Management Control Systems (MCS) Assignment

Diploma Program in Management

Adani Group

Date: 14.07.2013

Aloha Porducts

Mentor: Prof. Parag Rijwani

Submitted by: Ajay Nyati

Aloha Porducts :-

Introduction The coffee industry has proven to be volatile and prone to a variety of price drivers and threats. While green coffee is produced year round at least somewhere in the world, harvests are constantly at risk. Weather and insects are constant pests to crops and impact growers all over the world. Inventories have also been negatively affected in the past due to dock strikes restricting the flow of goods from ports. While gourmet and specialty coffees have sold well over the last 30 years, the general liquid consumption trend has shifted away from coffee. This might be attributed to the growing health concerns at the consumer level and the trend to move towards liquids that may better reflect a healthy lifestyle. Given all this downward pressure on the marketplace, it is increasingly difficult for smaller processing companies to compete. This becomes even more difficult when we consider the pricing of inputs and the complex futures market where green coffee is traded. For larger corporations (Maxwell House brand, Philip Morris, P&G) their large capital stake and stability allows them to gain trust . The purpose of our report is to provide our analysis, assessment, and recommendations related to Aloha Products (AP) and the current control systems for the manufacturing, marketing, and purchasing departments. Based on the case information, we believe the current implementation of measurements and controls do not best serve the current business strategy of AP. As a result, we have included recommended changes for the three departments that best align with APs business model and will create a more thorough and effective measurement for performance for each department and the firm as a whole. The following subsections of this memo will consider the current situation, the evaluation of current controls and the performance measurements in place, and then provide our alternatives that we believe are more aligned with the organization.

Question 1: Evaluate the current control systems for the manufacturing, marketing, and purchasing departments of Aloha Products
Evaluation of the current management control systemAloha Products 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 APs 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 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 plant manager does not control the green beans purchase The purchasing department is responsible for obtaining the required Purchasing Given the

volatile nature of the coffee market, having a central purchasing unit is necessary. Expecting each plant to handle the coffee purchases will add unnecessary overhead cost to the company.

Evalution of Marketing :-The executives of Aloha Products manage sales

policies; assume advertising responsibility and promotion; and oversee the roasting, grinding, and packaging of Aloha coffees. Executives have left little control to plant managers because, although executives have control of inputs, each of the plants it still responsible with its profits and losses. Plant mangers bonuses are also based on the percentage of his or her plants gross margin.

Question 2: Consider the companys competitive strategy, what changes, if any, would you make to the control systems for the three departments?
Purchasing department: As mentioned above, the centralized purchasing department is a great strategy to employ when establishing low cost. Requiring each plant to have their own purchasing department would require too many duplicated tasks as well as unnecessary overhead costs involved. Recommendations: 1) Do nothing, leave the purchasing department the way it is now 2) Give each plant their own purchasing department 3) Integrate the central purchasing department as an extension of each plant. Each plant will give their requirements to the purchasing department, thus creating more integration. Each plant will have more control over the inputs needed..

Manufacturing Department
Plant managers more likely have a better idea of the way the production schedule for the plant than executives. It would be better that executives and plant managers met to devise a strategy; rather, the specific strategy the company would like to pursue. The plant managers would better be able to manage costs if they had more control over the inputs, and as a result, more positive gross margins for the managers and the company overall.

Aloha Products profitability may rise because of its advantage in big volume purchases. However, the policy to make purchase commitments based on maximum potential plant requirements and sell surplus on the spot market is likely not to be benefiting the company as management desires. This is due to the fact that was pointed out above; i.e. the unbalanced structure of Aloha Products.

Recommendation
Aloha Products has a cost center structure, but the control system is attempting tomeasure the roasting plants on a profit center system. Having a profit center measurementapproach for infrastructure that operates in a cost center approach, will not providereasonable measurements for the management control system.The plant manager's concern regarding the evaluation system is valid. Without proper control over the input and output you cannot expect the plant manager to perform well.Aloha, should not tie the gross margin of the plant to the manager's evaluation withoutgiving them the ability to control all the variables that affect the gross margin. In myopinion, current measurement system is not appropriate. Given the current situation, themanagers evaluation should not directly tied the gross margin.EVA approach allows assigning same profit objectives of each plant and also allowsassigning different interest rates for coffee beans depending on the time of purchase. Thisapproach also allows the plant managers to make plant investments without negativelyaffecting their performance. When plant managers are evaluated and compensated basedon the EVA of the plant, they are motivated to increase the EVA of their plant, which inturn will benefit the whole company.