Purchase Costs Of Beans example essay topic

T&J's A Case Study BACKGROUND T&J's, a coffee manufacturing and distribution company founded in 1910, operates through its three roasting plants in the Midwest. The company's headquarters in Columbus, Ohio makes all operating decisions which include preparing monthly financial statements, managing sales policies, and providing production schedules for the current month as well as the succeeding month to the plants. Each plant is considered a profit center as it has profit and loss responsibility. T&J's produces and sells its own brand of coffee throughout the Midwestern and Mid-Atlantic states. The overall coffee market is in decline while specialty premium and gourmet coffee sales are increasing. T&J'S STRATEGY T&J's general strategy is to supply quality products to the high-end coffee market at the lowest possible cost.

Their strategy hinges on the minimization of spot market purchases, maximization of surplus beans selling in the spot market, real time decisions on whether to use the excess purchased beans to make coffee or sell them in spot market, appropriate hedge strategy to protect profits from bean market price variations, precise control over manufacturing (roasting, grinding, and packaging), and a good plant maintenance program to avoid production down times. The only competitive advantage of T&J's business seems to be their strong purchasing department and production plants capable of precise roasting, grinding, and packaging different coffee beans. CURRENT SITUATION The issue at hand is that the plant managers are dissatisfied with the manner in which they are rated. Each roasting plant considered as a profit center has responsibilities for its respective profits and losses. Dissatisfaction amongst plant managers is primarily due to the lack of control they have over inputs, volumes, price and product mix, since both production rates and raw material costs are loaded on them. While marketing projections (sales budgets) dictate production rates in the plants, the raw material costs (represented by the contract covering a particular coffee shipment) are determined by the purchase department.

SITUATION ANALYSIS T&J's manufacturing and purchasing groups are considered as profit centers. However, a profit center should only be established if the management responsible for that area has adequate influence over both revenue and costs. An analysis of each responsibility centers with reference to their current control systems vs. the desired outcomes. Production Facilities At T&J's, plant management controls a mere 38% of the total cost of sales at the production facilities, yet the plant manager performance is based on gross margin ($428,640) that includes sales ($22, 33,860) minus cost of sales, including green coffee bean costs ($18, 05,220).

Green Coffee bean costs are the responsibility of the purchasing department and are 62% of cost of goods sold of the production facilities. Because the plant manager controls only 38% of cost of goods sold, he will make efforts to reduce costs in the areas that he can control, such as, packaging, labor, and roasting. Plant manager may only be able to do this at the expense of quality. Purchasing Unit The purchasing unit operates autonomously, keeping its own records and handling all of the financial transactions relating to purchasing, sales to outsiders, and transfers to three company-operated roasting plants.

It purchases green coffee beans on contract and transfers required quantities to the production facilities. The purchasing group also sells excess beans in the open market to other producers, coffee brokers or other roasters. The control system for the purchasing department is a monthly income statement that measures only the effectiveness of open market sales of excess beans. The income statement only accounts for the sales price minus the cost of beans and excludes any administrative and overhead costs of running the department.

It's the central office (headquarters) that absorbs the administrative and overhead costs of purchase group as an element of general corporate overhead. The current control system does not encourage the purchasing unit to keep a check on its administrative costs. Also since the production facility "takes" the entire costs of green coffee beans transferred, there is no incentive for the purchasing department to minimize the cost of goods sold. Marketing Department From the information given in case, it is not possible to determine the control system for the marketing department.

However, in absence of a sales budget, the marketing department would not be motivated to have accurate sales forecast. ANALYSIS SUMMARY Due to the apparent absence of variance analysis, there is no way to know if the sales are higher or lower than budget, if purchase costs of beans are kept as low as possible, and if manufacturing is controlling the costs that they can influence. We can thus conclude T&J's current control systems do not support their strategy to minimize costs. RECOMMENDATIONS T&J's strategy and control systems must go hand-in-hand for its growth prospects.

The basis of these recommendations is that each respective department, marketing, purchasing and production be judged for performance only they can control. Moreover, participative management policies must be evolved at the middle management level in order to check dissatisfaction amongst plant managers. Efforts must also be made to ensure cohesiveness of policies and operations of the three units. Also important is too give unit heads responsibility coupled with authority to focus on a strategy that allows for cost competitiveness, product differentiation, market penetration, understanding customer's requirements and focus on key issues within organization. The following suggestions coupled with a variance budget would allow T&J's to chart a better control system for its current strategy: o The only functions the plant managers can control are the roasting, grinding and packaging functions. The company should establish production standards for making coffee and be graded on how efficiently the standards are met. o The purchase unit should be judged and compensated based on how well its meets the projected purchase prices vs. actual costs.

In addition, the purchasing unit should be measured on hedged price vs. average spot market prices. The purchasing group should also bear the cost of storage, contracts hedging or any other activities associated with purchasing the green coffee beans. o Similarly, differences in sales mix, prices and volumes from plan should be charged to the marketing department favorably or unfavorably.