Possible sources of diseconomies of scale


Case Scenario:

Once considered a commodity product, many small boutique coffee companies are luring customers with promises of high quality and unique flavors. How do the processes used by the small companies compare with those of the major coffee processors? Coffee producers purchase green coffee beans, which have been processed through several steps. At the manufacturer, green coffee beans are screened to remove debris, and then roasted for up to 30 minutes. A roaster is typically a rotating drum in which the beans are heated. The length of time spent in the roaster impacts coffee flavor. The longer the time spent in the roaster, the richer the coffee flavor. Following roasting, beans are sprayed with water, cooled, and screened to remove any remaining debris. Once roasted, coffee is ground to the size required by for the brewing process and packaged.

Ohori's Coffee is an example of a boutique coffee company. Established in 1984, Ohori's Coffee is located in Santa Fe, New Mexico. This privately owned business microroasts 32 types of coffee from Africa, the Saudi peninsula, Indonesia, the Pacific Rim, and North and South America. In batch sizes of 30 pounds or less, coffee beans are roasted in natural gas-fired rotating drum roasters carefully monitored by highly skilled "master roasters." To maintain quality, Ohori's depends on humans, not computer controls in the roasting process. Online and in its Santa Fe location, Ohori's sells whole beans and 10 different grinds ranging from Percolator to Turkish style. (Source: http://ohoriscoffee.com.)

Folgers Coffee was purchased from Procter & Gamble in 2008 by the J.M. Smucker Company in a deal reportedly worth $3.3 billion. Folgers coffee accounts for over 30 percent of the U.S. packaged coffee market, with about $2 billion in sales in 2007. Sales growth is estimated to be 2-3 percent per year.

Folgers' largest roasting and blending facility is in New Orleans, with 550 employees. It also has manufacturing operations in Kansas City, Missouri, and Sherman, Texas. The distribution center for Folgers is near New Orleans in Lacombe, Louisiana. Its coffee is sold in a single grind type. The company sells three Classic blends, seven blends in its Coffee House product line, five types of flavored ground coffee, and 10 flavors of Folgers Gourmet Selections. Folgers has introduced an enhanced roasting process for its Classic products. The coffee beans are preconditioned to reduce moisture and improve consistency before the final roasting. (Source: www.folgers.com.)
Think about the production processes used by Ohori's and Folgers.

Required to answer:

Problem 1. What are the ways that Folgers is likely to have economies of scale? What are possible sources of diseconomies of scale?

Problem 2. Using the product-process matrix, which processes are likely to be used by Ohori's and Folgers? Why?

Problem 3. Explain how the choice of process supports each organization's competitive priorities.

Problem 4. Is the operations layout likely to be the same or to be different at Ohori's and Folgers? Why?

Problem 5. What changes would Folgers need to make to compete directly with Ohori's? Why?

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Microeconomics: Possible sources of diseconomies of scale
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