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Question 3: Value Chain Analysis (34 marks)(This case has been written for illustration and is not meant to be correct in all details of brewery or pub operations.)Merry & Mellow Pub Ltd.Merry & Mellow Pub Ltd. (M&M) operate a brew pub—a pub which brews beer in a micro-brewery on its premises. M&M brews English-style beer from malt, hops, and yeast imported from brewery suppliers in England. Its equipment was imported from Germany.The business is the brainchild of four partners who contributed $100,000 as equity to the business. The remaining $400,000 is financed by debt instruments. Of the debt financing, $200,000 was raised through convertible debentures sold to investors, most of whom are acquaintances and family of the partners. Of the remaining $200,000, $100,000 is a repayable grant from a government agency, and $100,000 is a mortgage held by the brewing equipment manufacturer on the equipment. The average cost of this debt capital is 12%.Each of the partners has taken a role in the business, although to a different degree. Two are involved daily and draw a salary. John Rumbol is the business managers. He has a long history as a manager in the restaurant and hospitality industry. Alvin Smale is the Brewmaster with extensive experience in the English brewing industry. He makes $60,000 per year. Andy Bittrov is an accountant who prepares the business statements and manages the banking. The assistant manager does the daily accounting, which is primarily entering whatever data is not collected automatically into the computer and balancing computer summary data to cash. The manager closes up and makes bank deposits, although this task is occasionally handled by the assistant manager as well. The fourth partner is Joanne Van Wine who operates a computer business and has selected and customized the business’ information and accounting systems with some professional input from Andy. Altogether, management and administrative staff—excluding the Brewmaster, Alvin—are paid $19,000 per month.The main attraction and most distinctive feature of the pub is specialty beer, brewed using special and secret recipes developed by Alvin. Because of its role as the centrepiece of the business, the quality of the beer is of utmost importance to the long-term success of the enterprise. The malt, hops, and yeast used are imported form a brewery supplier in England, which specializes in the supply of these materials to small independent brewers. Alvin spent four months in England perfecting his beer recipes by working with the English company’s experts to develop the individual ingredients which are maintained for the M&M account alone. The English company’s costs for malt, hops, and yeast—costing M&M $9,500—are $7,500. M&M’s shipping and duty cost for that same amount is $500.The malt, hops, and yeast are shipped to M&M four times per year. The size of the order must be confirmed three months in advance of the desired delivery date. The shipment is cleared through customs by one of the partners—usually Alvin—then inspected and put into cool storage inventory until needed. All ingredients are dated and rotated to avoid spoilage. Ingredients have a six-month shelf life. Alvin estimates that the average monthly use of these items is $40,000.Alvin schedules the monthly production of beer according to customer and pub employee feedback regarding type of beer and quantities favoured, as well as for any special celebration or promotions planned. Capacity is also maintained for testing any new recipes. Alvin also works from sales data as reported by the computerized records.As a good Brewmaster should, Alvin and his assistant thoroughly clean the stainless steel tanks before mixing each batch. It takes an hour for them to thoroughly clean a tank. Hethen combines ingredients according to the selected recipe, dates the batch, and monitors it daily for temperature, taste, impurities, and expected time to completion. The beer is transferred between specialized tanks as it moves through the sequential fermentation and filtration processes. When completed, the batch is transferred to cold storage tanks from where it can be put directly on tap to the pub. As the beer is unpasteurized, any unsold beer over 30 days old must be destroyed. It is of the utmost importance that the stainless steel tanks be clean, and that the purity, taste, and temperature of the beer be continually monitored. The Provincial Liquor Control Board and Board of Health require the strictest quality control. The quantities, date of production, type of beer, and so on must be kept for these officials, for federal sales tax calculations, and for management purposes.The production of a batch of beer takes from 10 to 14 days. Two different batches are normally in preparation at one time—utilizing four fermenting tanks. Each batch makes about 50 kegs of beer. Sales of lager average about 25 kegs per week, ales 35 kegs per week, and bitter about 30 kegs per month. A batch of ale requires 10 days, lager 12 days, and bitter 14 days. Bitter, served warmer than the ales and lagers, has proven to be a novelty item for the pub’s Canadian clientele but has attracted a regular group of nostalgic old country drinkers to the pub. The brewery makes one type of lager and two types of ale, which sell equally well.Miscellaneous monthly costs for the brewery are $9,000 which includes $2,000 for water, $2,000 for utilities, $4,000 for labour, and $1,000 for supplies and maintenance. Depreciation is $12,000 per year.The brewery operation is displayed behind a glass wall at one end of the pub, where it can be observed by pub customers. Tours can be arranged.The pub is legally allowed to open from 11:00 a.m. until 1:00 a.m., a total of 14 hours, 7 days a week. The pub sells the standard array of bottled beers and imports kegs of two of the better-known British beers, Whitbread and Guinness, as well as wine, hard liquors, coolers, and soft drinks. It provides a short pub luncheon menu and salad bar. There is a dartboard and shuffleboard for the patrons’ enjoyment. Music videos are used when a special event is not showing, and there is no live entertainment. Entertainers are booked into the pub from Thursday to Saturday. The pub has a seating capacity of 130. The pub pays the micro-brewery $75,000 per month for its beers.Recognizing the importance of creating a friendly and welcoming atmosphere to the long-term success of the business, M&M makes every effort to ensure the right kind of employee is hired. Before John hires new employees, they are interviewed by the assistant manager and meet selected staff members who are asked for an assessment. The new employee then works for one week after which fellow staff and management meet to determine whether a permanent placement should be given. This procedure, plus a careful outline of criteria for service and performance with extensive training though the first week and continuous updating thereafter, has resulted in a stable workforce given the normally high turnover in the pub and restaurant business.If possible, customers are greeted at the door. If that’s not possible, they are greeted as soon as possible after entering the pub. Customers are given a menu if needed, and their order is taken. Customers are served at the bar by the bartenders and by waiters at the tables. Waiter pay is a low hourly rate, just above minimum wage. Cooks receive a better salary while other kitchen staffs—such as cleanup staff—receive the low hourly rate. For the waiters, the low rate is mitigated by a guaranteed weekly salary which kicks in when a waiter does not work enough, usually because of illness, to reach that level. Gratuities normally mean that the waiters make a very acceptable living. The service employees, bartenders, and waiters pool their tips and share them with the bussing staff. Labour costs in the pub average $40,000 per month.M&M shows its appreciation of its staff by organizing functions for them, and has a bonus plan under which all employees receive a bonus if profits exceed a target level (known to the employees). The employees are kept current on business performance and enthusiastically contribute their best efforts and suggestions. As a result of its attention to service and quality, M&M averages $200,000 in revenues per month.The chief cook receives the fresh food deliveries in the morning from the butcher, bakeries, and produce and grocery suppliers. He has ordered these the previous day as he finalizes his menu. Orders are done with a three-part order/receiving report. The top copy is the order record, which goes to the office for business records. The second and third copies are kept and are used (there is a receiving column) to check in the order the next day. The cook checks for quantities, quality, and freshness. The second copy then goes to the business office where the assistant manager (or the manager on occasion) enters the data for accounting and inventory records. The last copy is kept by the cook. Monthly food costs average $15,000.The ingredients for the salad bar are on a daily order filled automatically with the composition changing only as seasonal items change. The supplier of these items works almost independently from a standing purchase order and contract. She can be depended on to bring a good mix of quality ingredients. She and the cook consult each day when the delivery is made about what items are coming into season and also what events and specials are planned by the pub.The weekly Liquor Control Board delivery is verified by the manager or assistant manager, and the liquor is placed in a locked liquor storeroom. Liquor is requisitioned daily by the bartenders. The assistant manager uses the shipping manifest, the invoices when they arrive in the mail, and the bartender requisitions, and enters them for inventory and accounting records. The liquor order is prepared by the senior bartender and approved by the manager. There are three keys to the liquor storeroom; one is held by the manager, one is held by the senior bartender, and one is kept in the office. The pub spends $30,000 per month on externally purchased liquor.Supplies of linen, napkin, matches, dish replacements, candles, and other supplies are received weekly by the manager or assistant manager. Monthly supply costs are $2,500.When customers order, the waiter notes the order and keys it on the computer cash register. If a tab is being run, the customer is assigned a number by location, either table number, or bar location, and if known, a name is entered—usually the customer’s first or last name. The waiters usually obtain a name for tabs; this allows the staff to use the customer’s name which proves effective. The computer automatically prepares the bill for the customer from the information keyed in. Prices are standard except for the specials, which are entered into the system daily. Customers pay the person who serves them.John Rumbol continually with appropriate staff to review prices and menu items, including the volumes sold, and checks the costs of each item to provide contemporary selections at competitive prices. The pub’s own beer cannot be priced out of line although it is promoted as a premium product. Promotion is based on the quality of taste, the uniqueness of the beer, and the fact that it is locally made to European standards. Advertising also has an educational element to teach the customer that what he or she will receive will be different and better than the customer is accustomed to receiving from the mega brewing companies. Promotion also emphasizes the naturalness of the product.Finally, the pub is promoted for its friendliness, its atmosphere, and its service. Professional entertainers and special events such as parties and sports nights are used to encourage patronage.The waiters are responsible to keep their areas clean, wipe the tables and countertops whenever they appear soiled, clear away dirty dishes as soon as they can, and dispose of garbage quickly. They sweep or otherwise clean their areas whenever time permits.Every morning the kitchen prepares the daily soups, salads, and ingredients for the pub lunch specials. The waiters arrive before their start time to prepare tables, check on assigned cleaning duties for the day, familiarize themselves with daily menu specials, and obtain sufficient change to handle customer billings.Cleaning crews come into the pub after closing hours and wash floors, vacuum carpets, scrub washrooms, and so on. The servers take on light cleaning duties to be done during their shift. The Brewmaster hoses down the brewery daily, and sanitizes and polishes the tanks. The computer cash register keeps a perpetual inventory record of food supplies, alcohol, and brewed beer. Physical counts are done weekly to check the records. Andy Bittrov supervises computer input, supplier payables, and banking relations. John Rumbol makes daily bank deposits and supervises all aspects of the brewery and pub operation, and deals with the various government inspectors and regulators. Joanne Van Wine maintains the computer hardware and software.With the help of his assistant and Alvin, John prepares the weekly shift schedules for hourly paid staff. The assistant manager prepares the payroll using the schedule and manager reports.The computer system has the capacity to handle more data and programs that would facilitate the operation of the pub and brewery. Innovative new kitchen, pub, and brewery equipment is being introduced in the market on a regular basis. M&M management monitors these trends carefully. Management and administrative costs of $19,000 per month including salaries are charged to the pub. Depreciation and amortization in the pub total $48,000 annually.RequiredDevelop a value chain for Merry and Mellow Pub. Show the profitability of each segment and the overall chain.