Ina's Bean Crisis

DEFINITION AND JUSTIFICATION OF THE PROBLEM

The problem that Mr. Hugo Gomez is facing is how to commercialize INA's bean stock. He has to decide what is the best alternative to sell the bean supply.

Accumulated bean supply has grown a lot in the recent years, and it is important to Mr. Gomez to find out what to do to commercialize the excess of stock.

ANALYSIS OF THE ENVIROMENT

The problem that Mr. Gomez is facing was originated by past decisions. The drought of 1974 caused changes with the purchases, prices and commercialization of the bean stock. The Board set a guaranteed price below the market, which gave to farmers a huge incentive to sell their production to INA because it paid a higher price than the market (See Exhibit 1 for detailed prices and differences between INA and the market). This, combined with Government's incentives to farmers increased Tanama's bean production, and then, produced excess of supply at INA.

The guaranteed price was above the selling price to the consumers, causing a negative margin for INA; but the market was producing positive margins to wholesalers and retailers. (See exhibit 2).

In the other side, the selling price to the consumers was set above the market's price, producing incentives to customers to buy from other retailers because they offered a lower price than INA. This produced lack of demand for INA's beans, which caused a decline on INA's sales and even more accumulated bean stock. In exhibit 3 can be noticed the decline in sales and the growth of the stock.

All of these situations produced a growing stock of beans, because the pricing and commercialization policies were set against the market trend.

Before Mr. Gomez arrived to INA, there were some alternatives to solve the problem, but all of them were rejected and the problem was not treated with enough importance. The Board was more interested in protecting the market and it adjusted the prices above the market price. If the excess of bean stock had the same price of the market, it would cause a drop in the market prices, affecting the private sector. Mr. Gomez had to solve this problem for the sustainability of INA, but further more, to accomplish AID's requirements.

AID was interested in improving INA's storage capacity, which was conditioned to solve the crisis. There was a restriction of time to solve it: Mr. Gomez has approximately six months to solve the problem, and it's mandatory to find a solution, because AID's support is at stake. AID would put pressure under the Board to solve quickly the problem.

In order to solve the problem, INA had to face its bad image with final customers. This could affect the demand in Tanama's market.

In conclusion, INA has implemented pricing and commercialization policies that were going against the market trend, producing an increase in the supply from farmers and a decrease in the sales of the Institute, accumulating more and more stock of beans. This was caused by interest of the Board.

IDENTIFICATION, JUSTIFICATION AND PRIORITIZATION OF THE OBJECTIVES

In order to solve the problem, it is important to prioritize two dimensions: to solve today's problem and to solve tomorrow's possible problems related with the same nature.

The most important objective is related with solving tomorrow's possible problems. The objective is to achieve sustainability with pricing and commercialization policies, preventing future problems of the same nature in the future. This means that the best alternative has to be a strategy that meets the market requirements. It is important that the selling price of INA should not be above the market price, if so, it will produce an important decrease on INA's demand. The sustainability of the policies is also supported by the purchasing price and INA's margins. The margin should be positive for the following purchases.

Second, Mr. Gomez has to solve today's crisis, in order to accomplish AID's requirements in the best possible way, aligning current policies with long term policies. AID's support is very important to improve operations, and this is a need that should be met. But AID should be pleased if they see that the current policies are aligned with long term policies.

Third, continuing with solving today's crisis, it is important to minimize the loss of selling the bean stock. Purchasing prices were higher than current selling prices, so Mr. Gomez has to find the alternative that gives INA the minimum negative margin. Mr. Gomez needs to sell in the following six months at least 291,958 quintals of beans (74,307 of national red beans, 165,485 of imported red bean, and 45,996 of national black beans) because the pending 52,166 quintals of imported black beans has the longest average time to store, so it is possible to sell this black beans stock after six months.

IDENTIFICATION AND ANALYSIS OF THE ALTERNATIVES

Alternative # 1

Sell the supply outside of Central America

This alternative meets the market price in the international market (39.75 and 49.75 pesos for red and black beans respectively), because the stock will be sold at the international market price. For INA would be almost impossible to sell this stock above the international market price. This is good to solve the current crisis, but it is not sustainable, because in the future, INA will have to buy more beans at a price that is above the given international price (between 55 and 65 pesos per quintal), producing always negative margins.

In terms of accomplishing AID's requirements, this alternative is suitable, because it solves the current situation. But in the long run, this policy would not be aligned with long term policies, so it is not one of the best ways to meet AID's requirements.

Analyzing the involved costs and revenues, this alternative produces a loss of 10,587,106 pesos. (See Exhibit 4 for additional information)

Alternative # 2

Promote sales of the stock to countries in Guanacaste

To promote sales in Central America it is important to analyze current Tanama's market price and Central America guaranteed prices. The best option is to export 100% of the urgent quintals to