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Q1. Evaluate the current control systems for the manufacturing, marketing and purchasing departments of Aloha Products.
Solution: From the case we can see that Aloha products is structured on a cost basis; however the control system is attempting to measure each plant on a profit basis. Thus the company have a centralized control system. This means that the main office takes all the main decisions regarding purchases, production, sales, marketing and promotions in order to save costs. However, the plant managers are responsible for their profit and loss and are evaluated on the basis of their performance despite lack of adequate control over the activities by managers of the managed plant. This type of structure is an unfair way of measuring the performance of the individual production plants.
Based on the current system evaluating the three major departments of Aloha Products are described below:
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 any of the major activities in their respective production facilities; the vice president of the 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 departing assigns the costs based on specific contract for that shipment. If the inputs exceeded 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 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 the 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 entered into forward contracts with brokers anywhere between three to twelve months in advance.
The costs of each shipment are based on specific contracts for those green coffee beans, which can vary based on the various price drivers as mentioned earlier. This can create diversified and volatile costs 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 the purchases through the spot market, which incurs significantly higher costs. The costs associated with running this purchasing department are charged to headquarters of AP. Currently there is no communication between purchasing and manufacturing department. Furthermore, purchasing department does not need to report to head office or meet any performance measurement standards. Ultimately 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 purchasing department.
Q2. Considering the company’s competitive strategy, what changes, if any would you make to the control systems for the three departments?
The changes to the current control systems involves establishing accountability and effective communication among the three departments and providing key measures to evaluate the manager’s performance objectively. Recommendations for the current management control systems are as follows: Recommendations for manufacturing departments
The manufacturing department is currently profit centre. 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, here the recommendation would be to make 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. It would be unfair to evaluate manufacturing as a profit centre, 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. Thus instead of being assessed for the performance of the purchasing and marketing departments, plant managers will now have the incentive to ensure their costs do not vary from the standard. It will still be possible to evaluate roasting plants based on gross margin as well. However to ensure the plant managers are not penalized for the fluctuations in the costs of green coffee contracts, a standard cost for green coffee would have to established and used in the computation of gross margin. Recommendations for purchasing departments
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 standard costs 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 costing for the green coffee contracts will have to be established based on discussions between management and executives in the purchasing department. The standard costs could potentially be based on the average of spot price over past 6 months. Thus, the recommendation here would be that this standard cost be updated every quarter, in order to provide accurate standard costs of green coffee raw materials. Recommendations for marketing (sales) 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 costs associated with differences between the forecasted requirements and actual requirements. The difference results in the purchases or sales at the spot price for the green coffee, which tends to costs more than the forward contract prices. It is not reasonable for the marketing department to perfectly forecasts sales and therefore there should be leniency in developing a method of accountability for this department. The goal here 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 the forecasts methodology to be reviewed and continuously improve. Thus on an overall basis, the company needs 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 the goal congruence and communication, the department should also be evaluated based on the overall measure for the firm. This measure could be Economic Value added (EVA) as when it is applied, managers will not just be focussed on their own departments profitability but also that of company as a whole. The EVA approach promotes the same profit objectives across different departments. Thus by keeping the same structural organizations and only changing the way each department is evaluated, the incentive plan for each department more accurately reflects what each department can control.