LCC 241: rlclng SLraLegy

Case #1: Wendy's Ch|||

Monday, CcLober 13, 2013
Cladys nlckerson
Lln Zhang
uesnon 1
now was Wendy's ab|e to ach|eve |ts |n|na|
success and to grow so rap|d|y at a nme when
the qu|ck-serv|ce hamburger bus|ness
appeared to be saturated?

Wendy's was able Lo achleve lLs lnlual success and grew so
rapldly aL a ume when Lhe qulck-servlce hamburger buslness
appeared Lo be saLuraLed because of uave 1homas' bellef Lo creaLe
blgger and beuer hamburgers LhaL were cooked Lo order, served
qulckly [as he argued LhaL currenL hamburgers walL umes were way
Loo long], and reasonably prlced." WlLh Wendy's, 1homas declded
Lo go aer a dlerenL LargeL segmenL of Lhe hamburger markeL,"
namely young adulLs and adulLs. 1homas focused on hamburger
quallLy ln llghL of Lhe seemlngly lnherenL low quallLy of hamburgers
ln compeuLor qulck-servlce hamburger [olnLs, and also belleved he
was oerlng up a dlerenL producL.
Pls maln focus was Lhe hamburger. Wendy's old-fashloned
hamburgers were made from fresh beef LhaL was served dlrecLly
from Lhe grlll Lo Lhe cusLomer, noung our prevlous polnL LhaL Lhe
quallLy dld noL decrease due Lo lL belng a qulck-servlce resLauranL.
1he unlque shape also dlerenuaLed a Wendy's hamburger from lLs
compeuLors, whlch added Lo Lhe memorablllLy of Lhe pames. 1o
sLay prlce compeuuve, Wendy's declded Lo llmlL Lhe number of
menu lLems Lo four maln producLs. Powever, wlLh Lhe Lhree
dlerenL Lypes of pauy cholces LhaL lndlvldual cusLomers could
order, and Lhe many condlmenLs avallable, Wendy's was sull able Lo
oer varleLy (236 posslble hamburger comblnauons). So hamburger
varlauon was sull oered desplLe Wendy's llmlLed, and cosL-
emclenL, menu.



C. nlckerson & L. Zhang 2
uesnon 2
What benehts m|ght have resu|ted from
Wendy's' "||m|ted menu" concept? What were
the d|sadvantages of such a concept? Why was
the concept eventua||y d|sconnnued?


1he llmlLed menu" concepL was Lo promoLe compeuuve
prlclng whlle sull malnLalnlng Lhe ablllLy Lo serve a quallLy producL.
A beneL LhaL may have resulLed from Wendy's llmlLed menu was
noL necessarlly cosL-eecuveness ln Lhe sense of dlrecL maLerlals
(l.e. lngredlenLs), buL cosL-eecuveness ln Lhe sense LhaL research
hours needed aL Lhe managemenL level Lo allocaLe cosLs for each
menu producL and Lo prlce lLems were lower. ln shorL, Lhere are less
admlnlsLrauve cosLs assoclaLed wlLh less menu lLems, and generally,
fewer cosLs Lo Lake lnLo accounL. Slnce Wendy's already uses
speclallzed machlnery Lo make many of lLs core four" menu lLems,
fewer cosLs for new machlnery are lncurred.
AnoLher beneL ls Wendy's apparenL goal and ablllLy Lo serve
beuer-quallLy producLs Lhan lLs compeuLors aL Lhe ume. WlLh less
menu lLems, Lhere are less quallLy assurance conLrol measures ln
LoLal, Lhan lf Wendy's had sLarLed o wlLh a menu of 20 producLs
wlLh 10 quallLy conLrol measures each. ldeally, Lhls would allow
Wendy's more ume Lo focus on Lhe quallLy of lndlvldual producLs
and Lo address lssues more qulckly.



C. nlckerson & L. Zhang 3
uesnon 2: Cont'd
What benehts m|ght have resu|ted from
Wendy's' "||m|ted menu" concept? What were
the d|sadvantages of such a concept? Why was
the concept eventua||y d|sconnnued?


A nal beneL ls Wendy's Way" and Lhe chlll advanLage. ln
keeplng wlLh Wendy's Way," a seL of bellefs LhaL would resulL ln a
successful company, chlll was added Lo Lhe llmlLed menu aer
chooslng Lo malnLaln Lhe mosL deslrable producL mlx. Addlng chlll Lo
Lhe menu prevenLs wasung Lhe hamburger pames and also provldes
less problems for sLore managers slnce Lhere ls less pressure Lo
serve any hamburger wlLh a pauy LhaL ls Loo well-done" and noL
up Lo Lhe Wendy's hoL 'n [ulcy" sLandard. 1he absence of any
excesslve lLems ln Wendy's llmlLed menu accounLed for savlngs
whlch enabled Wendy's Lo be able Lo serve a cosL-eecuve quallLy
producL, reLalnlng a compeuuve advanLage.

1he dlsadvanLages of such a concepL was Lhe lessened menu
varleLy Lo cusLomers. Powever, ln Lhe case of Wendy's maln
producL, Lhe hamburger, Lhls becomes less of an lssue. 8eLween Lhe
Lhree dlerenL pauy cholces and all Lhe varylng condlmenLs,
Wendy's was sull able Lo provlde up Lo 236 dlerenL burger
varlauons.




C. nlckerson & L. Zhang 4
uesnon 2: Cont'd
What benehts m|ght have resu|ted from
Wendy's' "||m|ted menu" concept? What were
the d|sadvantages of such a concept? Why was
the concept eventua||y d|sconnnued?


AnoLher dlsadvanLage would be ln Lhe acqulsluon of new
cusLomers. Many cusLomers would go Lo Wendy's for lLs unlque
burger buL oLhers would frequenL oLher fasL food resLauranLs for
new menu cholces. 8ecause of Wendy's llmlLed and sLagnanL cholce
of four menu lLems, lL's noL as auracuve as oLher fasL-food
resLauranLs, so lL llmlLs Lhe chances of a new cusLomer golng Lo
Wendy's for a unlque producL. LasLly, Wendy's was unable Lo keep
pace wlLh oLher compeuLors aL Lhe ume ln Lerms of havlng new and
exclung menu cholces. Mcuonald's and 8urger klng, for lnsLance,
conunued Lo release novel menu lLems. Lach new producL came
wlLh a level of buzz" or word-of-mouLh markeung LhaL was noL
apparenL for Wendy's. 1herefore, oLher fasL food esLabllshmenLs
may malnLaln a compeuuve advanLage over Wendy's ln Lerms of
producL oerlngs.

Wendy's llmlLed menu concepL was evenLually dlsconunued ln
Lhe laLe 1970's because Lhe managemenL faced some upcomlng
formldable challenges. Cne of Lhem was cruclal Lo Lhe llfe of Lhe
already shorL-llved llmlLed menu concepL. Wendy's ma[or
compeuLors had subsLanually lmproved Lhe quallLy of Lhelr
producLs, servlce, and faclllues," and worse: Lhey had been, ln an
aggresslve manner, lnLroduclng new menu lLems. Wendy's declded
Lo dlsconunue Lhls ldea of a llmlLed menu ln order Lo keep up wlLh
and llmlL Lhelr compeuLors' growlng advanLage over Lhem.




C. nlckerson & L. Zhang 3
uesnon 3
Why was Wendy's' dr|ve-through w|ndow
successfu| when other qu|ck-serv|ce restaurant
cha|ns had been unsuccessfu| at |mp|emennng
the same concept?



1hls success was a resulL of Wendy's declslon Lo lmplemenL
Lhese wlndows ln mosLly urban or densely populaLed, suburban
areas. A loL of Lhelr success was dependenL on servlng a large
number of cusLomers. Wendy's was able Lo caplLallze on lLs drlve-
Lhrough wlndows because of Lhelr declslon Lo puL Lhem ln Lhese
areas where people are more oen Lhan noL, busy enough Lo uullze
Lhe drlve-Lhrough or even due Lo Lhe facL LhaL Lhere ls saLuraLed
populauon per square mlle ln Lhese areas.
Addluonally, Wendy's concepL of Lhe drlve-Lhrough wlndow
was falrly newly lmplemenLed, and Lhey were able Lo use Lhls facL
as an early compeuuve advanLage. 1hls made Wendy's sLand ouL
and subsequenLly garner more proL because of Lhe auracuon and
popularlLy lL gave Wendy's. CLher resLauranL chalns had been
unsuccessful aL Lhls because of Lhe decrease ln buzz" aer each
subsequenL lmplemenLauon of Lhe drlve-Lhrough wlndow.


C. nlckerson & L. Zhang 6
uesnon 4
now much does a bow| of ch||| cost on a fu||-
cost bas|s? An out-of-pocket bas|s?

Genera| Assumpnons
A full-cosL basls ls dened as Lhe LoLal cosL of
producuon Lowards a baLch/cup of Wendy's chlll,
lncludlng ouL-of-pockeL cosLs, dlrecL cosLs, and
lndlrecL cosLs.
1he ouL-of-pockeL cosLs lnclude cosLs LhaL are deemed
relevanL cosLs" or cosLs LhaL are dlrecLly assoclaLed
wlLh Lhe producuon of Wendy's chlll. lurLhermore, we
concluded LhaL Lhese ouL-of-pockeL cosLs are all cosLs
assoclaLed wlLh produclng Lhe nexL baLch/cup of chlll
(l.e. no sunk cosLs such as a one-ume cosL Lo buy
speclal machlnery for Lhe klLchen).
CosLs are calculaLed for one baLch of chlll, whlch
makes 37 elghL ounce servlngs.
1he producuon process has noL changed over ume.
Lmployees conslsLenLly work Lhe same number of
hours each day.





C. nlckerson & L. Zhang 7
uesnon 4: Cont'd
now much does a bow| of ch||| cost on a fu||-
cost bas|s? An out-of-pocket bas|s?


Assumpnons
8eef pames are only lncluded as an ouL-of-pockeL cosL
ln Lhe monLhs of CcLober Lhrough March, when Lhere
was need Lo cook meaL speclcally for Lhe chlll
(occurred 10 of Lhe ume).
CuL-of-pockeL cosLs are calculaLed as 0.3 * 0.1 * $42 = $2.10





Ingred|ents
(D|rect Mater|a|s)
uannty
Cost per
Un|t
Iu|| Costs Cut-of-ocket Costs
Cost per
8atch
Cost per
8ow|
Cost per
8atch
Cost per
8ow|
Can of crushed LomaLoes 1 $2.73 $2.73 $0.03 $2.73 $0.03
46 oz. can of LomaLo [ulce 3 $1.23 $6.23 $0.11 $6.23 $0.11
Wendy's seasonlng packeL 1 $1.00 $1.00 $0.02 $1.00 $0.02
Cans of red beans 2 $2.23 $4.30 $0.08 $4.30 $0.08
Cooked beef pames 12 (lbs.) $3.30 $42.00 $0.74 $2.10 $0.04
C. nlckerson & L. Zhang 8
uesnon 4: Cont'd
now much does a bow| of ch||| cost on a fu||-
cost bas|s? An out-of-pocket bas|s?


Assumpnons
Spoons are noL counLed ln ouL-of-pockeL cosLs
because Lhey are sLocked regardless of wheLher Lhe
chlll ls sold. ln oLher words, spoons are used for oLher
lLems on Lhe menu as well (such as lrosues).
1hls conLrasLs wlLh bowls and llds, whlch we assume are used
speclcally for Lhe chlll.
AlLhough llds are used speclcally for chlll sold aL a
carry-ouL wlndow, we assume LhaL Wendy's purchases
Lhe same quanuLy of llds and bowls.





Utens||s
(Ind|rect Mater|a|s)
uannty
Cost per
Un|t
Iu|| Costs Cut-of-ocket Costs
Cost per
8atch
Cost per
8ow|
Cost per
8atch
Cost per
8ow|
Servlng 8owls 37 $0.033 $1.993 $0.033 $1.993 $0.033
Llds 37 $0.023 $1.423 $0.023 $1.423 $0.023
Spoons 37 $0.01 $0.37 $0.01 $0.00 $0.00
C. nlckerson & L. Zhang 9
uesnon 4: Cont'd
now much does a bow| of ch||| cost on a fu||-
cost bas|s? An out-of-pocket bas|s?



Assumpnons
Cnly Lhe asslsLanL manager ls lnvolved ln Lhe producuon
of Lhe chlll.
So hls $10.30 wage ls $0.173 per mlnuLe.
1here are no ouL-of-pockeL labor cosLs. 1hls ls because
Lhe hours worked by Lhe assoclaLe manager are sunk -
Lhey would be worklng Lhe same hours regardless of
wheLher Lhey were maklng Lhe chlll or noL.
Labor cosLs lnclude payroll Laxes.
Slnce lL Lakes 10-13, Lhe ume Lo prepare a poL of chlll
Lakes an average 12.3 mlnuLes.
1he chlll ls surred for 30 seconds of each hour for 3 hours
(average of 4-6 hours of cooklng ume for a baLch).




Labor Costs
M|nutes
Wage per
m|nute
Iu|| Costs Cut-of-ocket Costs
Cost per
8atch
Cost per
8ow|
Cost per
8atch
Cost per
8ow|
reparauon 12.3 $0.173 $2.1873 $0.0384 $0.00 $0.00
CbLalnlng pames from cooler 1 $0.173 $0.173 $0.0031 $0.00 $0.00
Cooklng pames 10 $0.173 $1.73 $0.0307 $0.00 $0.00
Chopplng pames 3 $0.173 $0.873 $0.0134 $0.00 $0.00
Surrlng pames 2.3 $0.173 $0.4373 $0.0077 $0.00 $0.00
C. nlckerson & L. Zhang 10
uesnon 4: Cont'd
now much does a bow| of ch||| cost on a fu||-
cost bas|s? An out-of-pocket bas|s?

kesu|ts
8y summlng Lhe full and ouL-of-pockeL cosLs
for an 8oz. bowl of chlll, we geL:
lull cosLs per 8oz. bowl of chlll: 51.16
CuL-of-pockeL cosLs per 8oz. bowl of chlll: 50.3S




C. nlckerson & L. Zhang 11
uesnon S
Ior determ|n|ng the true prohtab|||ty of ch|||,
how much does a bow| of ch||| rea||y cost?

Cnly cosLs LhaL are speclcally relaLed Lo Lhe
producuon of chlll should be lncluded ln Lhe
calculauon of Lrue proLablllLy. 1hus, we do noL
lnclude sunk cosLs and cosLs LhaL were already
allocaLed Lo Lhe producuon of hamburgers. 1hus,
Lhe ouL-of-pockeL cosLs deLermlne Lhe Lrue
proLablllLy of a bowl of chlll. 1he cosL of each bowl
of chlll ls $0.33.



C. nlckerson & L. Zhang 12
uesnon 6
Wou|d you recommend dropp|ng ch||| from the
menu? Why or why not?





C. nlckerson & L. Zhang 13
Slnce Lhe Lrue cosL assoclaLed wlLh Lhe
proLablllLy of chlll ls $0.33, and Lhe prlce of an 8oz.
bowl of chlll ls $0.99, Lhere ls a slgnlcanL proL
margln for keeplng chlll on Lhe menu.