Hi,
Can anyone please review my AWA.
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."
The excerpt of the annual report sent to shareholders by olympic foods is flawed as it makes use of faulty assumptions and vague generalizations.
The report assumes that the cost of processing goes down overtime because organizations learn to do things better. This is a weak argument because there are a number of components that make up the cost of processing. These components include fixed costs like land and building and variable costs like the cost of raw materials, transportation to and from the processing facility, salaries and energy. A number of these components affect the economy on a macro level and are simply out of the control of Olympic Foods. For instance, if the cost of petrol goes up by 100% over the 14 year period, we expect the cost of powering the processing facility, and transportation to go up in commensurate amounts which can lead to an increase in the cost of production and has absolutely nothing to do with the experience of Olympic foods. A stronger argument could have been made if we had more information on the fixed and variable costs, macro economic data like inflation, employment rate over the time period in comparison,
The next faulty assumption is comparing the color film processing business to the food processing business. Food processing processes are logically expected to have a more complicated process than color printing. These industries are very different and are expected to have more differences than similarities in terms of their processes. They are also expected to be affected by very different micro-economic factors In the processing chain of food for instance, we expect storage before and after processing to be a significant component of the cost, whereas color film processing even if they have the need for storage will have less specific requirements which logically is expected to be cheaper. Hence a 100% increase in the cost of a food processing storage unit might not necessarily mean an increase in the cost of a color printing storage unit. A better approach here would be to compare a similar industry like beverage processing or other similar food companies which should have similar requirements and costs.
Another faulty assumption is the conclusion that the drop in the cost of producing a 3 by 5 inch print dropped solely because of the age of the company. This drop could have been initiated by a subsidy by the government on specific machinery or supplies, development of a new and improved technology by independent researchers among other things. Having more information about the cause of the drop would have helped improve the argument.
The conclusion of Omega foods on its magical increase in efficiency just because it turned 25 years needs to be re-thought all together as it is made on faulty assumptions.