Aloha Products

Aloha Products is a United States-based coffee-processor company that has been providing non-specialty and low-priced coffee for over a hundred years. It purchases the raw materials or what buyers and sellers refer to as “green coffee” from brokers and trade firms then processes the coffee and sells the final product to customers. Large companies such as Nestle and P&G directly import the unprocessed or green coffee beans from coffee plantations in tropical countries such as Brazil and Colombia while companies with smaller levels of business such as such as Aloha buy the green coffee beans from brokers or trade firms.

Aloha Products is managed by the owners and its headquarters is located in Ohio, United States. It has three plants located in Midwestern United States, each plant being responsible for its own profit and loss. Each plants performance is measured by each plant managers gross margin generated per plant. The raw materials or green coffee beans are handled by the company’s purchasing unit that is located in New York City. Each plant receives a production schedule that is determined from the center and receives raw materials as well as pay in accordance with the production requirements of each plant.

Aloha’s Top management is regulated by the members of the founding family. Company uses centralized control system where all main decisions regarding purchases, production, sales, marketing and promotion are made on corporate level while plant managers are only responsible for their profit and loss. Also there is centralized preparation of overall financial statement at home offices. This organization has led plant managers to a lack of adequate control over the activities of the managed plant; however, they are still assessed on the performance.

This method has been done until in the 1990s, when the plant managers started to speak out on their dissatisfaction on the computation of their bonuses since they do not have authority to determine the prices of raw materials, production schedules and output prices from the manufacturer. External factors such as the steady decline in Americans consumption of coffee from 1965 to 1990 affected the sales and profits of coffee processors as well.

Because of this, the company president hired a consulting firm to evaluate the current control systems in the three major departments: Plant Operations, Sales and Marketing and the Purchasing groups. 2. Case Question No-1: Evaluate the current control systems for the manufacturing, marketing, and purchasing departments of Aloha Products Answer is: From the case we can see that Aloha products have a centralized control system. What this means is that the main office or headquarters handled the purchasing, marketing and sales activities of each of the three plants.

Based on the current control system evaluating three major departments of Aloha Products are described as follows…… Evaluation of Manufacturing Departments: There are three production plants within AP’s manufacturing department; each plant is responsible for their own profits and losses. Unfortunately, the managers have no control over the any of the major activities in their respective production facilities. the vice president of manufacturing oversees all of the roasting, grinding, and packaging processes. Production schedules are provided to each plant manager for the current and following month.

The plant managers also have no control over the green beans purchase, production schedule, production mix, or the costs of their inputs, as the purchasing department assigns the costs based on the specific contract for that shipment. If the inputs exceed the plant’s requirements, they are sold at the spot rate in the market, and could very well result in a loss. Evaluation of Purchasing Departments: The purchasing department is responsible for obtaining the required quantities and types of green coffee to be roasted in the production plants.

The level of sophistication and expertise needed makes this department a necessity; proper staffing is vital based on the complexity of the green coffee market. This department relies on relationships with growers and brokers; for smaller firms, an important feature of this department is their ability to foresee demand and required inventory and subsequently enter into forward contracts with brokers, anywhere from three to twelvemonths in advance. The costs of each shipment are based on the specific contracts for those green coffee beans, which can vary based on the various price drivers previously mentioned.

This can create a diversified and volatile cost of inventory. Required inventory demand is based on communication between marketing (sales) and the purchasing department, any discrepancies at the current date is met by purchases through the spot market, which incurs significantly higher costs. The costs associated with running this purchasing department are charged to the headquarters of AP. Currently, there is no communication between the purchasing and manufacturing department. Furthermore, purchasing department does not need to report to head office or meet any performance measurement standard.

Ultimately, the power resides with upper management of the purchasing unit. Evaluation of Marketing (SALES) Departments: Under the current structure, this department is centralized. The president of AP and vice president of sales are in charge of advertising and promotion of the final products. The marketing department also determines the budgeted sales, which are then passed onto the purchasing department. Case Question No-2: Considering the company’s competitive strategy, what changes, if any, would you make to the control systems of the three departments?

Answer is: The changes to the current control systems involve establishing accountability and effective communication among the three departments and providing key measures to evaluate the managers’ performance objectively. Recommendations for the current management control system of Aloha Products are as follows…. Recommendation for Manufacturing Departments: The manufacturing department is currently a profit center. However, the plants do not have control over the costs of the green coffee.

Thus, the main concern of this department as a whole should be efficiency; how well they can control the costs to roast green coffee. As such, were commend that the manufacturing department’s plants be accountable for the costs incurred to roast and package the green coffee. The performance measure for the manufacturing department at AP should be evaluated based solely on the roasting, grinding, and packaging of AP’s coffees. Conceptually, it’s unfair to evaluate manufacturing as a profit center, when in reality it has little to no control over product costs or sales.

Since control over purchasing and selling will not be transferred to the manufacturing department in this proposal, it is logical to assess based on controllable factors such as cost/pound only. This is in contrast to a measure such as using manufacturing costs as a percentage of net sales. Instead of being assessed for the performance of the purchasing and marketing departments, plant managers will now have an incentive to ensure their costs do not vary from the standard. It would still be possible to evaluate roasting plants based on gross margin as well.

However, to ensure that plant managers are not penalized for fluctuations in the cost of green coffee contracts, a standard cost for green coffee would have to be established and used in the computation of gross margin. Recommendation for Purchasing Department: The purchasing department’s costs are being charged to central office. Due to this, the purchasing department is not being held accountable for the contracts it is entering into. The purchasing department’s main concern should be actual contract costs.

Thus, we recommend that the purchasing department be accountable for the difference between the actual costs per signed contracts and the standard cost of green coffee raw materials. The actual costs should be measured in a similar manner to the current practice. Contract costs related to buying and selling in the spot market should not be included in the computed price per bag. A reasonable standard cost for green coffee contracts will have to be established based on discussions between management and executives in the purchasing department.

The standard cost could potentially be based on the average of the spot price over the past 6 months. We recommend that this standard cost be updated every quarter, in order to provide accurate standard costs of green coffee raw materials. Recommendation for Marketing Departments: The marketing department focuses its efforts on advertising and promotion, however, it is not held responsible for the costs it incurs or how accurate their sales forecasts/budgets are. There is a large cost associated with differences between the forecasted requirements and actual requirements.

The difference results in purchases or sales at the spot price for green coffee, which tends to cost more than forward contract prices. It is not reasonable for the marketing department to perfectly forecast sales and therefore there should be leniency in developing a method of accountability for this department. We must keep in mind that our goal is not only to hold each group accountable, but also to make sure managers feel they are being evaluated fairly and motivated to improve performance. In keeping with this, actual sales volume should be compared to forecasted sales volume.

This will not only help to keep the marketing department accountable for their activities, but will also allow for forecast methodology to be reviewed and continuously improved. Overall, we believe that we also need to establish goal congruence between the three departments. This can be achieved through emphasizing communication between departments; this would encourage the forecasts of purchases/sales to be more accurate. In order to increase goal congruence and communication we recommend that the departments also be

evaluated based on an overall measure for the firm. This measure would be economic value added (EVA), as when it is applied, managers will not just be focused on their own department profitability, but also that of the company as a whole. The EVA approach promotes the same profit objectives across the different departments. Thus, by keeping the same structural organization and only changing the way each department is evaluated, the incentive plan for each department more accurately reflects what each department can control.