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Description of the Current Situation Aloha Products is a privately held regional processor of specialty coffees.

Headquartered in Columbus, Ohio, hey operate three processing and packaging plants and sell coffee blends in the mid-west and Atlantic states. The company generates annual revenues of $150 million through sales of their branded coffee blends in addition to normal profits earned on spot exchanges resulting from excess inventory. The company consists of the three processing plants operated by plant managers, corporate headquarters, and a special purchasing division which is responsible for obtaining coffee beams on the coffee, sugar, and coco exchange located in New York. Corporate headquarters is responsible for all marketing and sales operations, and is headed by the President and Vice-President for Advertising and Promotion. The plant managers were each responsible for their plant operations which consisted of processing and packaging. Plant manage compensation is tied to gross margin. Production output is dictated to plant managers from the corporate Vice-President of Manufacturing. The purchasing unit located in New York is nearly autonomous in their operation. Purchasing of coffee beans is done 3-12 months in advance of the delivery of the beans. The company obtains its input beans through a series of contracts, each of which is handled and treated separately. Because the inputs are purchased months in advance, sometimes consumer demands do not meet the inventory on hand at any given time. In either the case of a surplus or shortage, the company either buys or sells coffee in spot exchanges. The purchasing unit was able to sell beans purchased on the exchange to outside entities for a normal profit, or to transfer the beans at the cost of acquisition to the three plants, with no profit or loss recorded on the transfer. The overall cost of running the purchasing unit is charged to the central office, and then incorporated as part of general overhead. Recently, the plant managers have expressed discontent with the way in which their gross margin is calculated. Their grievance boils down to the fact that they cannot control the price of their inputs nor the volume, price, or mix of their outputs. In their view, this prevents them from operating efficiently and generating a better gross margin. Identifiable Problem Areas Alohas issues boil down to deficiencies in communications, unit responsibilities, and organizational structure. For starters, the production unit (three plants) managers have little to no voice regarding input purchasing, which is handled by the automatous purchasing unit in New York. The link between the two is essential, as processing managers will have much better knowledge regarding production capabilities and cost minimization than will the purchasing unit, or even the corporate office for that matter. Labor efficiency, mechanical breakdowns, wages rates, overhead expenses, etc. will all be different at each plant, and therefore the decisions made by the managers at those plants will differ as well. Logically then, if managers cannot make decisions regarding input acquisition, price, volume, and output, their hands are tied in terms of generating profit. For example, it could be possible in some

cases to increase total profit while reducing gross margin (the Wal-Mart model). However, with plant managers unable to determine output, this decision would not be an available option to them. Additionally, because most aspects of production are dictated by headquarters, it makes it nearly impossible for the central office to accurately gauge the performance of the plant managers and by extension, the plant itself. What may look to be a low gross margin may in fact be the highest margin attainable given the predetermined conditions regarding production at those plants. Or, what looked to be a high gross margin may have been sub-par compared with a situation where the plant manager could control all aspects of production. In essence, the company is attempting to operate on both a centralized model, with sales, purchasing, marketing, and output decisions being made at headquarters, but also with a decentralized structure, with production and purchasing being done by separate units. They also have inaccurate information regarding operations, with units incorrectly labeled. The three plants are evaluated as profit centers, while they actually operate as cost centers. Finally, the companys process for purchasing beans results in unnecessary shortages and overstocks. While central purchasing results in favorable pricing for the company, spot exchanges needed to meet output demand can have the opposite effect. The communication disconnect between the purchasing unit and the sales and marketing unit also means that some purchases will be made that do not align with customer needed, and unnecessary sales through spot exchanges will be required.

Possible Solutions for Problems Corporate management needs to align its performance standards with the unit objectives. This either means evaluating the three plants as cost centers, where minimizing cost is used as a metric, or it must be evaluated as a profit center and given the ability to determine input and output pricing volume, and mix. The conditions of the market are such that designating the plants as a cost center makes more sense. If the plants were a true profit center, each plant would need to purchase its own inputs either through the purchasing unit in New York or through a third party external to Aloha. Because most coffee is purchased through exchanges, any purchase of beans through a third party would most often come at a marked up price over the exchange price. Therefore, it makes more sense to have a team remain in New York for the purpose of acquiring beans at lower rates, and to have the plants function strictly as cost centers. This would also maintain efficiencies without the need for redundancy. However, the purchasing team cannot be independent of the plants or the sales and marketing unit. Instead, the purchasing unit would comprise of representatives from each plant and from the sales and marketing units. By integrating other areas of the business into purchasing the need for future spot transactions will be reduced. Also, by establishing the plants as a cost center, plant managers can more closely attend to relevant matters involving processing costs and headquartered management can accurately determine the effectiveness of the managers and the plants.