Olympic Foods - Please Rate/Give Feedback
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10 Oct 2016, 12:38
Question:
The following appeared as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen foods:
“Over time, the costs of processing go down because as organizations learn how to do things better, they become more efficient. In color film processing, for example, the cost of a 3-by-5 inch print fell from 50 cents for five-day service in 1970 to 20 cents for one day service in 1984. The same principle applies to the processing of food. And since Olympic Foods will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits”.
Answer:
The argument that Olympic Foods can expect lower costs associated with long experience is faulty in numerous ways. The argument fails to establish a solid connection between longevity and efficiency. Additionally, the argument does not address the differences between the color film processing industry and the food processing industry, nor does it take into account extraneous factors that may effect costs and profits.
The argument asserts that the cost of color film processing dropped as a result of improved efficiency over time. There is, however, no evidence to support increased experience as the cause of the decreases cost. The decrease in costs associated with color film processing could be attributed to a wide array of factors. Technological advancements may have resulted in lower costs. Increased competition may have driven prices down. The integration of film processing locations into existing buildings, such as pharmacies, may have reduced overhead costs. None of these potential contributors are tied directly efficiency learned as a result of long term experience. The argument would have been better supported had it provided evidence that factors such as technology, competition, and overhead costs had remained stagnant during the same period of time.
The second weak connection made in the argument is the comparison between the color film processing industry and the food processing industry. Even if evidence supported the assertion that improved efficiency resulted in lower cost in the color film industry, there is nothing to suggest that the same principle would apply to the food processing industry. One variable to take into consideration between the two industries is skill level. The rate of efficiency improvements can be expected to be higher in the color film processing industry if the workers are more highly skilled than in the food processing industry. Another variable is employee tenure. Employees with longer tenure have more opportunity to improve efficiency, thus, differences in average tenure between the two industries would nullify the presented argument.
Finally, the argument fails to take into consideration other factors outside of efficiency that may influence costs and profits. Changes in regulation, unionization, and the cost of raw resources would result in an increase or decrease in profits unrelated to improvements in efficiency. To strengthen the argument the author would need to cite evidence to assert no other changes are expected for the food processing industry. The weight the argument places on improved efficiency as the sole influence on cost and profits opens up the argument to many unanswered questions.
The author’s argument fails to sufficiently account for many other influences on the cost and profits expected to be experienced in the food processing industry. Without additional evidence to support the cause of the color film’s industries cost reduction, the comparison between the color film industry and the food processing industry, and an unchanged environment for the food processing industry, the argument fails to hold up under scrutiny.