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Assignment 3-PART 2 (Team Project)

Managerial Report

The Rationale for Investing in a New BrewPub

Ruilin Meng, Jie Li, Hangyu Zhao, Siyao Zhang, Youwei Cai

Boston University Metropolitan College

AD 715: Qualitative and Quantitative Decision Making

Professor Krystie Dickson

June 27, 2022

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Contents

Executive Summary………………………………………………………………………………………………………………………………..3

Introduction……………………………………………………………………………………………………………………………………………..4

Purpose of the Report……………………………………………………………………………………………………………………….4

Structure of the Report……………………………………………………………………………………………………………………. 4

Operations Management and Decision Making…………………………………………………………………………………..5

The Strategy of Operations Management Area……………………………………………………………………………..5

Cut-off Point……………………………………………………………………………………………………………………………………..5

What-if Analysis……………………………………………………………………………………………………………………………….6

Break-even Analysis……………………………………………………………………………………………………………………….. 7

Risk Analysis (Monte-Carlo Simulation)……………………………………………………………………………………… 9

Impact on Decision Making…………………………………………………………………………………………………………..11

Innovation & Technology Management and Decision-Making……………………………………………………….12

The Strategy of Innovation & Technology Management Area………………………………………………….12

Brewing Process Upgrading…………………………………………………………………………………………………………. 13

SWOT Analysis ……………………………………………………………………………………………………………………………..14

VRIO Framework………………………………………………………………………………………………………………………….. 15

Impact on Decision-Making…………………………………………………………………………………………………………..17

Organization & HR Management and Decision-Making………………………………………………………………….18

The Strategy of Organization & HR Management Area…………………………………………………………….18

PESTEL Analysis………………………………………………………………………………………………………………………….. 18

Decision Tree Analysis…………………………………………………………………………………………………………………. 21

Impact on Decision-Making…………………………………………………………………………………………………………..25

The Best Output Parameters (The Best Cycle)…………………………………………………………………………………. 26

Summary of Results and Decision Strategy ………………………………………………………………………………………27

References ……………………………………………………………………………………………………………………………………………. 30

Appendix………………………………………………………………………………………………………………………………………………..31

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Executive summary

This report aims to analyze the rationale for investing in a new brewpub, also

called microbrewery. All analysis we made are based on Business Cycle Simulation

altogether with Decision tree, Financial Statement, and Implementation Plan.

In Operations Management and Decision-Making section, to reach the break-even

point faster, we need to strictly control the cost and minimize the cost expenditure;

Adjust the unit price and cut-off points according to the relationship between supply and

demand; at the same time, try our best to reduce the unit cost to increase our income. In

Innovation & Technology Management and Decision-Making section, we made

upgrading by using the new box-fermentation brewing method, which allows us to build

and enhance comparative advantages as well as market competitiveness. In Organization

& HR Management and Decision-Making section, the decision tree analysis perfectly

reflects the correctness of our decisions in terms of human resources strategy and the

huge impact of specialized technical staff (such as brewers) on the profitability of our

projects.

In summary, we identified the Cycle 16 as our best cycle and our Average (Profit)

of the best cycle is $392,194.81 and our Average (IRR) is 0.71. Our Sharpe Ratio

(Applying Risk-Free Interest Rate) is 7.90 and our Sharpe Ratio (Applying Expected

Return on Investment) is 8.17. Thus, we firmly believe that stakeholders should invest

$150,000 in the microbrewery project. Also, we need to closely monitor the operation of

the whole project and the completion of the relevant indicators according to the

implementation plan. Once an anomaly is detected, we must take action at the first

opportunity to prevent the spread of the problem.

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Introduction

Purpose of the Report

The purpose of the report is to identify the rationale for investing in a new

BrewPub. As mentioned in part 1, we define the nature of the restaurant as a combination

of a grill and a microbrewery. And its outstanding feature is to provide consumers with

sports broadcast services. Increase alcohol consumption by enabling customers to watch

sporting events while dining. According to market research and analysis, we verified

again that the relationship between grill restaurants, beer, and sports events is often close

and integrated (Noel, 2018). Therefore, in part 2, we will explore the feasibility of this

project in more depth from three aspects: Operations Management, Innovation &

Technology Management, and Organization & HR Management.

Structure of the Report

The main structure of the article is organized around three parts：

Operations Management and Decision Making

Innovation & Technology Management and Decision-Making

Organization & HR Management and Decision-Making

At the beginning of each section, we will clarify the strategy we used for such an

area; at the end of each section, we will summarize the impact of such results on

decision-making. Based on the above three sections of analyses and conclusions, we will

conclude with the best cycle and output parameters and explain their reasons. In the end,

we will conclude with a summary of all the results and provide a description of the

overall project process according to the implementation plan.

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Operations Management and Decision Making

The Strategy of Operations Management Area

Within the Operations Management functional area, our strategy is to mainly

analyze the microbrewery project through aspects based on the Business Cycle

Simulation: Break-even Analysis, What-if Analysis and Risk Analysis (Monte-Carlo

Simulation). First, we determined a cut-off point for each brand of beer by calculating

the ratio excess demand/total demand. Then we adjust our parameters and decisions

according to the contribution rate of different products (every beer brand). In What-if

Analysis, we will use the method of controlling variables to analyze the impact of three

variables/factors (total fixed cost, selling price per unit, and variable cost per unit) on our

microbrewery project's revenue, profit, sales volume, as well as the period it takes to

reach the break-even point. In the break-even point analysis, we will pay attention to the

break-even point (BEP), and analyze the main factors that influence the time when our

microbrewery project reaches the break-even point through the logic behind it. In Risk

Analysis, we will use Monte-Carlo simulations and using its result to compare which

cycle is the most profitable. Then, we will discuss the influence of the conclusions drawn

from the above analysis on our decision-making.

Cut-off Point

Cut-off point is the point at which an investor decides whether to abandon a

production. In the analysis of microbrewery, we include the cut-off point to limit losses.

However, how to determine the cut-off point made our analysis more difficult, and we

had to calculate the reasonableness of each point and choose the most appropriate cut-off

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point. After continuous testing, we determined the most reasonable cut-off point. The cut-

off point of Pilsner is 0.52, and we used the formula that excess demand/total demand can

be calculated as 4.3% in fiscal year 1, which the ratio should be less than +10% or -10%,

which means that this cut-off point is reasonable. Similarly, we can calculate that in fiscal

year 2 and fiscal year 3, it is 4% and 3.4%, which are within the interval. The cut-off

point of Bavarian Lager is 0.6, which can be calculated as 3.4% in fiscal year 1, and 3.3%

and 3.5% in fiscal year 2 and fiscal year 3 by using the formula excess demand/total

demand. Also, the cut-off point of Light Wheat is 0.38, and we used the formula that

excess demand/total demand and got the result of -5.8% in fiscal year 1. Through a series

of calculations, we are able to justify our cut-off point.

What-if Analysis

What-if analysis is an evaluation tool, assuming what would happen if different

strategies were adopted and analyzing the results to make the best decision (Singh, 2013).

And this is very much like the single-variable analytical model in mathematics.

In our business cycle simulation, the first analysis is changing the total fixed costs,

and we need to answer the question that What is the BEP if the total fixed costs are

increased and/or decreased while the selling price and the variable costs per product

remain the same. (See Figure 8.1) In the original scenario, the fixed cost of our project is

$211,027, which results in 4.86 months and $318,729 sales for a break-even point.

However, if we increase our total fixed costs from $211,027 to $250,000, and other

variables remain the same, we can have the break-even point of 5.70 in months and

$373,864 in revenue. On the other hand, if we decrease our total fixed costs from

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$211,027 to $200,000, and other variables remain the same, we can have the break-even

point of 4.56 in months and $299,092 in revenue. We found that the smaller the total

fixed costs, the less time it would take for our project to reach the break-even point, and

also the lower the corresponding break-even sales.

Then we analyzing what is the BEP if the selling price per product are increased

and/or decreased while the total fixed costs and the variable costs per products remain the

same. (See Figure 8.2) If we increase the unit price of each beer brand by $0.5, and other

variables remain the same, we can have the break-even point of 3.92 in months and

$296,268 in revenue. On the other hand, if we decrease the unit price of each beer brand

by $0.5, and other variables remain the same, we can have the break-even point of 6.22 in

months and $346,212 in revenue. This means that the higher the unit price per beer, the

less time it takes for us to reach the break-even point, and also the lower the

corresponding break-even sales.

The last analyzing is that what is the BEP if the variable cost/unit are increased

and/or decreased while the total fixed costs and the price per products remain the same.

(See Figure 8.3) If we increase the variable cost/unit by $0.2, and other variables remain

the same, we can have the break-even point of 5.29 in months and $347,034 in revenue.

On the other hand, if we decrease the variable cost/unit by $0.2, and other variables

remain the same, we can have the break-even point of 4.41 in months and $289,356 in

revenue. We found that the higher the variable cost/unit, the longer it will take us to reach

the break-even point, and also the higher the corresponding sales.

Break-even Analysis

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The break-even point (BEP) gives us ideas mathematically about the relationship

between revenue and cost. Changes in various uncertain factors (such as investment, cost,

sales volume, product price, project life cycle, etc.) will affect the economic effect of the

investment plan (Tsorakidis, 2011)

Our break-even analysis is derived from the business cycle simulation. In simple, the

brake-even point is calculated as follows: Break-even point (or volume sold) = fixed cost

÷ contribution of the unit. For our project, the total brand-01's revenue is $786,740.56.

The total expenses of Brand-01 is $265,849.04, and the total fixed cost is $221,027,

which is a very important parameter. And the contribution of the total brand-01 is

$520,891.53, and the contribution margin is 66.21%. According to the Break-even

Analysis:

Break-even Months: 4.86 [=Total Fixed Costs/Contribution*12 months]

Break-even Sales: $318,729 [=Total Fixed Costs/Contribution Margin]

This means that the microbrewery project we are launching will break even within

four to five months of production (see Figure 7). During this time, our total cost range

was between $221,027 and $318,729. In addition, according to the break-even analysis,

we noticed that the beer BR01-10 has the highest contribution margin, reaching 79.99%,

while the beer BR01-11 has the lowest contribution margin, only 12.62%. We think this

result is reasonable: compared to other products, the beer BR01-10 sells for $4.49 per

unit with similar variable costs, making it the most expensive of all the beers we have

launched. Correspondingly, as our special beer BR01- 11 is only $1.25 per unit, which is

the cheapest of all the beers we have introduced.

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Risk Analysis (Monte-Carlo Simulation)

Based on the generated business cycles, we can apply risk analysis which is also

called the Monte-Carlo Simulation. The main tool for our risk analysis is the Monte-

Carlo Simulation. It is an algorithm that randomly generates our assumptions and then

outputs values based on these generated assumptions. In the business world, Monte-

Carlos Simulation are often used to visualize project risks and uncertainties. In our

program, the values that vary are those that would in a real business, such as variable cost

and demand volumes, etc. Rather than being chosen completely randomly, these values

are generated according to probability distribution centered on the assumptions from the

cycle. In plain, they're likely to be close to the values we chose for each cycle. A Monte

Carlo simulation will iterate many times to create a complete understanding of whatever

it is we are trying to model.

In our case, the overall goal of Monte-Carlo simulation is to model the possible

profit from each cycle. After the simulation is done running, it will provide a histogram

of potential profits (see Figure 9). This simulation is outputting profit after taxes based

on the various inputs of the cycle. It generates a histogram for each year and overall,

which shows the number of cycles as the y-axis and the profit interval as the x-axis. In

our microbrewery project, (see the histograms in deep blue) after running business cycle

simulations until 16 times with 100 iterations, we have 15 iterations that result in a profit

interval between 135-143 (in thousands); Also, we have 13 iterations that result in a

profit interval around 151-160 (in thousands). So, the histograms there have bars with 15

and 13 units high. The in FY-2, we have 13 iterations that result in a profit interval

between 145-155 (in thousands); Also, we have 12 iterations that result in a profit

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interval around 126-136 (in thousands). So, the histograms there have bars with 13 and

12 units high.

Moreover, we can run multiple Monte-Carlo simulations on different cycles by

clicking the Run Series button. We selected the first, fourth, seventh, and tenth as our

target cycles (see Figure 10). Each run of the simulation gets added to the histogram as a

different colored chart. For example, in our microbrewery project, (see the histograms in

red) after running business cycle simulations the first time with 100 iterations, we have

20 iterations that result in a profit interval between 108-119 (in thousands). And we also

have 17 iterations that result in a profit interval around 119-130 (in thousands). So, the

histograms there have bars with 20 and 17 units high. After running business cycle

simulations four times with 100 iterations (see the histograms in green), we have 15

iterations that result in a profit interval between 119-130 (in thousands). And we also

have 14 iterations that result in a profit interval around 87-98 (in thousands). So, the

histograms there have bars with 15 and 14 units high. After running business cycle

simulations ten times with 100 iterations (see the histograms in light blue), we have 18

iterations that result in a profit interval between 151-162 (in thousands). And we also

have 17 iterations that result in a profit interval around 130-141 (in thousands). So, the

histograms there have bars with 18 and 17 units high.

By using the Monte-Carlo simulations, we can already make some basic

conclusion about our project. Cycle 16, represented in deep blue, is obviously the most

profitable of all the cycles.

Then, in the Sim-Report (see Figure 11), we can make more advanced inferences

according to those important metrics taken from recent Monte-Carlo simulations. The

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standard deviation of profit shows variance between iterations of each simulation.

Similarly, the standard deviation of the internal rate of return represents variance in the

IRR. The Sharpe ratio is a metric used to compare investment risk and return, The higher

the ratio the better an investment has performed relative to the risk it has taken on.

Note that these numbers match the lowest histogram from the D-Analysis table. In

our project’s best cycle, the Standard Deviation (Profit) is 56,293. The Failure rate

(Return on Investment) is 0.0% which is very well. Our Standard Deviation (IRR) is 0.15.

Our Sharpe Ratio (Applying Risk-Free Interest Rate) is 7.90 and our Sharpe Ratio

(Applying Expected Return on Investment) is 8.17. These two Sharpe Ratios are

significant because they are the highest ratios compared to each of their rows. This tells

us that after multiple cycles, our Sharpe ratio is gradually moving in a better

direction. Then, our Average (Profit) of the best cycle is 392194.81 and our Average

(IRR) is 0.71.

Impact on Decision Making

This section focuses on how these tools used above affect the changes made in

our business simulation files.

From the cut-off point, we realize that different cut-off points will affect the

whole profit and loss situation, and we must choose the most suitable cut-off point to

prevent losses.

From What-if analysis, we are aware of the impact of changes in total fixed cost,

selling price of each product and variable cost/unit on our income and the time required

to reach the break-even point.

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From the Break-even analysis, we realize the importance of paying attention to

the contribution and contribution rate of each beer brand to the overall brand/project, and

its influence on the time when we reach the break-even point. In addition to the special

price, increase the supply of beer brands with high contribution rate to the whole project,

increase the marketing budget, and increase the promotion of such beer brands.

From the perspective of economic law and the relationship between supply and

demand, we can even fine-tune the prices of these beer brands that contribute more to the

overall project. At the peak of demand, we can consider increasing the unit price of these

beer brands to some extent to further increase our income. Of course, this practice is risky,

and we need to always be alert to the impact of price fluctuations on sales.

In general, in order to reach the break-even point faster in our decision-making

process, we need to strictly control the cost and minimize the cost expenditure; Adjust the

unit price according to the relationship between supply and demand; at the same time, try

our best to reduce the unit cost to increase our income.

Innovation Technology Management and Decision-Making

The Strategy of Innovation & Technology Management Area

Within the strategy of innovation & technology management area, our strategy is

to Brewing Process Upgrading, mainly analyze the microbrewery project based on the

SWOT Analysis, and using VRIO Framework to analysis. First, we determined the

difference between craft beer and common industrial beer. We found that the craft beer

attracted more young customer class with higher demands for a sense of experience,

personalization, and diversity in consumption. Based on market research, our team

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decided to use the box-fermentation brewing method. Then we used SWOT Analysis to

determined strengths, weaknesses, opportunities and threats. After that we used VRIO

Framework to determine the value, rarity, inimitability and organization. In the end, we

will discuss the influence of the conclusions drawn from the above analysis on our

decision-making.

Brewing Process Upgrading

The biggest feature that distinguishes craft beer from common industrial beer is

its extremely rich variety, which is sought after by consumers for its unique recipe of

ingredients and independent brewing process (Gatrell et al., 2018). According to market

research, craft beer has a much higher added value compared to industrial beer. Generally

speaking, a 500ml craft brew sells for $4 to $7, while ordinary beer is sold at restaurants

for $1 to $3 a bottle. Although it seems that there is still a significant price gap between

the two, but craft beer has tended to civilian consumption momentum, the market

potential is still very large (Hoalst-Pullen et al., 2014). Craft beer (an upgrade of the

brewing process) is in fact an innovative movement in the beer industry, behind which is

the rise of a young consumer class with higher demands for a sense of experience,

personalization, and diversity in consumption.

The quality of craft beer also depends on the freshness of the product, and the shelf

life of fresh beer varies from 15 to 30 days. In order to maximize the freshness of the beer,

our microbrewery project must be based on the local market and open craft brew bars for

promotion. On the other hand, craft brew brands are going beyond in-store sales. Setting

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up smaller craft breweries and expanding channels through the internet and social media

are also options for us.

Based on market research, our team decided to use the box-fermentation

brewing method. This is a relatively simple brewing method. Wort is a small volume,

concentrated, syrupy liquid obtained by removing most of the water and is pre-made by

the maltster. The homebrewer rehydrates the wort and then ferments it to make a full keg

of beer quickly. This method takes only 20-30 minutes. And it requires very little

expertise. In recent years, professional brewers have developed brew kits that closely

resemble commercial beers, and the quality of brew kits has improved dramatically as a

result.

SWOT Analysis

Strengths

Brewing can be prepared quickly

Easy to get started, no need for too much expertise

Box-fermentation brewing method

Only basic equipment required

Can brew many types of beer

Specific grains can be used to get the desired flavor

A strong sense of participation and a boost of confidence to quickly acquire skills

Weaknesses

There are few known beer recipes, so we must try them ourselves

Inevitably, some of the hop aromas are lost during the brewing

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Some raw materials (wort) are not suitable for this method

The yield rate is not very high, which may lead to waste and rework

Opportunities

Create a new brand image

Breaking the industry and technical barriers to craft beer through technological

innovation

Threats

No long-term and extensive market (consumer) testing

This technology is still in a rapid iteration phase

VRIO Framework

Value

The value of the microbrewery and craft beer technology upgrade lies in its own

characteristics as well as the novel restaurant style design and free form. The expression

of diverse product styles fits the consumer experience of young consumer groups seeking

new and different things. Visually, craft beer has a more delicate and long-lasting foam

than ordinary beer, and its color is brighter and more lustrous. In terms of smell, craft

beer usually has more types and quantities of malt, yeast and hops added, which allows

for hundreds of different flavors to be brewed. In terms of taste, craft beer has a

particularly mellow and layered taste. In terms of brewing process, it is more refined and

unique than industrialized ordinary beer, thus ensuring the quality of craft beer, and

making it synonymous with high quality beer.

Rarity

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From the perspective of culture and function, craft beer also contains alcohol culture

and social functions that can meet the needs of young consumers. Craft beer packaging

design has moved toward content-based expressions, and marketing planners have

incorporated more emotional and ideological elements into the design of craft beer bottles,

trademarks, and craft beer halls to reinforce the value of the product. Craft beer has taken

on a colorful pattern in terms of bottle shape and brand logo design. It also better conveys

the brand's distinctive concept to consumers. This advantage is not available in other

alcoholic products.

Inimitability

From the point of view of technological innovation and upgrading, the brewing

method of box fermentation used in this project allows for quick preparation. It is easy

for the staff (brewers) to get started, without having much expertise or long training, and

after becoming familiar with the basic process only basic equipment is needed to brew

many types of beer.

More importantly, there are not many off-the-shelf recipes for the beer we brew,

which means that we need to innovate and experiment to develop our own "secret recipe"

or "exclusive recipe". Once this "exclusive recipe" has been tested in the market and

recognized by consumers, we can form a strong comparative advantage and market

competitiveness. At the same time, this is also an important aspect that is difficult for

other competitors to imitate.

Organization

In terms of organizational factors, as mentioned above (It is easy for the brewers to

get started, without having much expertise or long training, and after becoming familiar

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with the basic process only basic equipment is needed to brew many types of beer). The

box-fermentation brewing method we used in the microbrewery project naturally dictated

that we did not need to expend excessive cost and effort in terms of human resources.

Thus, this can save us some labor costs while ensuring a good return on products.

Impact on Decision Making

This section focuses on how these tools used above affect the decision we would

make for craft beer.

From the Brewing Process Upgrading, we realize that the quality of craft beer also

depends on the freshness of the product, in order to maximize the freshness of the beer,

our microbrewery project must be based on the local market and open craft brew bars for

promotion by using the box-fermentation brewing method.

From SWOT Analysis, we can see that we have lots of strengths like brewing can

be prepared quickly, easy to get started, no need for too much expertise, and only basic

equipment required, etc. However, there still have some weaknesses like some raw

materials (wort) are not suitable for this method and the yield rate is not very high, which

may lead to waste and rework. But these weaknesses can be remedied in different ways.

We can use this chance to breaking the industry and technical barriers to craft beer

through technological innovation.

From the VRIO Framework, we found that the value of craft beer and craft beer

technology upgrading lies in its own characteristics, novel restaurant style design and free

form. And hundreds of different flavors can be brewed, so that the taste of the craft beer

is particularly mellow and full of layers. Moreover, once this "exclusive recipe" has been

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tested in the market and recognized by consumers, we can form a strong comparative

advantage and market competi