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Description of 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
andAtlantic states. The company generates
annual revenues of $150 million through sales
of their brandedcoffee 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, corporateheadquarters, and
a special purchasing division which is
responsible for obtaining coffee beams on
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thecoffee, sugar, and coco exchange located

in New York. Corporate headquarters is
responsible for allmarketing and sales operations,
and is headed by the President and VicePresident for Advertising andPromotion. 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 isdictated to
plant managers from the corporate VicePresident of Manufacturing. The purchasing
unitlocated 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 companyobtains
its input beans through a series of contracts,
each of which is handled and treated
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separately.Because the inputs are purchased

months in advance, sometimes consumer demands
do not meet theinventory on hand at any given
time. In either the case of a surplus or
shortage, the company eitherbuys or sells
coffee in spot exchanges. The purchasing
unit was able to sell beans purchased on
theexchange to outside entities for a normal
profit, or to transfer the beans at the cost of
acquisition to thethree plants, with no profit
or loss recorded on the transfer. The overall
cost of running the purchasingunit 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
iscalculated. Their grievance boils down to
the fact that they cannot control the price
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of their inputs northe volume, price, or mix of

their outputs. In their view, this prevents them
from operating efficientlyand generating a

better gross margin

dentifiable Problem Areas:

Alohas issues boil down to

deficiencies in communications,
unit responsibilities,
and organizationalstructure. For starters,
the production unit (three plants) managers have
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little to no voice regardinginput purchasing, which

is handled by the automatous purchasing unit
in New York. The link betweenthe 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 thatmatter. 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 aswell.
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 plantmanagers unable to
determine output, this decision would not be an
available option to them.Additionally, because
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most aspects of production are dictated by

headquarters, it makes it nearlyimpossible for
the central office to accurately gauge the
performance of the plant managers and
byextension, the plant itself. What may look
to be a low gross margin may in fact be the
highest marginattainable given the
predetermined conditions regarding production at
those plants. Or, what looked tobe a high gross
margin may have been sub-par compared with a
situation where the plant managercould 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
informationregarding operations, with units
incorrectly labeled. The three plants are
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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 meetoutput demand can have
the opposite effect. The communication
disconnect between the purchasingunit and the
sales and marketing unit also means that
some purchases will be made that do not
alignwith customer needed, and unnecessary
sales through spot exchanges will be required

Possible Solutions
for Problems
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Corporate management needs to align

its performance standards with the unit
objectives. This eithermeans evaluating the
three plants as cost centers, where minimizing
cost is used as a metric, or it mustbe evaluated as
a profit center and given the ability to determine
input and output pricing volume, andmix. The
conditions of the market are such that
designating the plants as a cost center makes
moresense. If the plants were a true profit
center, each plant would need to purchase its own
inputs eitherthrough the purchasing unit in
New York or through a third party external
to Aloha. Because mostcoffee is purchased
through exchanges, any purchase of
beans through a third party would most
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oftencome at a marked up price over the

exchange price. Therefore, it makes more sense
to have a teamremain in New York for the
purpose of acquiring beans at lower rates, and to
have the plants functionstrictly 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 andmarketing units. By integrating other
areas of the business into purchasing the need
for future spottransactions will be reduced. Also,
by establishing the plants as a cost center, plant
managers can moreclosely attend to relevant
matters involving processing costs and
headquartered management canaccurately
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determine the effectiveness of the

managers and the plants

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