Economic of scale and scope - Essay Example

a) There are four major potential disadvantages. First, since to do its own food production, each outlet will have to time its preparation in accordance with when it is supposed to be served, the conventional cooking system will be susceptible to fluctuations in demand. In particular, peak hours will necessitate hiring more workers and will thus tend to make the associated labor costs of this process to be very high. Secondly, if each outlet does its own food production, attaining consistency across all outlets becomes problematic.

Inconsistent portions, quality and unintended non-homogenous variations may cause significant problems particularly if labor is not highly skilled and trained to reduce such errors. Again, this implies high labor costs and additional costs for training. Third, with lesser control over portions, a greater number of drops/deliveries may be required or alternatively, we could also see wastage of prepared food due to approximation errors on the part of the servers because of non-uniformity. This implies a higher food production cost.

Finally, due to an absence of a centralized control, regulations over food safety become difficult to abide by. b) Centralization of food production in a restaurant chain implies that the food served in the outlet is prepared fully or partially in a centralized location and sent out to the outlets. The preparation features standardized ingredients and the distribution is handled by controlled channels of supply. When homogenous food is sold at multiple locations, centralized kitchens are used.

Good examples are fast food chains like KFC and McDonalds. Following are the benefits of having a centralized kitchen. i) Economies of scale deriving from bulk production at the centralized location. ii) Because of the high quantities produced there will be productivity gains that will reduce labor costs to reasonable levels. iii) Consistency across chains is attained. iv) Greater control over portions is attained leading to lesser wastage and lesser number of drops. v) Food safety is enhanced due to greater controllability due to centralized cooking. vi) Greater control over inventory and ingredient usage. vii) Scheduling food production becomes more flexible since the prepared food ships frozen only the final rounding up of the preparation is done at the outlet. viii) There is also further reduction of labor costs due to mechanization of production in the centralized location which in addition enhances the efficiency of the process.

However, there are some disadvantages of centralized cooking as well. These are mentioned below: a) High initial investment costs for building centralized food production plant. b) Some of the machinery used may require highly skilled operators implying a steep wage payment bill. Further, workers with such skills are not easily found implying high training costs as well. c) There will be significant transport costs involved in shipping prepared foods to the outlets. d) Mass production as opposed to customized, on site preparation reduces the appeal of food for a considerable share of the market.

Thus there is a loss of quality at least in accordance to the perception of many.