Competitive Environment in the Pre-1980 Era with That of the Early Nineties - Assignment Example

Briefly summarize and contrast the competitive environment in the pre-1980 era with that of the early nineties. In the 1970’s there was an increase in power generation demand after the Second World War. Power service industry was the major beneficiary for increased demand for electricity. As a minor to the OEM East River also repaired the replacement parts markets also called loose tubes. Tubes got worn out in unfriendly environment and needed replacement, however, it was hard to project demand for service work. Short lead time on time shipment and competitive prices was the requirement for the business An ordinary replacement order was valued at $ 50000 and was to be delivered within ten days. In this case 40% of the revenues were made from replacement orders. The marginal profits were high and the size of the total returns on OEM made the markets friendly In the 80’sthere was an escalation of interest rates fuel prices and economic recession. Previously there were shortcomings and orders could catch up when the economy stabilized which was different. The increased electricity consumption leveled and the orders were placed once more. Several factors led to a decrease in demand by the OEM these were rise in energy cost and the ability of energy transmission across the country. There was an expansion in demand for replacement parts as demand for the originals declined the reason being that utility and the industrial customers wanted to retain the useful life of equipments used to generate power by substituting the exhausted parts rather than get new capacity Whereas in the nineties total OEM and replacement part was considerably less than in the 80’s.there was excess industrial ability in 1989 the industry was overinvested and the demand from OEM and replacement part was operating at a level which consumed45-50% of the east river capacity. The expected result was steady pressure on prices, margins, and market share. What are the problems that plant management has to resolve? High fuel prices An increase in fuel prices increase production cost thus an increase in prices this makes it hard to obtain the boilers they require in the production power. The management needs to hedge against the cost of fuel by issuing the financial derivatives that would help hedge against the rising cost of fuel. High interest rates High interest rates causes an increase in the cost borrowing thus discouraging borrowing this leads to unavailability of capital to the producers. This makes it difficult to expand the operation of the firms thus limiting the growth of the firm. High interest rates also causes insatiability of the exchange rate in the market making, this makes it difficult to import products due to the high prices occasioned by the fluctuation of the currency. Global recession Global recession in refers to a situation where the economy is at stack, that there demand deficiency. Global recession lead to the decline in the demand of the company products, this was due the deficiency of demand in the economy. This lead to reduced sales and an overall reduction in the company returns (Drury313). Lead time Lead time refers to the time between the period at which the company makes the place an order for input or a finished good to be used in the production process. One the main consideration of customer is timely delivery of products order. The company does not deliver good on time since as highlighted in the case study the company has backorders which can be traced back to four years. Labor union activity The management of the company needs to monitor the activity of the labor union and always be will to dialogue with the union on issues pertaining to the employees so as to avoid industrial actions, which would result to huge losses to the organization. Increased energy consumption The management needs to monitors the organization utilization of electricity and other form of energy used in production so as to minimize inefficiency in the use of the energy and curb the rising trend in energy consumption. The number defective product Another problem that the management needs to address is the number of defects products resulting from the, production process. Although the organization has a quality assurance department which monitors the quality of the product, there is need to incorporate the quality assurance personnel “in the production process”. This implies that the quality assurance personnel will always ensure that the every stage of production conform to the set standard. Motivation of employees The organization needs to develop a system that would appreciate the employees who does a good job; also the remuneration received by the employees should be fair. This would result in increased job satisfaction and thus increased productivity What potential problems may occur between the as-sold cost estimates and the actual contract cost? As- sold cost estimates may vary from the actual contracts, this may affect the organization positive or negatively. Some the potential problem that may arise include Change in market conditions The existing cost of material at the time of sale are bound to change, thus the input material can either increase or decline. In a situation where the cost of materials used in production increase the actual contract may increase more than the as-sold cost estimate the resulting into a loss. This problem out of control of the management since this is a exogenous variable. Accuracy in estimation It is very difficult to accurate estimate as-sold estimates because of the wide range of dynamic factors that should be considered. This May challenging and thus a potential problem. Increase pressure As-sold cost estimates may act as pressure device to the workers. In orders for the firm to achieve the set profitability the employees and the management have to work an extra mile thus the employees may view as-sold cost estimates as a pressure device (Drury341) Purchase of inferior raw materials In order to match the contract actual cost to the as-sold cost estimate, the organization may be forced to use inferior raw materials in order to lower the actual contract cost so to avoid a situation where the organization suffer losses. Diagram the structure of the existing cost system and explain how cost information is used for decision-making, cost control, and performance evaluation purposes. The structure of the above diagram help the firm in establishing the costs is controllable. In this case the organization would use the information taken measures that would result in reduction of the cost of the production process. The cost structure also helps the firm in establishing the value adding activities so that the firm can concentrate on such activities. The existing cost system helps the firm to evaluate its actual cost against the standards thus the firm can be able evaluate its efficiency. Is the labor-based cost system appropriate for this facility? Should activity-based costing be implemented to analyze product costs? Labor based cost system is not appropriate cost system since may be characterized by idle hours thus leading overestimation of the actual cost. Labor- based cost is also characterized by high level inaccuracy. In my opinion the firm need to adapt the activity based since activity based costing allocates costs to product or department based on the number of specific activities the product or department required for the support function where as conventional methods apportion and allocate on a predetermine basis that is arbitrary determined. This may be contracted to the labor- based costing since cost are distributed to various department, and from this section they can be easily analyzed (Drury123). Prepare a set of recommendations for changes in the cost system. Describe a general framework for costing products in an automated facility. The organization may need to adopt the preparation of value added statement. Value added statement will help the organization to a control the input rather the cost or the usage efficiency of the purchased materials and service. Secondly value added statements focuses on how the benefits arising from the production are shared out like for example whether the employees are paid too much for the labor services, whether there are fund injected back in the business. The organization also need to develop a framework that the variance between the actual cost and the standard cost. This would help the organization is to monitor the cost more efficiently so that the management can the best corrective measure. The best framework for costing products in an automated facility is the target costing. Target costing involves setting a target cost which is ascertained by subtracting a desired profit margin from a competitive market price (Drury 234). This can be achieved by adopting the following procedures, A market research is conducted to determine the acuity of the customer how much the customers to values the products that the company manufactures. This will help ascertain the maximum money the customers are willing to pay (target price) At target profit, ascertained from the company return on investment is established The target profit is subtracted from the target price to ascertain the target cost Then the actual cost of the product is estimated If the estimated actual costs exceed the target cost the company should investigate means to drive the cost down This would ensure that the company products are in line with maximum willingness .to pay and of their quality expectation. This diminish instance of resistance and observed as participatory costing system. Read More