Overview of 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
plant's performance is measured by each plant manager's 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. Alohas 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 American's 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.

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 APs 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 plants
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 twelve
months 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 companys

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, we
recommend that the manufacturing departments 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
APs coffees. Conceptually, its 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 departments 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 departments 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.