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04 Jan 2021, 17:47
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Topic:
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 twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits.”
My Response:
In an annual report sent to stockholders, Olympic Foods, a processor of frozen foods who will soon celebrate its twenty-fifth, noted that the costs of processing decline over time as organizations become more efficient. The report cited an example in the color film processing industry, which saw a 60% decline in the price of 3-by-5 inch prints in 1984 from 1970, even though the service time was reduced from five days to one day. The report then concluded that the same principle applies to the processing food, and as a result, the company can expect that its 25 years of experience enables cost minimization and profit maximization. However, the report’s argument is weak and depends on flawed assumptions.
First, the conclusion from the annual report — that the same principle, from color film processing, applies to the processing food — depends on the faulty assumption that the changes made in color film processing are necessarily available and applicable to Olympic Foods. Throughout the latter half of the 20th century, many technological products saw substantial reductions to their cost of production as the result of rapid technological developments. It is likely that the 60% decline in the price of prints can be attributed to external technological developments, not to more efficient processes learned through years of processing. However, without similar technological developments for the food industry, it appears unlikely that Olympic Foods would see similar drops in the cost of processing. Additionally, it is possible that Olympic Foods is unable to change its processing in any significant way, as it is unlikely that the preparation of food or recipes have changed much over time.
Next, the annual report depends on the faulty logic that the company’s longer experience necessarily translates into higher operating efficiency, thus resulting in lower costs of production. Though this might be true for industries that are dependent on technology, such as color film processing, I do not believe that this is the case for Olympic Foods. In most cases, longer experience results in lower costs of production because of the implementation of new technology, which makes operations more efficient. However, it is the technology, not the experience, that drives this improvement in efficiency. This can be seen in many old-fashioned industries, such as mining and cattle production, which have not seen this improvement in efficiency, despite years of experience.
Lastly, the report ignores all other factors that may impact the company’s costs, and profits, outside of the company’s tenure. In many industries, especially in one as industry-heavy as food processing, supply chain costs far exceed the costs of manufacturing. Accordingly, it is reasonable to expect that many of Olympic Foods’ costs are dependent on external parties and markets, and as a result, cannot be reduced through higher operating efficiency, as the report describes. Therefore, I would expect that the other factors that the report’s author does not consider, as described above, would not allow Olympic Foods to minimize costs and thus maximize profits. Likewise, the report does not speak about revenue, which is the other important factor in calculating profit.
To conclude, the report’s argument not only cites weak evidence, but also depends on flawed assumptions. By providing additional detail on their manufacturing process and how closely it parallels color film processing, as well as through adding more quantitative data on production, the report’s argument could be significantly strengthened.
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 twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits.”
My Response:
In an annual report sent to stockholders, Olympic Foods, a processor of frozen foods who will soon celebrate its twenty-fifth, noted that the costs of processing decline over time as organizations become more efficient. The report cited an example in the color film processing industry, which saw a 60% decline in the price of 3-by-5 inch prints in 1984 from 1970, even though the service time was reduced from five days to one day. The report then concluded that the same principle applies to the processing food, and as a result, the company can expect that its 25 years of experience enables cost minimization and profit maximization. However, the report’s argument is weak and depends on flawed assumptions.
First, the conclusion from the annual report — that the same principle, from color film processing, applies to the processing food — depends on the faulty assumption that the changes made in color film processing are necessarily available and applicable to Olympic Foods. Throughout the latter half of the 20th century, many technological products saw substantial reductions to their cost of production as the result of rapid technological developments. It is likely that the 60% decline in the price of prints can be attributed to external technological developments, not to more efficient processes learned through years of processing. However, without similar technological developments for the food industry, it appears unlikely that Olympic Foods would see similar drops in the cost of processing. Additionally, it is possible that Olympic Foods is unable to change its processing in any significant way, as it is unlikely that the preparation of food or recipes have changed much over time.
Next, the annual report depends on the faulty logic that the company’s longer experience necessarily translates into higher operating efficiency, thus resulting in lower costs of production. Though this might be true for industries that are dependent on technology, such as color film processing, I do not believe that this is the case for Olympic Foods. In most cases, longer experience results in lower costs of production because of the implementation of new technology, which makes operations more efficient. However, it is the technology, not the experience, that drives this improvement in efficiency. This can be seen in many old-fashioned industries, such as mining and cattle production, which have not seen this improvement in efficiency, despite years of experience.
Lastly, the report ignores all other factors that may impact the company’s costs, and profits, outside of the company’s tenure. In many industries, especially in one as industry-heavy as food processing, supply chain costs far exceed the costs of manufacturing. Accordingly, it is reasonable to expect that many of Olympic Foods’ costs are dependent on external parties and markets, and as a result, cannot be reduced through higher operating efficiency, as the report describes. Therefore, I would expect that the other factors that the report’s author does not consider, as described above, would not allow Olympic Foods to minimize costs and thus maximize profits. Likewise, the report does not speak about revenue, which is the other important factor in calculating profit.
To conclude, the report’s argument not only cites weak evidence, but also depends on flawed assumptions. By providing additional detail on their manufacturing process and how closely it parallels color film processing, as well as through adding more quantitative data on production, the report’s argument could be significantly strengthened.
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