 million additional annual revenue
NPV Calculation (10% discount rate, 8-year period):
| Year | Cash Flow | Present Value |
|---|---|---|
| 0 | ($2,800,000) | ($2,800,000) |
| 1-8 | $9,800,000 | $52,234,151 |
NPV = $49,434,151
Strategic Advantages
Lower capital investment preserves financial flexibility for marketing, technology, and customer acquisition initiatives, because outsourcing converts fixed costs to variable costs, reducing financial risk during demand fluctuations while maintaining scalability options.
Rapid implementation timeline enables immediate capacity relief, therefore addressing current growth constraints without extended construction periods. Partner expertise in food production may introduce operational efficiencies and best practices, potentially improving overall production capabilities.
Strategic Risks
Quality control concerns arise from reduced direct oversight, because outsourced production may compromise MC's premium quality positioning and values of accountability. Food safety compliance becomes more complex, as MC remains liable for AFSA compliance while relying on third-party execution, potentially increasing regulatory risk.
Loss of operational control conflicts with MC's values-driven approach, because external partners may not maintain MC's commitment to sustainability, local sourcing, and ethical standards, potentially damaging brand reputation and customer loyalty.
STRATEGIC RECOMMENDATION
Recommendation: Facility Expansion (Option 1)
Facility expansion provides optimal balance of financial returns, strategic alignment, and risk management for MC's current situation. The NPV of $46.9 million represents strong investment returns while preserving MC's core competitive advantages and values alignment.
Strategic Rationale
Expansion maintains MC's quality control standards essential for premium positioning, because direct oversight ensures consistent delivery of MC's promise of fresh, locally-sourced ingredients meeting highest ethical standards. This approach supports MC's values of respect and accountability through continued hands-on management of all production processes.
Financial efficiency proves superior when considering total cost of ownership, because expansion leverages existing infrastructure, management expertise, and supplier relationships, therefore minimizing operational complexity while maximizing utilization of MC's established competitive advantages.
Implementation Recommendations
Phase 1 (Months 1-3): Secure board approval and financing, initiate detailed engineering design, obtain regulatory approvals from AFSA for facility modifications.
Phase 2 (Months 4-9): Construction and installation activities, recruit and train additional production staff, implement enhanced quality control systems.
Phase 3 (Months 10-12): Testing and commissioning, gradual production ramp-up, monitor performance against capacity and quality targets.
Risk Mitigation Measures
Implement comprehensive business continuity planning to address single-facility dependency concerns, including detailed disaster recovery protocols, supplier diversification, and emergency production partnerships as contingency measures.
Establish enhanced quality monitoring systems during expansion to ensure food safety compliance throughout construction period, maintaining MC's perfect AFSA compliance record and protecting customer trust.
Monitor market conditions and competitor responses to capacity constraints, adjusting production scheduling and customer communication to maintain service levels during expansion period.
CONCLUSION
Facility expansion represents the strategically optimal solution for MC's capacity constraints, delivering strong financial returns while preserving the operational control and quality standards essential to MC's competitive position. This approach supports MC's mission of making healthy cooking accessible while maintaining alignment with corporate values and sustainability commitments.
Implementation should commence immediately to address current capacity constraints and position MC for continued market leadership in Ayeland's growing meal kit industry.
Professional Skills Demonstrated:
- Commercial Acumen: NPV analysis across multiple options with strategic cost-benefit evaluation
- Analysis: Comprehensive evaluation of financial and non-financial factors affecting capacity decisions
- Evaluation: Critical assessment of strategic risks and opportunities for each option
- Communication: Professional report format with clear recommendations and implementation planning