Krumbelo Corporation is a leading chocolate manufacturing company. There are several stages involved in the manufacture of chocolates. The steps are:

(1) Harvesting cocoa beans,

(2) Fermenting the cocoa beans,

(3) Drying the cocoa beans,

(4) Roasting the cocoa beans,

(5) Making cocoa powder,

(6) Tempering the cocoa powder to remove excess cocoa butter,

(7) Adding cream, milk and sugar to the melted chocolate,

(8) Moulding the mixture into chocolates

(9) Packaging. Krumbelo Corporation purchases roasted cocoa beans from a supplier and processes it to make chocolates. The distribution of chocolates manufactured by Krumbelo is managed by an external distributor. The senior management of the company is considering various options to expand business. Krumbelo currently manufactures and sells only milk chocolates. The company is planning to introduce white chocolates and dark chocolates. The cocoa butter that is separated from the cocoa solids is the main ingredient of white chocolate. White chocolate does not contain cocoa solids. Dark chocolates contain a higher percentage of cocoa solids than milk chocolates. The processes to manufacture white chocolates and dark chocolates are very similar to the manufacturing process of milk chocolates. Krumbelo currently purchases roasted cocoa beans from an external supplier. However, going forward, Krumbelo plans to control all activities involved in the manufacture of the chocolates, from the harvesting of the cocoa beans to the packaging of the chocolates. The senior management of the company feels that the company can manage all three chocolate categories better by controlling all stages of manufacturing. The company also wants to take control of distribution.

Required

1. The management of Krumbelo Corporation has decided to harvest, ferment, dry and roast cocoa beans rather than purchasing the roasted cocoa beans from an external supplier. Identify the benefits that Krumbelo can enjoy by controlling all stages of manufacturing. Also, list the advantages of using external suppliers.

2. Krumbelo Corporation is considering either harvesting, fermenting, drying and roasting cocoa in-house or buying roasted cocoa beans from an external supplier. Describe the strategic approaches to the make-orbuy decision. Identify when Krumbelo Corporation should manufacture roasted cocoa beans in-house and when this process should be outsourced.

3. Krumbelo Corporation currently purchases roasted cocoa beans from an external supplier. Both parties have negotiated an open-book agreement to set the prices. Describe how an open-book agreement plays a role in setting prices for transactions undertaken between strategic partners.