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Considering 4V model about Nayuki

Research on Nayuki drinks operation analysis with the
improvement strategy
As a typical "consumption upgrade product" in daily diet, new-style tea pays attention
to the quality of raw materials and product health, and at the same time innovatively
integrates the current trend elements popular among young people to create a brandnew catering that integrates taste, innovation, and fashion. product, the industry has
also developed rapidly under the dual background of favorable macroeconomic
environment and catering to the current consumption concept of young people. At the
same time, due to the relatively short period of time in the industry, from the beginning
of 2020 to the present, it is still affected by Covid 19, and a large number of stores in
the economy that rely heavily on offline physical stores immediately closed down,
causing many companies to fall into sluggish sales revenue growth, high operating costs,
and gross profit. This industry is such a sunrise market which should have boomed if
there is no external shock, and become one of staple industry in China’s economy.
Under the new business environment and consumer market, as the result, it is
significant to find a solution about the transformation of business models on operation
for enterprises.
Nayuki’s Tea (see appendix 1 for detailed business profile) is a leading enterprise in the
new-style tea beverage industry, targeting the high-end consumer groups of young
women, and taking the lead in becoming the pioneer of new-style tea beverages in the
market. It operates as a public limited company which listed in Hongkong Exchange
last year. Nayuki serves customers worldwide, mainly in China. It boasts the fame of
innovator of the tea. As its vision shows, "A cup of great tea, a bite of Nayuki’s signature
bread, and countless wonderful moments." Through the research of this paper it is found
that the company has a temporary management deficiency in the expansion, which
threatens the brand image, and the advantage of ensuring the quality of the company's
raw materials through a strong supply chain. Since the 2021 annual report states, the
company, through its subsidiaries, produces and retails hand-made tea drinks, bakery
products as well as peripheral products such as handbags, accounting for 74.2%, 21.9%,
3.9% in terms of revenue respectively. The following analysis will therefore mainly
focus on the operation of its most significant product —— hand-made tea.
Considering 4V model about Nayuki, as for tea-making, the volume is relatively low
since its signature product is hand-made tea, from brewing tea, boiling bubbles, to
packaging. Such a labour- intensive process will decrease the efficiency for them due
to increased inessential motions and less systemization. On the other hand, those
personalized products get higher level of variety, customers are allowed to customize
their own drinks in terms of cup size, temperature, topping, syrup or even the DIY
packaging if they like. The higher flexibility will not only satisfy customers’ needs,
make them feel more valued, but echo brands’ slogan “countless wonderful
moments”. The third aspect is variation in demand, Nayuki gets the medium high
level, mainly resulting from seasonal fluctuation. Its prospectus in 2020 states that in
order to forecast the demand for their products more accurately and valid, they invite
professional marketing panel to do annual quantitative analysis including time series
analysis and moving-average method to identify and apply the seasonal variation to
predictions. It turns out that, normally, the sales of tea in summer are higher than that
in winter, and the sales revenue in winter is one third of that in summer, since lower
temperature will decrease perspiration and further the desire for liquid. In addition,
many types of fresh fruit tea such as one of its most popular products named
“supreme passion fruit” can only made with ice, limited choices with hot drinks will
curb the consumption in freezing weather as well. Being visible to customers and
making tea face to face is one of the unique selling points for Nayuki. This
contributes to hearing final customers’ voice faster, meanwhile, it effectively shorts
waiting tolerance for customers, since they perceive all staff are busy at completing
their orders, they directly experience most of the ‘value-adding’ activities. All this
goes against lean production and possible higher waste will further rise the unit costs.
According to diagram 1, the process step from checking the raw material to the sales
to final customers of Nayuki is shown. In order to get and keep fresh raw materials
such as seasonal fruits, juices, normally, each store will check them at the end of
opening hours every day, and then directly give feedback to the stock or procurement
centers, asking for next day’s inventory. It takes about 3 days for transport those
perishable materials, and 36 days for packaging materials form central warehouses
which locates nearest to the store. Noticeable, fresh fruits are easy to be damaged and
deteriorated during transportation even they are kept in cold storage. Or tea cups and
paper bags may be out of dated if there is a change in trend or hot spot once they
reach, for example, some drinks have designed and launched special and limited
packaging with regard to Qatar World Cup recently, so did Nayuki. However, the
launch time for them is too late to catch up its rivals. It does not organize pre-sale, and
also the launch of their limited packaging and some other peripheral products are near
two weeks later than its competitors. The main problem is because of the unreliable
and delay delivery. After receiving the raw materials, they are splited into 2 store
condition in terms of durability. Perishable items such as milk are stored in
refrigerates while others such as tea leaves are stored at normal temperatures,
followed by using them for on-site production. This, to some extent, may increase the
operation costs due to over-inspection and managerial duplicates. As the result, better
logistic system accompanied by more accurate demand forecasting is needed to avoid
Diagram 1: Process map of making fresh-made tea drinks
Recent literature illustrates that dining facilities, such as café, carry a high labor cost
(Kim, Jang & Shawn, 2020). In such cases, capacity decisions are made from various
strategic perspectives, since labor costs affect profitability (Adenso-Díaz, GonzálezTorre, & García, 2002). Nayuki currently capacity management is feasible and
effective. It adopts mix strategies to maximize the utilization of its own capacity. First
of all, in order to cope with variants in demand, price discrimination is employed in
this business. For example, it devises special offers to allow for bulk-purchasing
discounts. As shown in its mini takeaway platform, customers can get 30% discounts
if they buy 2 cups of tea and 2 bread as a combo. Or if customers consume in-store
from 10:00 a.m. to 5:30 p.m. on working day, they could also get 5% discount as the
reward of avoiding over-crowded. In addition, it organizes below-the line promotional
activity to increase demand in off-peak periods, such as free coupon or buy one get
one free in specific winter day. On the other side, it also directly closes the online
order platform if there is a busy-time such as weekend, so consumers cannot preorder
or the staff may negotiate delivery time with customers, if they do want to order, there
is an expectation of expected longer waiting time told by staff so that it helps to
restrict services indirectly. Therefore, based on different price elasticity of consumers,
all these measures will help it to balance the demand in different periods, cooling
over-heated consumption, nudging and attracting some customers to consume during
slack time. Nayuki also meanwhile get chase capacity plan to adjust capacity in
responsive to the fluctuation of demand. Besides over-time working during peak time,
workforce planning does contribute the capacity management in supply side. As
shown in the annual report in 2021, 30% of its employees are with temporary or zerohour contracts, this allows the business to be more flexible to manage peak season
such as summer holiday. Also, more staff are available to be called, if there be
sickness or absenteeism, or just for demand surges. Moreover, the opening hour
adjustment also indicates that in order to meet the higher demand in peak season
(usually from April to October plus Chinese spring festival holiday in January), most
stores will open early and stay open longer from 9:00 a.m. to 10:30 p.m. compares
with that in winter from 10:00 a.m. to 9:30 p.m.
Even if Nayuki has already proved to be one of the top businesses in Chinese drinking
industry, there are still excess capacity it could exploited if improved capacity
management plan is introduced. Firstly, level capacity can be considered, keeping
manufacturing of basic food materials as close to ‘level’ as possible, and ignoring
demand fluctuations. Nayuki should focus on maximum utilization, for example,
consumers queueing moment. Some studies suggest that the management of queues
using technological innovations, such as online-based ordering and self-service
kiosks, can reduce long customer lines (Dixon et al., 2009; Ramasamy et al., 2018). In
particular, a cloud-based method to automatically manage the queues of casual dining
facilities was explored by Ramasamy et al. (2018), where the customers were allowed
to reserve their spot in the queue without being present at the facility. They posited
that the proposed system would enable the customers to be served within 10 min of
entering the facility. Besides reducing the customer wait time, queue management
technologies can also improve their overall experience (Dixon et al., 2009). As the
result, Nayuki should have got a strong online booking system. As shown in its 2021
annual report, 35% of its sales revenue generated from customer orders placed
through our WeChat and Alipay mini programs and Nayuki app. However, it
meanwhile gains increased customers’ dissatisfaction and negative publicity on
highly-frequent application crashes which makes inconvenient for customers and
further falls in sales. Some customers complains that “the mini program is too weak to
support their basic order needs, probably the internal IT staff do not receive a fair
remunerate, this is why their platform is such a useless application”. Another method
is to make best-sellers in advance when staff are relatively slack such as early in the
morning, and store and refrigerate them in cans, so that it contributes utilize staff
better to meet the surged temporary demand since they do not need to spend extra
time on making the products once order receive. However, Nayuki is required to
convince the customers that the quality of prepared canned drinks is the same as the
freshly-made ones, it takes time to change their perceptions as “make-to-order”
product is the most important unique selling point for Nayuki.
Meanwhile, this innovator has to do data collections and analysis if it adopts AI
system. Ali K. Dogru (2021) suggests artificial intelligence is widely used in current
retail operations. Web-based shopping enables retailers to collect vast amounts of data
regarding shopping habits, basket composition, and even browsing patterns. These
data provide information regarding future offerings, promotions, and help retailers
manage their supply chain operations, inventory fulfillment, and distribution systems.
Based on AI analysis, Nayuki could forecast the possible “right” amount of demand
more accurately. Through big data analysis of consumers' consumption behavior, it
can grasp consumers' consumption preferences, as well as the catering characteristics
and laws of the entire consumer group. Be able to respond timely and according to big
data analysis results. Despite AI immense benefits, this to some extent conflicts with
lean production since it increases waste by storing Inventory in excess of immediate
needs. Besides, AI applications currently operate in the grey legal area that has not
been regulated well. Inadequate regulation creates an asymmetric environment, in
which Nayuki might be incentivized to accelerate deployment of AI technologies
while spending minimal time for tests that are vital to protect consumers from
information disclosure. This not only does the business increase research and develop
costs, but also leads to customers’ untrust and an unethical image, further cuts its
profit margin.
In post-pandemic era, a dramatic increased unemployment rate in China and a
reduction in purchasing power of customers due to inflation hits the whole retailing
industry, as consumers tend to be more cautious towards travel and consumption with
the recurrence of the COVID-19 pandemic. Especially when the corresponding public
health control measures tightened in various regions when the Omicron variant
emerged in Mainland China in the second half of 2021, which brought challenges to
Nayuki’s financial performance. Specifically, in 2021, the Group’s revenue increased
by approximately 40.5% to RMB4,296.6 million from RMB3,057.2 million in 2020,
and the adjusted net profit/(loss) turned from profit of RMB16.6 million in 2020 to
loss of RMB145.3 million in 2021. The reason is that increased energy crisis caused
by Russia's war in Ukraine leads to higher logistic costs. And internally, as of
December 31, 2021, the inventories of the Group amounted to RMB174.1 million (as
of December 31, 2020: RMB103.1 million). The increase in the Group’s inventories
was primarily due to raised stock, however, it is noticed that write-down of
inventories goes up to 1.6 million (2021) from 0.6 million (2020), indicating the of
waste on raw materials including dairy products, seasonal fruit and on cost of
packaging material such as tea cups and paper bags might be the culprit of its loss.
Therefore, it is necessary for Nayuki to adopt the philosophy of lean production.
Krisztina Demeter (2010) states that companies that implement lean practices in
manufacturing have significantly better inventory turnover for each type of inventory
(RM, WIP and FG) than do traditional companies. The Group’s inventories turnover
days increased from 28.5 days for 2020 to 36.1 days for the Reporting Period. Lean
companies keep fewer inventories of any type. By the practice of lean production,
Nayuki will maintain the flexibility of production while improving resource
utilization (Chase et al, 2006) by prolonging the turnover rate.
As the result, firstly, the business could keep minimum level of inventory to avoid
risks, this requires reliable suppliers with no delay delivering when needed, so just-intime system could be applied once they get trusted upstream companies. This requires
an advanced ERP system based on timely information of supply chain management.
In particular, each store of the business collects customer information about their
demand, through the customer-based store system, and transmits the customer
demand information to the operation decision-making system of the headquarters
after sorting. The operation decision-making system of the headquarters will feed
back the information to the corresponding departments through the supplier-based
procurement system, so that the procurement department can make a reasonable
demand plan. Then, the purchase order is issued through the collected relevant
information, and the information is exchanged with the supplier through the system.
The logistics management department shall check the warehousing situation and the
demand plan of outlet stores fed back by the headquarters in real time through the
logistics management system based on distribution and transportation, and timely
arrange material distribution. This system might be very help in the distribution of
perishable raw materials such as fresh fruits and daily milk. In addition, considering
backward vertical integration is an alternative, so that it ensures the quantity and
security of supplies and possibly reduces the costs of supplies. In 2021, the Group’s
largest supplier accounted for 10.39% of the Group’s total purchase. And the Group’s
five largest suppliers accounted for 29.80% of the Group’s total purchase, this shows
that Nayuki may be over reliant on those suppliers, leading to lower bargaining
power. Or it is advisable for Nayuki to develop its own supplier chain from the very
first stage such as raising cows on its own pasture to provide dairy products, or
growing exclusive tea plantation in order to get the fresh tea leaves.
Secondly, since the most consumers complaints are about too long waiting time, and
for delivery not arriving as promised (See appendix 2 for detailed complaints), it is
urgent for the group to decrease motion of the staff. The fresh-tea making process is
based on piece rate with independent individuals, which means, there will be only one
staff who serves the customers from the ordering, the making, till the delivering. They
will always get into each other’s ways to finish more pieces with unstandardized tea.
It will be more efficient and productive if the whole store could produce with division
of labors and arranges different employees within the same stores to finish different
tasks, since decrease the time between different tasks will presents a more
professional and well-organized image. Also, the defect rate might decrease as
specialized staff may be more skilled due to repetitive work, further leads to eliminate
unnecessary excess production, includes any form of inspection to avoid non-value
add activity such as over-processing.
In conclusion, since early 2022, a new wave of COVID-19 outbreak has impacted
various regions across Mainland Chinese with raising reported confirmed cases. The
Chinese government has imposed various restrictions over business activities,
including temporarily banning of dine-in services and reduced business hours in
certain areas where the confirmed cases are high. From 2020 to 2022, more than 60%
milk-tea shops have left the market due to limited revenue stream. The impact to the
operation of the Group remains highly uncertain and subject to the development of the
situation. Introducing lean production in the long run will definitely benefit the group,
however, in the short run, the high set-up costs on information system or professional
training of staff may result in a huge cash outflow at the same time. Potential liquidity
problem could occur which makes it harder for Nayuki to survive at the moment.
Therefore, a more conservative strategy rather than aggressive expansion and overexcessive on research and development might be more appropriate for the group in
2022 considering its main market is extremely shocked by external factors such as
political or economic influence, which is out of control by Nayuki itself even if it has
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Appendix 1: Nayuki group profile
Nayuki Holdings Ltd is a China-based investment holding company. The Company is
principally engaged in the sales of freshly made tea drinks, baked goods and other
products. The Company mainly operates two teahouse brandsits flagship brand
Nayuki and sub-brand Tai Gai. Nayuki focus on offering a broad array of freshly
made tea drinks and handcrafted baked goods. Tai Gai mainly offers a selection of
classic milk tea and lemon tea drink. The Company has developed a list of classic and
seasonal tea drinks, comprising three major product categories in fruit teas, milk teas
and pure teas. In addition, the Company provides a wide selection of other products,
such as gift tea boxes, snacks and ready-to-drink tea beverages. The Company
distributes its products both in the domestic market and to overseas markets.
Appendix 2: Customers’ complaints on Nayuki