Caper? Measrng and Cooling Anu Bgljed 309 Case 7-4 Aloha Products 1m compat fp. How am Teuppaod to ran a prftala plat whan dnt Ihave any control oer the pi of my input and none over the veume ie or ‘mi fy utp Fn hd eta by te whine th purchasing nd ‘meraeting department [dd got business ein] Tenuld be evacted on {Ga bse eecrnoace led perranen, Li Anerson ‘Alc Praducs Pant Manager, Dayin, Ohio October 804 ‘Ala Products, founded in 1910 and headquartered in Columbus, Ohio, sold lis own brends of coffee throughout the Midwestern and Middle Asanti States. In 1884, the saos revenues of the company were $150 milion. Th em ‘anys stock was closely held by mombors ofthe founder's family. The proi- ‘ont andthe cecretary-treesurr wore part ofthe family and th only reembers ofthe management taam to have aguity stakes. ‘The Coffee Industr} ‘Cofes in its raw state Ie referred toby buyers and ellers as “gran caffe” "Ths refers to tho grosn beans that ae pckod fom the coffee tres. Tharo are ‘wo types of coffee beans: arabice and robusta. Arabica, afevoritoof American consumers, is grown primarily in South America, Robusta cofed's major (gromear is the Ivory Coast. It hase stronger favor than arabica and is favored By processors who make instant calfee. Suppliers (Coffea generally s grown in tropical regions. Bema the largest producer, sup plies 201080 porceat ofthe words goon cof. Other lage exporting countrie {elude Colombia, Indonesia, the Ivory Coat, and Mexico, Coe is harvesind somewhere in tho world almost every manth of tho yor. For example, Breil harvests coffee Api through Septamber, Colambia from Octcber inte March, ‘nd the Fvory Goa rom Novernber into ApHL Buyers ‘The United Stats is tho world’s largost single importa of effs. I buys moet of te coffe from Brazil and Colombia. Burope is second, purchasing a Uitle Teen than haf of al cnfee exported. ‘Buyers fall into tw catogories: reasters and brokers, Roasters include large food processing companies euch aa Philip Moria (which acquired Generel “Thcae wa ten by thar C Murphy (93a a. Chae (94 ude person {Prk Code any hc oe a ped Sta a cv co dy tt Rt Paat One The Monagument Court Enns ods, nsluding ta Maxwell House brand P&G, and Nestlé, a3 well as ro tonal aud loa coffee compenien. Large players purchase tok cafes supplice ‘secty fiom the growers. Thor Ananealerength generally ellowa thera to ‘negotiate favorable terme with Uhe growers and t faventory coffe stock as protection agsintfotureprie increases. ‘Smaller caffe proveesos normally bay thet otfee frm brokre—oither a “pure” broker ora trade fim, Pure brokers don actually purchase the coo, they maraly match bayer and wellerin the merkatplace Tadefirns do purchase ‘ff from its country of origin and then sel to fod procesor. Generally, they nance their $ranaocsons through secured Toane frm commercial banks ‘Thea bank aval allow acodioworthy eompany vo borrow 80 980 porcant of the markot value laced on th spt pric) ofthe coffee purchase, The bank holds the tile to the eofon unt the trade re sella the product ta ond user, nee hoe ropa here nko reneising protest ae pre or large and small buyers, the coffe busines is relationship business Developing stong relationships withthe rowers la important to maintin ¢ stendy nappy of eae, Although clfee f eammadity product and, as such Stn tupply and demand depend on pric, one cannot fly dwn to Colombia and texpoct to bay millon beg of eof ealy.Groware Went to dal with buyers they trust and vice vere ‘strong eleionship provides bw thing: information about the coffee markt and an inti tack one growers cop. Thais expecially important ita roaster ‘needs caraln type ofeffea (eg, Colombienmil) to maintan astandardblend ground colfeo that will keep caasumars viking "othe last op Factors Affecting Price Wester, specifically fort and drossht, eth mot important factor affecting reduction and hence price fr Westra Hemisphere clfes. The commedity Sections in most maj newapapers fen erry stores conceraing Uh effect of ‘weather on harvert, Coffe eps from Buntern Homlophors counties moet tftan are damaged by insect. The lave of eae inventries in major produc {ng and conruming cruntriee is anouber important market consideretion. ‘Actual or threatonod deck strikes may causa buildup of ene stocks ata por of exit Marketing policies of vero exporting countries ala alfct pices On {the eosrumer nde, high retail price or concerns about health ean reduce con sumption, whieh, a furs, may exert downward prea on pees ‘The Futures Market Fuinres markets fr coffe exist in Now York, London, and Pars. In Now Yor, caffe fatares ure traded on the Coffe, Sut, and Cocoa Bxchange. Predicting ries and availability of green oofeo beans entails considerable uncertain. ‘Thos, the normale ofthe coffe futures narkot ito aot up « hedge to pro- tect ones ivontory position against pree tuctuatioe. A hedge is commonly Aefined as the estblishment of postin inthe futures matkot approximately ‘equal to, but in th opposite direcuon af, a commitmonsin the cash market (also koown as the psa, or actual, ommodity). Only 2 pereat ofall atures contracts rebut in actual dalivaryo'eufee beans. Tho majority of cn tee er deed ot by prehasing a cnc in the opont dieton by ling one's own entract(Capt Meaning and Conlin vet plod 319 For example, a company that owns an inventory f coffee establishes short postion in the fares market. This poriton offeets a drop i the value of the firm's inventory in case coffee pricce decline. The short position cbignes the holder sell coffe ata predetermined price at some future date. If, jn the fo ‘reef prics drop the shar postion increcse in value beceuae te holder Tooked in ata higher sles pees Thia feta the dodine i vale of the actual coffe inventory. It is virtually impossible to set up a perfect hedge postion ‘because of imperfections between the phycal and futures merkets, but the favures markets do protec! the value of one inventory Hldging leo allowe coffee merchants to get bank credit. Benks seldom lend money ta commodity holders wha do notattemp to hedge ther positions properly Coffee Consumption Trends ‘Per capita cafe contumption hee declined precipitously since 1965. Fxbibit ‘hows US liquid eonaumpsen in saver drink etegores, While overall cafes ‘consumption declined, specialty premium and gourmet cofees backed this trend tnd sold wall. Gourmet cafes aals lane elimbed from appraximataly 1500 milion in 1987 to $780 milion in 1992. Daring this period, total coffee tales moved only from $6. billion 086 Silion, Specialty brands attracted new toffee consumers who wore youngor end more afftent than the enfae drinkers of 30 yen enrlier Gourmet nd premium effec aosunted fr 10 percent of < {aa cnwamption in 198, an th perentage wat epee toners inthe fare. ‘Many small firms scppod into both crate nd take advantage ofthis ahi ‘a contumer preferencn One of tiem was Seatile bated Starbucks Colac Cn pang. Starbucks Parchabed nnd rosa high-quality whole bean coffees and tel them, along with fresk-brewodenfe, a varoty of pastries and confections, EXHIBIT A Generation of volving Tastes—US Ligué Consumption Trends (Galtons por Capita) cane by ld agave 0512 row he Management Conta! Bnsrnmen exwiorr 2 Sopment Sale ‘and Expense Data i milion) “et pia cnn i hemp te er nea and coffe related accesscries and equipment, primarily through ita company- ‘operated retail stores, To ensuze compliance with its rigorous coffee stan- dards, Starbucks purchased greoneofoo beana for its many blonds from ‘fee producing regans throughout the werd and custom roasted them ‘9 ts ‘evacting standards [¢ also contrlld the packing and distribution of enter to its retail stores. For the year exdod October 1994, Starbucks generated $284 millon of sale from 400 compuny-operated retail outlets. Gruen Mountain Coffe Reastere GMC), basod in Shelburne, Vermont, on- Joyed $31 milion fn ales for 1981 This company had seven retail oulets and ‘mare than 1,000 restaurant and gotrme fod store accounts. GMCR hep: its reas igh and was decidedly high ee, sing a computriced reacter wad a Aatabase to help customers manage their coffee inventories. “While the specialty eafo industry had high hopes for contumer demand in ‘he early 90, some trend in consumer products pointed to opportunities in the nonspesalty segment. Ta the wake of an ezonomie eceaion, eonomert were cost constlous. Accordingly, demand for lower-priced store brand (pr ‘ate labels) increased Te was not yotconr how this trend would manifest al? {nth coffe etall marke n the yotrs ahead. Competitors [Nesté was the Irgetcofoe company inthe world. In the Unitad States, the largest cafe producers wore Philp Mors (Maxwall Hous) and P&G (Folger) ‘These companion had conidorable meource:infrestructar,distribation net works, brand equity, production resources, and mevkating expertise. They ‘ned competed largely through heny sverising\ and aggressive pricing Senet tive to shifts in cffe consumption al three had introducod many new coffee products. (Selecied financial Gata on tho major compelitore are provided in ‘chit 2) Tn adi to theo exfs giants, chere were several nebo players such a Starbuck, Aloha Products ‘The ico prsident of als for Asha Products and his two asitantscetrally ‘nunagd the ales polices. The company president nnd the vie president of ‘oles jointly assumed responsiblity for advertising end promotion, The vise "1990p Mors and PG ee set uty 160 mln on tain | |extioir 3 Prot & Lose Statement for ‘Plant Nod Opn? Meurng and ang ants role 318 TNeaaesGhiprectatbiling pce) ——SSS~S~S~« president of manufecturingoversow tho roasting, grinding, and rackaging of ‘sha’ coffees, "The company operated thres rossting plant fn Use Midwest, each plant ‘with te own pruft and loss responsibilty. pant manager's bonus Was a per. entage of hin or her plants gros margin, Hendquartore prepared monthly ‘gous margin statements fr ooch plant, ou iuatrated in Exhibit & ‘AL the start of euch month, hosdquartare provnted plant managers with ‘production schedules fr the current month and a projected schedule far the ‘eeseding ant ‘Bach plant had a amell accounting ofc that recorded all manufacturing coats and prepared pyrola The home offce managed bling, eet, and ca eon and prepere lof he copay rue att laut managers had no control over buying the green (unprocessed) cofoe ‘beana, special purchesiag un within th company bundled these purchases, ‘Tho unit was located in Now York City the eart ofthe green cobs business, ‘because ths alowed constant contact with cufoe brokers. The purchasing (group was largely sutonomaus it kept al of ts own rsords and hubdled al of ‘he financial transactions related ta purchasing, sales to outsiders, and tra fare to the theo company-opersted roseing plants. The uals manager ported directly tothe company’s screiary-treerures, ‘The purchasing units primary function was to obtain the necesary var- tien and quantities of geen coffee for the tonatng planta to blond roast, pack, ‘and deliver to customers, The pursing group dealt wth mare tan 60 fe {td grades of coffe beans grown in topical countries all over th word ‘Using projected sales budgets, the purchasing group entered ito forward sroen coffe bean contract with exporters, arward contracts rocured green fnlfee delivery 3 to 12 months out at apcie prices. The group also had tho option of parehering on the spot markel~that ig, purchawo for immedialo dalivery. Spot purchasse were kept toa minimum. A purchesing agents know fedgo of the market was erica, tho egont had to jadge market trends and ‘ale comutinent acardingly.514 fetGne The anageent Contra Boonen ‘The result ofthis process was thatthe green cee purchasing unit bought & ange of ates in advance fr delivery at various datos. AL the actual delivery date the company salen were not sways at thelevel expected wien the org ‘nal green cate contract was signed The differmce betwoon acbldeliveriss and eurront roquiremonts was handlod through cthor sales or purchases ot the spot masket. The company would sll to, or buy from, eofee brokers and sometimes from ster rornars. ‘As tn example, commitments fo Kona No. 2(a grado of Hawaiian coffee) might specify dalivry in May of 2,00 bags (a bag contains 182 Tb. of green ‘alfo). Thee eliverea would be made under SDentract cxocuted a! varying ‘ries, 9 to 12 mente before the maou of dalive'. for eome season dna for the company’s products fl in May, the plat raw material needs could cxerespondingly fll to 17,000 bags, tn this cave, the purchasing unit would Ihave to decide betwean paying to tare 6,000 surplus begs in roncompany fe clitis or alin the coffe onthe open market. This example had been typical fhe company’s normal operation, Generally, the company’s big volume purchass permitted ito buy on faver- sable terme and to realize anormal brokerage and trading proft when i wold ‘smaller lot to small roasting companies, Hence the wual policy was to make urchase commitments based on maximam potential plant requirements and fell he surplus on the spot market. ‘The company aezounted fr coffee purchane by maintaining a aeparate cot cord for each enirat. Thi record wos changed with payment fr cfs po ‘hased aswell as shipping charges, import expenss, ad ena tems. For cach ‘contract, he purchasing group computed ane co per bag. Thus, the 60 deliver Jesof Kone No. cod in the example would come nto inventory at 80 diferent oats. To etblishod policy waa to reat each eonractinvidualy. When green fofle was shipped toa plant, «charge wea madefor Uh oat represented by the fontract that covered that particular shipment o'cffe. There was no elemat bf prfitorlas ssaclatad with tha tranafer Whenthe company sld green aoe ‘on the cpen market, tho cals were ikewige costal ona specie contract bas witha resulting profi or lat on the transectin. ‘The operating suc of runaing the purchasing unit was charged deel to ‘he central fies The cost was ncorded us an element inthe general corporate ‘overhead. "Por tho pest soveral yours, tho plant manager had boen diate with the method of computing gross margi (ae evident from Uso quote a Us Dgin- hing ofthis ens). Thai complaints Hall motivated the president to reqsest ‘8 caneulting fm that specials in steatogy execution to sbady the whole Imothod of reparting the renulla of lant eperatons, rales and marketing, and ‘the purchasing groups. Questions 1. Byaluate the crrent control system fr the marfacturing, marketing, and purchasing dopartmant of Aloha Prods, 2. Considering the company's compelitiv atraegy, what changes, any, would you make tothe contol eycoms for the Uses lepartmenta?