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					Founded 1905

THE NATIONAL UNIVERSITY
of

SINGAPORE

Spinnelli Coffee in Singapore
Dr. Clare Chow, Dr. Jacob Lee Lye Hock, and Dr. Teo Chung Piaw prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation

Marsha Guerrero, Director of Retail Operations of Spinelli’s Coffee (Singapore), believes in the potential of the coffee industry in Asia despite the current financial crisis that has knocked off 20% of coffee sales. In particular, she feels that there is a great potential of having its own roasted coffee plant in Singapore and becoming a regional supplier in Asia. Currently, all of Spinelli's roasted coffee beans used in Singapore are brought in by airfreight direct from California, USA. Since the coffee benas oxidises easily and lose their flavour very quickly, faster and expensive forms of transportation are employed so as to ensure that the freshness and quality of the coffee beans demanded by Spinelli (Singapore) remain intact upon arrival in Singapore.

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Marsha feels that something has to be done for the company in order to be world class supplier in coffee. She identifies two important issues that need to be addressed. First, the high transportation cost would cripple its ability to compete with its competitors in the near future. In the long run a better solution is definitely needed. Second, Marsha feels that the company requires a more formal system in controlling and monitoring the inventory of beans. It would definitely reduce wastage and shortage costs. Marsha is therefore considering the possibility of setting up a coffee roasting plant in Singapore to supply roasted coffee beans to the retail outlets in Singapore as well as other parts of the region. This will eliminate the airfreight costs incurred by shipping roasted beans from California and significantly eliminate the delay from the time a Spinelli coffee outlet places an order to the time the order is received. Spinelli Company in Singapore

Fashion Café is a relatively young industry in Singapore. Cafes originated from Europe, especially France, where side walks cafes have been a way of life for the French since 1714. However, it was the Americans who came up with 'Fashion Cafes'. With Big companies like Starbucks Co. from the USA paving the way, Fashion Cafes are fast becoming or already have become a way of life for young Singaporeans. It seems that it is fashionable and trendy to be seen hanging out at a nice cafe.

The first major 'fashion cafe' chain set-up in Singapore was Coffee Club in 1991 by a local coffee trading company, Hiang Kie. Since then, many other major coffee chains have set-up shop in Singapore, namely 'Starbucks', 'Coffee Bean & Tea Leaf', 'Spinelli Coffee Company', 'Burke's Coffee' and 'Olio Dome'.

It is fair to say that Coffee culture has seeped into Singapore and taken this island by storm. It is almost impossible now to walk the stretch of Orchard Road these days without spotting someone carrying a takeaway Ice Blended or Frappuccino, or sensing to whiff of steaming espressos emitting from the ever-present sidewalk cafes.

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Christopher Calkins and Arnold Spinelli founded Spinelli Coffee Company in San Francisco in 1983. They presently own and operate 13 retail stores in San Francisco and Marina County, as well as a 10000 square foot roasting plant. Spinelli Coffee Company supplies more than 20 blends and a variety of premium coffee to hotels, restaurants, cafes and food markets throughout San Francisco Bay area. In a sophisticated market, which places high value on brand names, Spinelli Coffee Company, though not the biggest, has been consistently rated as the best coffee retailer in San Francisco. Recently, they have been acquired by another San Franciso based cafe chain called Tullys Coffee. However, it is still business as usual over here in Singapore. Spinelli represents the first foray into Asia by a major US coffee company. “Speciality coffee in its home-grown variety, has gone from non existence to a market of S$35million in two years and continues to grows rapidly” reported by the Straits Times on September 11, 1995. The coffee culture that is so pervasive in Europe and the United States is in Singapore and Asia to stay.

Spinelli Coffee Company (Singapore) opened its first store at the Amara Shopping Center, in February 1996. Presently there are eight stores in Singapore, located at Bugis Junction, Caltex House, The Heeren Shops, Robinson Point, Marina Square, Golden Village Cineplex, NUS Science and Far East Square Plans are already in the pipeline to construct a ninth outlet to serve its growing customer base. They strategically located their retail outlets in the urban area to target at office dwellers, shoppers, and tourists.

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Spinelli’s roots are in the purveying, roasting, selection and serving of coffee. It proudly serves premium coffee drinks made from the fine Arabica coffee beans, roasted and blended to its unique specifications. Spinelli offers classically prepared brewed coffee and espresso drinks served hot or cold according to customer preferences. Favourites of Singaporean customers include the “Spinelli Spin”, Mocha Spin and Banana Spin. The Spinelli Spin is made with iced coffee, iced espresso, milk and sweetener, blended with ice. The “Mocha Spin" is obtained by adding Guittard cocoa to the Spinelli Spin, while the “Banana Spin” includes the obvious addition of a freshly peeled banana.

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COMPANY’S MISSION

Spinelli Coffee Company (Singapore) is building its success on the foundation blocks based on freshness in the products and quality services provided to its customers. Spinelli's company mission is to buy, roast and sell the finest coffee available on the planet, to create and maintain an atmosphere of respect and appreciation for the company’s work force to provide services that consistently exceeds the customer’s expectations and to strive always to be better.

ORGANIZATIONAL STRUCTURE

Spinelli (Singapore) operates through a network of relatively autonomous retail stores in Singapore. It treats each of the retail stores as a separate profit and loss center, under the supervision of Marsha Guerrero . The Vice President with the support of three functional departments manages Spinelli (Singapore). They are the Human Resource, Retail Operations and the Finance and Accounting department. The organizational chart is shown in Figure 2.

Stanley Morris (Vice President) Human Resource
Marsha Guerrero (Director of Retail Operations)

Finance and Accounting

Inventory and Logistics Executive

Regional and Operations Manager

Training Manager

Amara Shopping Center, Bugis Junction, Caltex House, The Heeren Shops, Robinson Point and Marina Square Golden Village Cineplex  Store manager  Supervisors  Crew

Figure 2: Spinelli Organisational Chart

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The function of the Human Resource Department is to ensure that all the outlets are staffed with the required manpower. Their operating activities includes soliciting, screening and selecting potential candidates using a long and rigorous selection process weeding out any candidates that do not meet up to their standards. The Finance and Accounting department deals with the financial and budget aspects of the company. This includes the consolidation of sales figures for the different outlets on a regular basis, allocation of budgets for each individual outlet and the preparation of financial statements and balance sheets for the company as a whole. Profit and loss reviews are conducted with each outlet manager monthly.

The Director of Retail Operations manages the operation of the business with the help of the Inventory and Logistics Executive, Regional and Operations Manager and Training Manager. The Inventory and Logistics Executive is responsible for the requisition and replenishment of coffee beans and other inventories from suppliers both locally and overseas. This executive also monitors the inventory levels at the warehouse and at the individual outlets and co-ordinates and schedules the distribution of inventories to the respective outlets. The Regional and Operations Manager is responsible for the daily monitoring of operating activities within each individual outlet, the consolidation of sales figures for each outlet for analysis purpose, the welfare and motivation of the employees. She also makes weekly rounds to the outlets to help identify and solve potential problems, reallocate staff through crew shifting and to ensure store cleanliness and staff discipline. This is to ensure that any major operations hiccups are not in any way interrupting the natural business flow. The Training Manager’s duties are to ensure that the employees are equipped with the necessary skills in brewing a fine cup of coffee and the various aspects in providing excellent and total quality service to their customers.

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3. INVENTORY CONTROL AND MANAGEMENT

Inventory Decisions: What and where to order? How much to order? When to order?

Inventory management was key to success in the case of Spinelli (Singapore). It is very important for Spinelli to have the necessary quantity to meet the daily demand and expectation of customers. More importantly, besides meeting the customer demand, Spinelli also has to guarantee freshness and taste of the roasted coffee bean. In order to maintain the freshness, the company adopted a policy that the shelf life for each bag of coffee beans should not be more than 7 days long. In order to preserve the quality, Spinelli uses beans that are roasted in the USA and imports the beans and cocoa powder by air freight. Although sourcing coffee beans regionally would be a cheaper alternative, unfortunately the locally roasted beans are not able to meet the quality standard of those Bay Area coffee beans. Spinelli demands that all their coffee beans have to be roasted using the best roasting method that is called the Spinelli method. This is to ensure that they are able to maintain the unique Spinelli taste.

To attain these objectives, the company needs to have an efficient distribution and inventory replenishment system so that it is able to deliver roasted coffee beans to the retail outlets in a timely and efficient fashion. The imported beans are then grounded and brewed into different categories such as Latte, Espresso, Spins and sold over the counter served either hot or cold. Imported cocoa powder is another essential ingredient used in making its chocolate category for alternative consumer preference.

Presently, Spinelli does not have any formal inventory models to control and monitor its inventories. They use a simple ordering policy that is the retail outlets give the central office (in Singapore) the demand figures which are forecasted based on the past demand.

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Then the central office will process the orders by aggregating all the demand at the retail levels and fax the order to US. The imported coffee beans will then be consolidated at a warehouse in Woodland and distributed to the various retail outlets over the next one week.

In addition to coffee beans, Spinelli also retails baked goods and pastries (e.g. scones, muffins, cakes, tarts and cookies) that are freshly baked in its bakery. They also carry items such as dairies (e.g. milk, yohurt and butter), juices, ice, paper and packages. These are mainly sourced locally within Singapore.

Nevertheless, coffee beans are the core product of Spinelli. How much to store depends on the demand. The monthly demands for different type of roasted coffee beans in the past 12 months are shown in Table 2. The normalised weekly demand per month is relatively rather stable and predictable over the 12 months period (see Figure 2). This is possibly due to the established nature of the business. Having been in operation for two years, variations in demand, especially in periods prior to the holidays, are well anticipated. The demand for dependent products, such as dairies, juices, ice, paper and packages, varies in proportion according to the fluctuations of the coffee beans demand. This demand is normally calculated based on the demand for coffee.

coffee bean

jan

feb

mar

apr(4

may

jun(5

jul

aug

sep(5 oct (4wk) 255 15 47 31 30 26 26

(4wk) (4wk) (5wk) wk) Original Original-Decaf House Mrs D Sumatra 233 17 30 26 25 254 17 37 33 31 31 30 328 24 42 40 39 47 47 249 14 35 33 32 32 33

(4wk) wk) 242 16 37 29 31 34 30 342 19 54 42 42 42 39

(4wk) (4wk) wk) 228 15 70 24 24 24 24 232 13 50 26 25 30 26 351 20 72 50 46 50 47

Extra Dark French 32 Bambino 27

Table 2 : Monthly Demand for Coffee beans

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Average Weekly Order Quantity (bags)
80 70

Average Weekly Order

60 50 40 30 20 10 0 jan feb mar apr may jun jul aug sep oct

Month in 1998 Original Sumatra Original-Decaf Extra Dark French House Bambino Mrs D

Figure 3: Demand Distribution for the 12 months period

The demand for coffee is dependent on the location of the retail outlets. For example, the retail outlets at Caltex House and The Heeren, both located in Orchard area have the highest traffic volumes. These two outlets consume on average approximately 30 to 35 coffee beans bags per week where each bag weighs 5 pounds. As for the other outlets the average consumption rates range from 10 to 15 bags of coffee per week.

The demand for coffee is seasonal and the pattern is affected by the presence of festive sales promotions (e.g. The Annual Great Singapore Sale in July each year), school and national holidays. The consumption rate during these seasonal periods is expected to be 30 percent higher than normal based on conservative estimates. Store managers will usually used this knowledge to come out with rule-of-thumb estimate for their weekly requirement.

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Inventory Management problems

Coffee beans are perishable products as they oxidise very easily and lose their flavour. This means that the outlets cannot keep the coffee in inventory for too long. Furthermore, once the shelf-life of the beans exceed 7 days, they are then mainly used as an ingredient in Iced coffee drinks, such as the local favourite Spinelli's "Spins." The company will also occasionally donate unused cofffee beans to charity homes.

By minimising inventory, wastage can be reduced. However, minimising inventory can lead to problems of shortages at the outlets. The right level of inventory needs to be maintained to minimise both the costs of wastage and shortages. The Inventory and Logistics executive encountered difficulties in managing the high transportation cost and the need to maintain the freshness of the coffee beans. The problem seems to lie in forecasting the coffee beans demand at the various retail outlets. The forecasted demand has to be as accurate as possible at the retail outlets levels. They cannot order in excess of the beans (over-order) because any unsold beans need to be written off after their expiry date to maintain the policy of freshness. On the other hand, if they order less than demand (under-order), it will cost them in terms of lost sales and lost market share to its competitor like Starbuck.

The policy of freshness required frequent orders of roasted beans from the USA. As the beans are prone to losing its freshness, there cannot hold large quantity of beans in the warehouse to meet the fluctuation of demands. Therefore Spinelli orders every week based on weekly demand. The high ordering cost is inevitable in order to meet the freshness policy. If there is a shortage at a retail outlet, the demand is satisfied from the inventory of the other outlets. The order size is enough to satisfy one week of demand and this poses a risk of shortage if the transportation and distribution is not reliable. Therefore it is very important for Spinelli to have a reliable distribution system. This current ordering policy costs Spinelli a large sum of money in terms of transportation costs, co-ordinating import activities, warehousing, storage equipment and so on.

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Here are some matters that are of concern to Spinelli:

1. Coffee Bean Shelf life

The shelf life of the various inventories are important considerations and inputs for deciding the quantities to be ordered and ensuring superior quality in the products served. This is especially true due to the hot and humid tropical climate of Singapore. The shelf life of coffee beans is greatly reduced when exposed to the heat and humidity. Therefore, in order to preserve the freshness in the product, all shipments of beans are sealed airtight before transportation from the USA. The moment it arrives in Singapore, the shipment is sent directly to a temperature regulated warehouse in Woodlands before final distribution to the refrigerators in each outlet. It costs the company $40 each time for the shipment to clear the customs. Despite the ability of the packaging to keep the coffee fresh for a year if left unopened, Spinelli still maintains its strict policy that coffee beans with a shelf life of more than a week will not be used for freshly brewed coffee. Instead, these beans will be used as an ingredient for coffee mix. Other inventories such as pastries pose fewer problems as they are baked and consumed on the same day. Quantities can thus be customised for consumer purchase on a particular day. The shelf life of fresh milk is dependent on the expiry date printed on the back of the carton box, usually kept not more than 4 days after manufacturing. The problem of shelf life for fresh milk is further diminished as expired milk can be exchanged for a new batch sealed by a contractual agreement with the supplier. Ice for the preparation of Spinelli coffee mix such as smoothies and spins are delivered on a daily basis while supplies of juices are maintained on a weekly basis.

2. Capacity and size of outlets

The order quantity is also dependent on the size of the retail outlet. As majority of the space is maximised in serving the customers, little room is catered for the storage of inventories. Other than the two largest outlets located in Caltex House and The

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Heeren, the remaining outlets only have minimal space for inventories. Figure 4 showed the Bugis Junction Spinelli outlet.

Figure 4: Bugis Junction outlet

3. Over or under stock of inventories

Due to the inherent inaccuracies in the forecasted demand figures, (despite the stable demand patterns) situations of over and under stock do occur among the outlets. However a unique feature of Spinelli lies in the networking of outlets that it owns. Proximity with each other enables redistribution of stocks from other outlets thereby minimises the costs due to over and under-stock of inventories. Outlets faced with a sudden surge in demand can request inventories from neighbouring outlets and vice versa. Outlets with an over stock of inventories can transfer their extra stock to ones that are experiencing a shortfall. This flexibility enables Spinelli to react quickly to fluctuations in demand among its outlets without compromising its quality.

4. Current inventory level

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Spinelli does not have a computerised system to electronically monitor the level of stocks. The employees conduct daily stock checks and inform the outlet manager of the stock level at the end of each working day. In general, reorders are based on the rule of thumb that current inventory levels are sufficient to meet demand for a maximum of 2 days.

5. Delivery lead time

Shipments of coffee beans are air freighted on a weekly basis from the roasting factory in USA. The requisition process is initiated when individual store managers fax their weekly requisition form for the coming week to the Inventory and Logistics Executive on Wednesdays. Airfreight shipment from California to Singapore takes about 48 hours (including custom clearance, which costs $40 per shipment regardless of order size). The cost of airfreight is about $2 per pound for all types of coffee beans. The purchase cost of each type of coffee bean is as shown in Table 3. Upon consolidation of these orders, the warehouse will be instructed to release the goods on Friday, just in time for the weekend. Other inventories, such as milk, sugar and ice have a delivery lead time of only as they are supplied locally.

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Cost of Coffee Bean
$12.00 $10.59 $9.89 $10.00
Cost per bag (5 lb/bag)

$10.59 $9.28 $8.49 $9.80 $8.49

$10.50

$8.00 $6.00 $4.00 $2.00 $0.00
House OriginalDecaf Original

Extra Dark French

Type

Table 3: The cost of coffee beans

Production Process of Coffee Beans

It is hard to believe, but coffee is the world's second most traded commodity, after oil. The United States is it's largest consumer, and Brazil, its largest producer.

Coffee was first discovered in Northern Africa in an area we know today as Ethiopia. A popular legend refers to a goat herder by the name of Kaldi, who observed his goats acting unusually frisky after eating berries from a bush. Curious about these phenomena, Kaldi tried eating the berries himself. He found that these berries gave him a renewed energy. The news of this energy-laden fruit quickly spread throughout the region. Coffee berries were transported from Ethiopia to the Arabian Peninsula, and were first cultivated in what today is the country of Yemen. From there, coffee travelled to Turkey where coffee beans were roasted for the first time over open fires. The roasted beans were crushed, and then boiled in water, creating a crude version of the beverage we enjoy today. Coffee first arrived on the European continent by means of Venetian trade

Christmas

Bambino

Mrs D

Sumatra

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merchants. Coffee-houses spread quickly across Europe becoming centers for intellectual exchange.

Today, coffee is a giant global industry employing more than 20 million people. This commodity ranks second only to petroleum in terms of dollars traded worldwide. With over 400 billion cups consumed every year, coffee is the world's most popular beverage. In Brazil alone, over 5 million people are employed in the cultivation and harvesting of over 3 billion coffee plants.

Production of Coffee Beans

Production of coffee beans is a complicated process. Coffee is the seed of a cherry from a tree, which grows from sea level to approximately 6,000 feet, in a narrow subtropical belt around the world. Coffee cherries ripen at different times, so they are predominantly picked by hand. It takes approximately 2,000 Arabica cherries to produce just one pound of roasted coffee. The average coffee tree only produces one to two pounds of roasted coffee per year, and takes four to five years to produce its first crop. The coffee plant first produces delicate clusters of white blossoms, resembling jasmine in shape and scent. These blossoms last only a few days. Small green coffee cherries then begin to appear and ripen from yellow to finally almost black, within six to nine months. Once the coffee cherries are picked, they are transported for processing. The fruit is then removed from the bean. The green beans are then dried, sized, sorted, graded and selected, usually all by hand. The beans are then bagged and are ready for shipment to local roasters around the world.

The two commercially significant species of coffee beans are coffee arabica, and coffee robusta. Arabica beans produces superior quality coffees, which possess the greatest flavour and aromatic characteristics. They typically contain half the caffeine of the robusta beans. Arabica production represents 80% of the world's coffee trade, however, only 10% of this meets speciality coffee standards. Robusta beans are used when a lower price or additional caffeine is desired. A small percentage is typically added to many

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Italian espresso blends for the additional crema and complexity they contribute. In addition to the species of the coffee, many other factors contribute to the overall quality of the green beans. Seed stock, plantation location, soil composition, altitude, weather conditions, fertilisation, cultivation, harvesting, and processing methods will all have a dramatic influence on the finished product.

The major coffee producing countries are as shown in the following:

Coffee Roasting and Blending

The most important processing operation which coffee undergoes before consumption is roasting. During this process, the beans open and the distinctive central furrow dilates. Their weight drops by about 18-20%, and their volume increases by 35%. Particularly complex chemical-physical phenomena - change of colour, development of aroma - also occur in the bean. The degree of roasting is the basis of every blend. Arabicas require a lighter roast if their distinctive, delicate aromas are to be preserved. Robustas, on the other hand, require a slightly darker roast to mask a certain woodiness.

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Part of the coffee-roaster's skill consists of an expert knowledge of unprocessed coffees, because every type of coffee reacts to roasting in a different way, depending on roastingtime, percentage of swelling, colour of grains and reduction of weight. Roasting is the production phase that has made the most significant technological progress over the last few years.

The most important innovations have been the way in which heat is transmitted to the bean, and the length of the roasting process. The new generation of roasting machines is based on a completely innovative principle. The coffee no longer comes into contact with the heat-source but is heated by an enormous quantity of air at temperatures that are not extremely high. The coffee bean is thus "fluidified". Every coffee bean floats in the flow of hot air and roasts more uniformly, without coming into contact with the superheated metal walls for an extended period. After this exposure to heat, the coffee is rapidly aircooled. This makes it possible to capture and seal the flavour and aroma, which develop in the bean.

With more than 100 coffee-growing regions in the world, each producing beans with distinctive characteristics, proper blending is essential to the balance of flavours necessary to create superior espresso. A single coffee bean will generally not possess the complexity necessary for great espresso. Many espresso blends will contain three to seven different types of beans. The experienced roaster, with his knowledge of each bean, artfully combines them to create the desired blend of flavours. The roaster's blending knowledge is usually a closely guarded secret.

Argument still exists among roasters as to which should occur first, the roasting or the blending. Generally, roasting each varietal separately to maximize its flavour characteristics, and then follows by blending, will produce the best result. Freshly roasted beans will release hundreds of chemical substances in the form of vapours. A day or two will generally be required for these gases to dissipate before the beans will reveal their optimal flavour characteristics.

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Today, many quality roasters are packaging their beans in air tight bags with a one way valve, which allows the gases to escape, without the beans being exposed to the damaging air. This type of packaged should help retard flavour deterioration. If beans are not packaged this way, or once beans packaged airtight are exposed to the air, they will begin to deteriorate. Roasts where oils are exposed on the surface of the bean are much more vulnerable. Once exposed to the air, and if properly stored, beans will stay reasonable fresh for 7 to 10 days.

Roasting Plant Decision
To decide whether to site a roasting plant in Singapore, Marshall understands that she has to take into consideration the complexity of the roasting and blending process, while at the same time examine its impact on the current distribution system within Singapore. The existing distribution system costs the company close to $60000 per year on the shipment of coffee beans alone. Furthermore, the delivery lead is relatively long and it contributed to 30% of the beans’ shelf life. It takes 48 hours to ship the beans from US to Singapore. To compound the problem, the company has expanded to Taiwan (with future expansion plan on the China market) and is responsible in supplying roasted coffee beans to the expanding market in Taiwan. Thus, the task of forecasting the demand for both markets in Singapore and Taiwan is difficult to manage.

Marsha estimated that the fixed cost of setting up such a Spinelli roasting plant in Singapore would cost about $350,000 (including equipment cost), with an annual variable operating cost of about $12000. She is convinced that the new plant will enable Spinelli (Singapore) to enter the emerging markets in Asia in a cost-effective manner. The output from the plant can also be used to serve other coffee bean wholesalers in the region, which is another new business opportunity made possible by the roasting plant. The high freight cost that is plaguing the current system can also be automatically eliminated. Marsha highlighted the potential benefits of such a move. However, she also voiced her concern about the possible pitfalls of such a strategy:

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“The roasting plant may bring about a new set of problems. We have already established a strong brand name in Singapore in the retail sector. The setting up of the roasting plant will signal a strategic shift of the company’s vision, as we will be entering the coffee bean wholesale sector. We have neither experience nor track record in this area. Furthermore, we will have to handle the production inventory system of the roasted coffee beans, and at the same time, manage the replenishment of the green coffee beans from South Africa for the roasting plant. This problem is currently handled centrally by Spinelli (US) for all the markets, so that the distribution cost for such products can be minimised by suitably exploiting the scale of economy using bulk shipment. I am concerned that the volume of the business here in Asia might not be able to sustain such an operation here. Another concern that I have is how it will affect the existing customers”

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Discussion Questions

1. Evaluate the current resource management system. What resource planning system would you purpose? 2. What are the pros and cons of having a roasting plant in Singapore? 3. What would be the additional cost of having a roasting plant in Singapore? How would you suggest that Marsha justify her decision? 4. Propose other alternatives and justify.

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