BY:

Hedie Mirimoghadam

Farid Khaheshi

Nassim Parsa

Product Analysis

Market Analysis

Company Analysis

Suppliers

Brazil, The largest

Colombia

Indonesia

Ivory Coast

Mexico

Coffee

Arabica in South

America

Robusta at Ivory Coast

Buyers

United States, The

largest

Europe

Origin Country

Trade Firms

Food Processor

Coffee Business is a relationship Business.

Drought and Frost

The Level of coffee inventories in major producing and consuming countries.

Marketing policies of exporting countries.

Premium and Gourmet Coffee Sales increased.

Nestle : The largest coffee company in the world.

Philip Morris and P&G: The largest coffee producer in US.

Their resource:

Infrastructure, distribution network, brand equity, production resources and marketing expertise.

The company operated 3 plants, each plant with its own profit and loss responsibility.

Headquarters presented monthly gross margin statements for each plant.

Every month, headquarters present plant managers with production schedules for current month and a projected schedule for the succeeding month.

Each plant has small accounting office to record manufacturing costs and prepared payrolls.

Plant manager has no control over buying the green coffer beans. A special unit within the company handled the purchases.

The purchasing unit kept all its records and handled all financial transaction related to purchasing, sales to outsiders and transfers to the three company-operated roasting plants.

Unit manager report directly to the company’s secretary-treasure.

The PU’s primary function: Obtain necessary varieties and quantities of green coffee

The purchasing group entered into forward green coffee bean contracts with exporter.

The group can also purchase on the spot market- purchase for immediate delivery.

Spot purchases are kept to a minimum.

The difference between actual deliveries and current requirements is handled through either sales or purchases on the spot market.

The company would sell to, or buy from, coffee brokers and other roaster.

The usual policy of a company is to makepurchase commitments based on maximumpotential plant requirements and sell the surpluson the spot market.

The company maintains a separate cost record foreach contract.

The record is charged with payments for coffeepurchased, shipping charges and import expenses.

For each contract, the purchasing groupcomputed a net cost per bag.

The operating cost of running the purchasing unit was charged directly to the central office.

The cost was recorded as an element in the general corporate overhead.

The problem was in computing gross margin.

Q: Evaluate the current control systems forthe manufacturing , marketing andpurchasing departments of Aloha products.

Answer:

The management control structure does notgive the plant managers control on any of themajor activities of a production facility.

The plant manager does not control the greenbeans purchase, production schedule or theproduction mix, nor do they have control oversales or marketing.

Aloha Products has a cost center structure,but the control system is attempting tomeasure the roasting plants on a profit centersystem.

Having a profit center measurement approachfor infrastructure that operates in a costcenter approach, will not provide reasonablemeasurements for the management controlsystem.

The plant manager's concern regarding theevaluation system is valid. Without propercontrol over the input and output you cannotexpect the plant manager to perform well.

Aloha, should not tie the gross margin of theplant to the manager's evaluation withoutgiving them the ability to control all thevariables that affect the gross margin.

Aloha, should not tie the gross margin of theplant to the manager's evaluation withoutgiving them the ability to control all thevariables that affect the gross margin.

Current measurement system is notappropriate. Given the current situation, themanagers evaluation should not directly tiedthe gross margin.

Q: Considering the company’s competitive strategy, whatchanges, if any, would you make to the control systems forthe three departments?

Answer:

Purchasing

Given the volatile nature of the coffee market, having acentral purchasing unit is necessary. Expecting each plant tohandle the coffee purchases will add unnecessary overheadcost to the company. One recommendation is to restructurethe purchase unit as an operational arm of all three plants.Purchase department should take the requirements fromeach of its plants and execute them. This gives Aloha toachieve cost savings from bulk purchasing. This approachalso gives the plants an opportunity to control their inputsaccording to their needs.

Marketing

Aloha should continue its marketing from thecentral office. The marketing resources will bebetter utilized under one unit since all threeplants producing the same product. Understrict profit center approach, the plant shouldundertake the marketing function as well. Inthis case, the parent unit would be servedbetter if a central unit handles the marketingfunction, because the Aloha can promote itsbrand in an efficient and integrated manner.

Sales:

Sales function should be conducted at theplant level. Aloha's target areas should bedivided into the three regions and each unitshould be assigned one sales area. This avoidspotential cannibalization within the threeplants if they are allowed to sell at free will.

With sales under their supervision, the plantmanagers can make long term sales forecasts.Depending on their current and future salesforecast, the plant manager can make greencoffee orders to the purchase unit and controlproduction levels accordingly.

Plant Management:

Current system of evaluating plants on grossmargin can be applied with aboverecommendations, but using EVA for plantevaluation would be a better approach at thispoint. EVA approach allows assigning sameprofit objectives of each plant and also allowsassigning different interest rates for coffeebeans depending on the time of purchase.

This approach also allows the plant managersto make plant investments without negativelyaffecting their performance. When plantmanagers are evaluated and compensatedbased on the EVA of the plant, they aremotivated to increase the EVA of their plant,which in turn will benefit the whole company.