Business Information Systems - Cedar Hardware - Case Study Example

Business Information Systems Name: Tutor: Course: Date: Executive Summary Cedar Hardware founded in 1989 is a distributor of paints and adhesives and has two branches in Bendigo, Australia. It was recently acquired from a previous owner who had been running the company’s operations and processes manually. The company has 18 employees and assets used in day to day operations of the business. The new management has considered making changes in the management, organizational culture and operations. Installation and implementation of new information system is a key issue that requires funding and technical support to enable the company to improve on its efficiency and bring the business into the 21st century. The implementation of the system will enable the company manage its operations and logistics as it expands into 5 different locations in different cities. The information systems required are marketing information systems, sales and inventory systems, human resource information system and accounting and inventory control systems. The information systems will perform various functions and support the management information systems (MIS) with a total cost of $100,000. The company will contribute $20,000 into the information system and is looking forward to finance the remaining $80,000 from a bank loan. The first section of the report provides an introduction and company description including financial performance, differentiating factors and the market the business is serving. The second section conducts a comprehensive market analysis by looking into the CH competitors, market and a brief on the business industry. The third section is marketing and sales which looks into the target market, market segmentation, and the marketing mix. The fourth section consists of the strategic plan which includes the expansion strategy and a detailed analysis of the new information systems. The section also considers the request for finance and computation of financial returns. The report concludes by requesting for funds to improve efficiency of the new face-lifted company through purchase of new information systems. Table of Contents Executive Summary 1 1.0 Introduction 5 1.1 Company Description 5 Figure 1: CH sales figures in the last five years. 6 Table1: CH Cash Flow Statement 6 1.2 Market Analysis 7 Figure 2: CH market share 8 1.3 Marketing 9 1.3.1 Target Market and Market Segmentation 9 1.3.2 Marketing Mix 9 1.4 Strategic Plan 10 1.5 Information systems for CH Business Functions 11 1.5.1 Marketing Information Systems 11 1.5.2 Logistics, Costing and Inventory Systems 12 1.5.3 Financial and Accounting Information Systems 12 1.5.4 Human Resource Information Systems (HRIS) 13 1.6 Financial Request 14 1.7 Expected Returns 14 Table 2: CH NPV projections 14 Table 3: CH cash flow projections 15 1.8 Conclusion 17 References 18 List of Figures Figure 1: CH sales figures in the last five years. 6 Figure 2: CH market share 8 Figure 3: Graph of CH 5-year cash flow projections 16 List of Tables Table1: CH Cash Flow Statement 6 Table 2: CH NPV projections 14 Table 3: CH cash flow projections 15 1.0 Introduction Cedar Hardware (CH) located in Bendigo, Victoria in Australia has been distributing paints and adhesives since 1989 to retailers and furniture makers. The business has two branches in the city and employs 18 people at various job descriptions. Being acquired from a previous owner, the business has been struggling with sales and profitability owing to internal challenges that can be addressed. The business is looking forward to improving efficiency and increasing its market share through strategic expansion to five other cities and installation of a new information system. The previous owner had not automated most of the business processes and much of the work was manual, therefore, acquisition of the new information system will help increase efficiency and increase productivity of employees. The paints and adhesives market is huge and steady though the recent financial recession of 2009 and 2013 witnessed decreased sales. Centrally located in town, CH has been steady and is well known in town for supply of paints and adhesives. Delivery processes has been effective making it one of the most efficient distributor in town. The company has been reaching out to furniture makers and retailers in Bendigo and outlying areas and is soon targeting other market segments such as construction companies. 1.1 Company Description Mission and Vision: The CH business seeks to provide quality and valuable paints and adhesives in a growing market in Bendigo and surrounding cities. Its vision is to be a leading company in provision of reliable and responsive products that meets customer needs in Victoria, Australia. Management style: Management of CH is currently under a functional structure with two levels of administration. The business owner can reach all the employees including cashiers, loading assistants, store keepers and drivers. Most of the work requires supervision and authority which demands greater use of a functional structure. Business Values and Culture: CH believes in equal treatment of employees, reliability and responsiveness to customer needs. The business also encourages employees to act with little supervision and develop ‘to be’ attitude which helps in creating customer loyalty and brand reputation. Employees are the core of the business operations and regular training on better customer service and operations will increase their capabilities. Financial performance: The business has been struggling to maintain sales and profits in the last five years. However, there was a slight growth in 2014 which indicates a change in business trends and increased demand for the products. The sales figures and the cash flow statement below provide a picture of the financial performance of the company in the last five years. Figure 1: CH sales figures in the last five years. The graph above shows declining sales figures, however, there was improvement in 2014 after a change in management and repositioning of the business to a new target market. Table1: CH Cash Flow Statement CH Cash Flow Statement (AUD$) 2010 2011 2012 2013 2014 EBIT 995,368 991,579 950,705 930,844 940,820 EBIT(1-t) 890,704 902,500 900,730 870,230 893,200 Non-Cash Expenses -1,802 -1,500 -1,850 -2,300 -2,450 Capital Expenditure -461,698 -455,613 -430,800 -390,460 -400,210 Increase in W/C -112,440 -110,200 -108,500 -113,300 -102,700 Total 314,764 335,187 359,580 364,170 387,840 NB: The cash flow above shows declining earnings. However, the expenditure has also been reducing which has eased the pressure on operating incomes. 1.2 Market Analysis Paints and adhesives have been used since time immemorial in construction and furniture making (Walker, 2005). Manufacturers of these products have had unparalleled competition to production owing to strict regulations on environmental pollution and employee safety and health. Distributors also face the same considerations and the government has limited entry into this market. There are few players in the distribution of paints and adhesives making it more lucrative for existing competitors. Buyers are few but purchase in bulk (volumes in liters) for resale to retailers and final consumers. Brick and mortar distribution forms the business model of CH and has been carrying out its operations under the same model for the last 23 years. The paint and adhesive industry has begun to embrace technology and use of online advertising and ordering is changing the business landscape (Walker, 2005). Use of social media such as Facebook, Instagram, Google, Pinterest and YouTube is also influencing promotion and advertising in the distribution industry. However, the regulators have been concerned about wanton environmental pollution from the disposal of containers, unused paints, and adhesives. The reduction in the tax regime and levies on construction and building materials has seen a surge in furniture making and construction of buildings in Bendigo and neighboring towns such as Melbourne, Ballarat and Geelong. This opportunity has created increased demand for finishing products to new constructions and infrastructure. There has been a general demand for neat and decent buildings which has prompted many real estate owners to renovate their old structures. Figure 2: CH market share Traditional customers of paint and adhesives are furniture makers and small retailers. These buyers search for information on products magazines, TV and newspapers as been in the past. Fortunately, the new target market which consists of construction companies and individuals are now buying in bulk and sourcing online. The construction and renovation companies are about 22 in Bendigo alone and handling up to 15 buildings annually. They have organized structures and leadership with information systems of handling orders and purchases. Their procurement departments are responsible for ordering and re-ordering construction materials including paints and adhesives. These companies have more than 20 employees and are registered with the government for taxation and issuance of operating licenses. Individuals are developers entering the real estate construction business for the first time as well as developed real estate developers. 1.3 Marketing 1.3.1 Target Market and Market Segmentation As earlier discussed, the new target market will be construction companies and individuals. The old market remains small retailers and furniture makers who have been loyal and consistent customers for the business. Bendigo city has more than 1500 furniture makers and suppliers, 22 construction companies and 250 small retailers handling hardware products. Melbourne, Portland, Ararat, Geelong and Mildura combined have more than 5000 furniture makers, 60 construction companies and 800 small scale retailers. The market is segmented based on ability and frequency of purchase (Kotler & Singh, 1981). The segments include; companies, small retailers and individuals. Construction entities and furniture makers are categorized as companies. Companies buy paints in bulk and volumes (100l, 50l and 20l) and lesser for smaller units for small retailers and individuals (20l, 10l, 5l and 2l). For adhesives, companies buy (20l and 10l) while individuals and small retailers purchase (10l, 5l, 1l and 500ml). CH will continue targeting these segments since they form the core buyers and contribute to its profitability. 1.3.2 Marketing Mix The company sells paints and adhesives which are used in construction and wood treatment. Paints are used in producing a final and decorative finish to exterior and interior walls of new and renovated buildings. Adhesives are used in protecting and treating wood and floors in decking and interior office, and residential furniture. Paints and adhesives are manufactured in industries and packaged in various sizes in plastic and metallic containers. They are short term products that have a limited life span hence used within the active product period. Paints are packaged in containers ranging from 100l to 2l while adhesives are in containers of between 500ml to 20l. Pricing of these products are based on marginal profit and psychological pricing. The final product prices are arrived at after deduction of fixed and variable costs. The 100l paint is sold for $499 while the 20l adhesives go for $48. The pricing strategy ensures that the company makes profit from the sales while maximizing on the behavior and psychology of buyers that $499 is less than $500. Promotion and advertising has committed a greater part of marketing expenses. About 50 percent of marketing costs have been on advertising through traditional print and electronic media. In 2013, the company used $50,000 in marketing and promotion from the $100,000 marketing budget. However, the company has been concerned on increased cost of marketing through the traditional media platform and has considered other channels of advertising. Flanking attack is the most appropriate marketing strategy used at the moment since established players have not recognized the growth in construction and building companies (Goria, 2012). Companies are seeking consistent paint products of different hues and adhesives for regenerated wood products. CH has recognized the shift in the market in preference of water paints and the composite wood adhesives is now selling compatible products. Use of social media and online web advertising is a new area that the company is looking forward to in increasing leverage and reducing the cost of marketing (Hallberg, 2000). The business has already developed a website and is planning to host it and invite manufacturers of paints and adhesives to run their adverts in it. The company has also opened a Facebook page and Twitter to customers to share and follow on their experiences respectively. Distribution of the paint and adhesive products involves use of outlets and physical deliveries. The distributor business model is currently being used by the business to reach customers. Customers currently visit the two premises in Bendigo to make orders and carry their deliveries on their trucks and pick-ups. Those who make large purchases are discounted with paid transport as long as they are within a radius of 20km from the city centre. 1.4 Strategic Plan CH is keen on expanding to 5 different locations in other neighboring cities within Victoria, Australia. The growth of CH is sustainable if it expands to other markets and reaps on new markets. Expansion requires adoption of new management information and operation systems. Over the past, the company has been running most of its operations manually such as employee payroll, human resource, marketing, sales and inventory and management. To increase efficiency and effectiveness, the company has recognized the importance of new information systems in the quality management and product enhancement. Many suppliers of paints and adhesives are now employing information systems which through partnerships will compel CH to go the same route. 1.5 Information systems for CH Business Functions As noted above, CH is in need of information systems to support its principal business functions; operations, marketing and sales, human resources, and accounting and finance. Marketing activities are directed to promotion, selling and planning of paints and adhesives to satisfy the needs of customers and meets the goals of CH. Decision making will be supported by marketing information systems in terms of product, price, place and promotion (Khosropour, 2001). It will involve adoption of a market research or intelligence software to interpret and obtain data on buyer behavior (psychographic, demographic and geographic variables) and firm’s competitor information. The likely reports are corporate annual reports, external provider reports, online databases and media-tracking services. Decision Support Systems (DSS) will assist in product knowledge work, evaluate proposed product and bring expertise of people in time and space through an electronic meeting systems (Malik, 2008). 1.5.1 Marketing Information Systems Place sub-systems such as Bar-Coded Universal Product Code (UPC), customized delivery and just-in-time product delivery, electronic data interchange (EDI) and Point-of-Sale (POS) scanning will increase availability of product information on movement of the product, tracking performance and planning distribution channels. Media selection packages will promote advertising and personal selling of the products since it enables an optimal selection of avenues such as electronic media (Facebook, Web and Internet), print media, television and direct mail (Kumar, 2009). The marketing information system will monitor the selected media and adjust its composition continually (Malik, 2008). CH will also launch database marketing to reach potential customers with personalized product information. Sales force automation will enable CH sales people to carry portable computers linked to the CH information systems. They will be able to receive instant information access, specify product meeting customer specifications, contact experts, and gain freedom from excess paperwork (Khosropour, 2001). Their level of performance will increase and so will be their selling time. For profit maximization, the DSS will inform pricing decisions on industry prices to guide decisions on company pricing objectives. It will also inform circumstances on sale transactions, mode of charging different prices and segmenting customer groups. Marketing information systems will help in planning outstanding orders and marketing mix through a full marketing plan and sales forecast. Dynamics of the environment to a large degree affects actual sales (Malik, 2008). Environmental forecasting will attempt to predict the technological, social, legal and economic environment using various techniques to achieve company objectives. The techniques are extrapolation of cycles and trends, scenario analysis and group decision making techniques. 1.5.2 Logistics, Costing and Inventory Systems Operations management will demand use of information systems to control costs such as equipment and labor including schedules on equipment replacement and maintenance. Managing and re-packaging of products is combined with inventory management to plan and control the arrival of procured goods to the company as well as delivery to customers (Malik, 2008). The system will interface with Enterprise Resource Planning system (ERP) in administering and storing all data types for accurate and efficient store inventory management. The system will consist of fields or modules to track back orders, requisitions, locations, all items, inventory error tracking, inventory on hand required, lead times and reorder points. 1.5.3 Financial and Accounting Information Systems CH financial function is to take stock of money and other assets out and into the company making it financially fit and proper use of available resources. The accounting systems will include the records on payroll, accounts receivable, inventory control, general ledgers and accounts payable (Khosropour, 2001). Information on finance will use custom produced reports and on-line databases in areas of funds management, internal auditing, financial control, and financial planning and forecasting. Financial forecasting will utilize scenario analysis to prepare contingencies to predict cash inflows and outflows using cash flow models (Kumar, 2009). It will be easier to identify the sources and needs of funds in the company. A budget is a tool of financial control over a period of time. The budgets use spreadsheets and may be fixed or flexible depending on the level of activity. The CH manager can be able to compare actual results, generate performance reports and financial rations on Return on Investment (ROI). On funds management, financial information system helps in managing liquid assets of the company like securities and cash (Kumar, 2009). Computerized systems will help generate sell or buy orders and manage securities portfolio. The audit function will appraise information, operations, financial and accounting function of the organization. 1.5.4 Human Resource Information Systems (HRIS) HRIS recognizes people as valuable resources and will support the human resource function in order to conform to regulations and laws. The system will exploit employee performance, inspection of own records, open positions in company, computer aided evaluation and training opportunities, strategic planning and control and in evaluation of subordinates (Malik, 2008). The HRIS system will also record employee performance, salary, history of occupied positions, occupational background, educational history and skills and personal data (Khosropour, 2001). The systems consist of position inventory, skills inventory, applicant databases, external databases and benefit databases. The information sub-system will help in human resource planning, compensation and benefits, labor relations support, government reporting, recruitment and workforce management. 1.6 Financial Request The business is confident that installation of new information systems will improve efficiency of operations and profitability of the company. Some of its competitors are on the lead after adopting information systems. However, they are lagging on marketing strategies of which if CH capitalizes with the information systems, it will take a greater market share for itself. The company requires $80,000 to install and implement the new system. The benefits are huge and significant in the distribution of paints and adhesive market in Bendigo and outlying areas. The loan is to be repaid in 36 equal monthly installments with a 2-month moratorium period. 1.7 Expected Returns The expected returns after the installation of the new information system has been analyzed using the Net Present Value (NPV) is calculated at the discounting value of 10% based on returns in a five year period. The finance mix in early 2015 will consist of retained earnings of $2,000,000 and $80,000 from a bank loan. The total finance mix will be $2,080,000. The net present value is as shown in the table below; Table 2: CH NPV projections NPV projections of CH 2015 2016 2017 2018 2019 Income Streams '000) 1,564 1,625 1710 1990 2340 Discounting Factor 0.9091 0.8264 0.7513 0.683 0.6209 PV 1,421.832 1,342.9 1,284.723 1,359.17 1,452.906 Total PV '000' 6,861.531 Initial Investment '000' -2080 Net Present Value '000' 4,781.531 The net present value obtained in the table above is a positive $4,781,000 which is sustainable and profitable for CH. The cash flow projection for 5 years will provide a picture of returns and repayments of the loan which is due in 3 years. The growth rate in 2015 is calculated based on the ability of the new system to generate twice the income streams in the next five years. The cash flow will be as shown in the table and graph below; Table 3: CH cash flow projections CH Cash Flow Statement Projections (AUD$) 2015 2016 2017 2018 2019 EBIT 1,564,000 1,625,000 1710000 1990000 2340000 EBIT(1-t) 1,564,000 1,625,000 1710000 1990000 2340000 Non-Cash Expenses -2,805 -3,500 -3,850 -4,300 -4,450 Capital Expenditure -610,698 -655,150 -630,850 -690,700 -600,760 Increase in W/C -180,440 -190,200 -198,500 -183,300 -193,200 Total 770,057 776,150 876,800 1,111,700 1,541,590 The cash flow projections are as shown in the graph below; Figure 3: Graph of CH 5-year cash flow projections 1.8 Conclusion The business is poised for profitability and greater market share within Bendigo and neighboring cities in Victoria. Installation and implementation of information systems will be crucial in improving efficiency and bring the CH business into the 21st century. Financing this requirement with a bank loan is critical in complementing the retained earnings that will be required to procure and purchase information systems. $80,000 will be used to procure and implement the information system which costs $100,000. The company will contribute $20,000 towards the project. It is hoped that the information system will bring the desired returns. References Goria, S. (2012). How to adapt a tactical board war game for marketing strategy identification, Journal of Intelligence Studies in Business (JISB), Vol. 2(3): 12-27. Hallberg, K. (2000). A Market-oriented Strategy for Small and Medium Scale Enterprises. World Bank Publications. Khosropour, M. (2001). Managing Information Technology in a Global Economy. Idea Group Inc (IGI). Kotler, P. and Singh, R. (1981). Marketing warfare in the 1980s, Journal of Business Strategy, winter 1981, pp. 30-41. Kumar, M. (2009). Business Information Systems, 1E. Vikas Publishing House Pvt Ltd. Malik, A.G. (2008). Management Information Systems. Firewall Media. Walker, G. (2005). Modern Competitive Strategy 2nd ed. New York: McGraw Hill-Irwin. Read More