Operational Risk Management
Case Study
Bon Boulangerie
DIANA DEL BEL BELLUZ
President, Risk Wise Inc.
Bon Boulangerie is a bakery business located in Oakville, Ontario. When the
owner, Ray Pane, purchased the business three years ago, it consisted of a
single site with baking facilities and a retail store and café. Based on market
research with the bakery's retail and café clientele, Ray began to change and
expand the product offerings to increase the volume of sales and margins.
He also began a new line of business, wholesaling to local restaurants and
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high-end grocery stores within a 20-kilometer radius of the bakery.
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Based on the success over the past three years (see Exhibit 31.1), Ray has
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made a strategic decision to expand his wholesale business, with the goal of
tripling profits over the next three years (see Exhibit 31.2). He expects to
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accomplish this by: (1) covering a larger territory (i.e., expanding to a 120
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km radius) for wholesaling to local restaurants and independent grocery
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stores across the entire Greater Toronto Area, and (2) introducing a new
business line, white label products that he can supply to major supermarket
chains.
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(Actuals)
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(all figures in $000's) Year 3 Year 2 Year 1
Income
Café 300 273 246
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Retail Bakery 718 624 562
Wholesale—Restaurants 410 234 0
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Wholesale—Other Retailers 359 312 0
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Total Revenue 1,786 1,443 807
Operating Expenses
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Cost of Inventories Sold 1,349 1,090 610
Marketing, General, and Administrative 361 291 163
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(Actuals)
(all figures in $000's) Year 3 Year 2 Year 1
Total Expenses 1,710 1,381 773
Net Income 76 62 35
Exhibit 31.1 Financials for Past Three Years
(Projections)
(all figures in $000's) Year 6 Year 5 Year 4
Income
Café 348 331 315
Retail Bakery 831 791 753
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Wholesale—Restaurants 960 768 614
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Wholesale—Other Retailers 4,306 2,153 1,076
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Total Revenue
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Operating Expenses
Cost of Inventories Sold 4,926 3,105 2,175
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Marketing, General, and Administrative 1,301 816 557
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Total Expenses 6,227 3,921 2,732
Net Income 217 121 27
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Exhibit 31.2 Projections for Next Three Years
To realize this strategy, Ray has leased and outfitted a separate baking
facility to be primarily dedicated to supplying the wholesale business. Ray
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also hired a full-time vice president of sales and marketing (see Exhibit 31.3
for a summary of the Bon Boulangerie management team) to take over from
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him on the wholesale side. Finally, he purchased a second previously owned
delivery truck and hired a full-time distribution manager.
Growth in the first three years is attributable to enhancement of product
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offerings and continual drive to find efficiencies in operations. In year 4, the
new baking facility will open. It is expected that it will take several years to
add new wholesale customers and wholesale products. Therefore, there will
be unutilized capacity in the new facility. It is anticipated that expanding the
wholesale business will, at least initially, require an increased level of
product development, marketing, sales, and distribution.
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Exhibit 31.3 The Bon Boulangerie Team
Ray Pane, President and CEO. After a successful legal career, Ray
decided to pursue his dream of being an entrepreneur. He has a
passion for fine food and is committed to providing his customers with
high-quality, wholesome, and artisanal products.
Janice Sweet, Manager, Accounting. Janice is a Chartered Professional
Accountant who came to Bon Boulangerie with five years' experience
in several finance roles at a furniture retailer. She joined Bon
Boulangerie halfway through its third year of business. She is the
company's first in-house accountant. Prior to her joining, the
accounting was done by an external bookkeeper on a contract basis.
Janice has begun to introduce more systematic accounting processes.
She is also working with Ray to develop more forward-looking
reporting, including projections and forecasts of revenues and costs.
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Joe Silkwood, Vice President, Sales and Marketing. Joe was hired near
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the end of year 3 when Ray decided to expand the wholesale business.
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Joe is a classic salesman; he's outgoing and optimistic. He has nearly
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10 years' experience in the grocery business.
Rick Kneader, Manager, Baking Operations. Ray hired Rick as the
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head baker for the retail bakery at the beginning of year 1. Rick is a
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true artisan who successfully developed the new products that have
been responsible for the increases in sales in the café and retail bakery
in its first three years of business. He also runs a tight ship and has
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managed costs well, despite shifting to products with higher-cost
ingredients. With the opening of the new commercial baking facility in
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year 4, Ray has received a promotion to Manager of Baking Operations
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for both the retail and the commercial facilities. He will now spend less
time working with his hands and more time overseeing junior bakers
while managing the expenses at the commercial baking facility.
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Mohammed Sharif, Manager, Distribution. Mohammed has been
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hired by Ray to manage distribution to the expanding roster of
wholesale customers—both restaurants and other retailers. He has
worked in the trucking field for 15 years. He will expand and supervise
the existing team of drivers who were hired in year 2 to distribute
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product to wholesale customers. Ray has also made it clear that he
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expects Mohammed to find efficiencies and reduce shipping costs.
Jelena Zarinovic, Manager, Retail Operations. Jelena has been with
the company since it started. In fact, she worked for the previous
owners. She is the only full-time retail sales employee. She is friendly
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and adored by customers and the many part-time sales associates.
However, she is less interested in paperwork and is finding it
challenging to learn the new accounting procedures that Janice is
implementing.
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QUESTIONS
1. How does Ray's strategic objective translate to the operational level,
that is, what is his key operational objective(s) for the wholesale
business line?
2. What performance drivers, that is, the internal capabilities (e.g.,
people, processes, and systems), and external factors need to be
present to achieve operational success?
3. What are the risk factors that drive the uncertainty around achieving
operational objectives?
4. Which risk drivers are most likely to impact operational objectives?
5. How large of an impact might those key risk factors have? Hint: Use
scenario analysis to explore the full range of potential outcomes.
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6. Based on your analysis, what are the “significant few” factors on which
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Ray should focus his attention to manage the operational risks
associated with the new facility?
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7. What underlying assumptions underpin your analysis and conclusions?
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ABOUT THE CONTRIBUTOR
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Diana Del Bel Belluz is the President and Founder of Risk Wise Inc., a risk
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management consulting firm that provides advice and support to executive
leadership teams and boards who want to achieve more effective, proactive,
and strategic management and oversight of risk. Her forte is helping leaders
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to solve the people issues associated with bringing enterprise risk
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management (ERM) to life in their organizations. Diana advances the
practice of ERM through her thought leadership as an educator, conference
organizer, speaker, and author of ERM resources, including numerous
articles, book chapters, and the Risk Management Made Simple Advisory, a
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quarterly publication of ERM implementation tips and resources available
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at www.riskwise.ca. She also wrote Chapter 16, “Operational Risk
Management,” of the book Enterprise Risk Management: Today's Leading
Research and Best Practices for Tomorrow's Executives, edited by John Fraser
and Betty J. Simkins (John Wiley & Sons, 2010). She holds bachelor's and
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master's degrees in systems design engineering from the University of
Waterloo and is a professional engineer.
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