Supply Chain Simulation: Along with Order Fulfillment Legacy Technology System - Term Paper Example

? Business Proposal of Implementing Supply Chain Management Along With Order Fulfillment Legacy Technology System Prepared By: Submitted Submission: Executive Summary During this period where economic crisis are being witnessed globally, there is an urgent need for a firm to consider alternative ways of ensuring long-term sustainability. The profitability of a firm is of utmost importance if it has to remain relevant and achieve competitive advantage over its rivals. A firm can make the most out of the resources it currently holds as well as incorporating new technologies to maintain financial strength and profitability. An effective system of production management is sufficient to make a company stand out. This report provides effective and efficient ways of handling the production activities of the firm so as to ensure its financial strength and enhanced earnings. Table of Contents CHAPTER 1 4 1.1Problem Statement/ Opportunity 4 1.2Scope of the Report 4 1.3Background 5 1.3.1Legacy Technology 5 1.3.2Customer Satisfaction 5 2.1Proposed Solution: Supply Chain Management 6 2.2Cost of the Project 6 2.3Adequacy of Funds 9 2.4Project Benefits 11 2.4.1Estimated Annual Savings 11 2.4.2Just in Time and Lean Operations Usage 13 2.5Management of Inventory 14 2.6Work Cells Vs. Straight line Method 15 2.7Continuous Improvement Program 16 The main objective of the organisation has always been to achieve total quality management throughout the organisation. Therefore, every new project is sufficiently scrutinized with the aim of establishing the impact it has on the rest of the organisation. To achieve total quality management with the new project, employees will be adequately empowered through training, constant feedback and engagement in the implementation of the supply chain management to ensure maximum contribution from them. 18 CHAPTER 3 18 3.1Conclusion 18 References 19 CHAPTER 1 1.1 Problem Statement/ Opportunity Our current production capacity is not up to the industry standards. To begin with, our client base has expanded in recent years and nothing has been done to adjust the production process to accommodate the changes being experienced. The present production capacity of the firm does not meet the present market needs. This has perhaps to a great extent contributed to the loss of customers every year. The fact the company gains new customers every year cannot in anyway justify the loss of the existing ones. A lot of company finances are usually spent in attaining new clients which can be cut by engaging in activities that facilitate customer retention. Among those ways of retaining customers entails engaging in company practices that ensures that the needs and expectations of the customers are met in terms of service and product quality, availability of sufficient products as and when they are needed as well as appropriate pricing. This report was generated with the main aim of bringing to light the means by which the current production processes can be adjusted to enhance company performance as well as please and increase the client base. 1.2 Scope of the Report This report shows the production activities that our company can engage in to enhance the company performance. Matters of the supply chain management and any possible changes that can enhance the company performance have been analysed in this report. Resource allocation in the form of budgetary control was kept into consideration when developing this report. The probable changes in the finance structure of the company are presented in the form of balance sheet and income statement in the form of attachment in this case. The best ways of supply chain management such as just in time, lean operations as well as effective management of the inventory are well outlined in this report. 1.3 Background Despite the fact that ABC Limited Company has been successfully running its operations to a certain extent, more can be done to achieve more success. Increased efficiency and effectiveness could be achieved by making changes in certain technology areas. Among the various business problems facing ABC Limited Company arises from the technology used in the management of inventory and distribution of finished goods. For a long time the company has been utilizing several legacy technology systems in managing stock and distribution of commodities. 1.3.1 Legacy Technology However, legacy technology has a number of shortcomings that can be dealt with. For instance the several legacy technology systems lack the capacity to work together. This has led to delays in the way information is received and processed resulting in redundant information input and processing within the order fulfillment division. The high level of redundancy in the processes has resulted to duplication of work hence requiring several data entry points which results in high levels of inaccurate and irreconcilable data. This current situation has in turn translated to long processes of production and insufficient or overage supply of commodities. This fluctuation in the supply of commodities can gradually lead to unreliability and the inability to forecast the capacity of the department thus affecting the rest of the operations in the firm. 1.3.2 Customer Satisfaction Our clients are deeply aggrieved and a number of complaints has been filed which demonstrates the increasing level of dissatisfaction among the clients. At this rate, the company is likely to lose important customers to the competition and the situation hence demands a quicker solution to the problem. In addition the delay in the information flow has resulted to excessive costs as the division has to incur inventory carrying costs; an expense that can be easily avoided through installation of up to date technology. 1.4 Sources and Methods This report relied on information from the company library from the sales reports, production reports as well as customer service reports. To settle at the most effective company practices, simulation method was used to evaluate various strategies. Extensive market research was also conducted so as to attain a real picture of the general business environment. CHAPTER 2 2.1 Proposed Solution: Supply Chain Management The solution to the above mentioned problem is replacing legacy order fulfillment technology with a supply chain management (SCM) system. The proposed system entails all the businesses and contributors being involved in the creation of the product right from obtaining raw materials to making the finished product. Smooth information flow is guaranteed with the proposed system as channels of communication are clearly defined (Craig & Dale, 2008). 2.2 Cost of the Project Replacing legacy order fulfillment technologies with a supply chain management system will cost the company budget approximately $1.2 million. The amount will cover infrastructure required and other necessary resources to complete the project implementation. In addition the new technology will consume $250,000 from the company budget each financial year for its support and maintenance. If implemented the same process will be repeated after every ten years as it has a lifecycle of ten years and there will also be a need for the business to stay up to date for continued relevancy and efficiency. The company will be forced to buy new software as well as upgrade a few technological devices such as the computers and telephones. In addition employees will need to be trained as soon as possible to be able to use the new system effectively. However, the costs of these activities will be covered by the $1.2 million. 2.2.1 Product Design Decisions Product design evaluation and decision plays a very important role in product quality improvement. The product decisions made during simulation is generally about production of products that are user led product decisions. Therefore, adequate market research was put in mind so as to learn sufficient information about the needs and expectations of the consumers 2.2.2 Target Markets The target markets used while conducting the simulation analysis were reached at after a comprehensive analysis of their benefits and costs. A wide range of the target market was considered with 2.2.3 Sales Office Location To ensure effective and increased sales volumes, the location of the sales office settled upon was considered highly effective because they are strategically located at the heart of big cities and towns in the country. Therefore, if simulation was to be repeated all over again, the same sales office location would be used. 2.2.4 Marketing Research This simulation consumed a considerable amount of finances on market research especially when reaching out to the existing and prospective customers’ equivalent to $15000. However, given an opportunity to conduct the market research for simulation purposes a lesser amount would be used since market research skills have since been mastered. 2.2.5 International Markets Before deciding on whether to go global or not, a number of factors were put into considerations which include: the ability of the company to attain competitive advantage in the domestic market, the process as well as the costs involved. The market research revealed that seeking key international markets will enhance company’s sales. Essentially, 35% of the growth in company revenues is generated from a possibility of seeking international markets. 2.2.6 Additional Factors For International Markets Besides the factors considered in the simulation, the company should also consider the following factors: Availability of information; Level of competition in the international market; The politics and legislation of the host country; The culture of the country; Availability of personnel and other important resources; and Accessibility to business partners. 2.3 Adequacy of Funds The company will be operating on the following project budget: ABC LIMITED PROJECT BUDGET FOR THE FIRST YEAR Quarter 1 2 3 4 Year 1 new computers(100 computers) 185,000 0 0 0 185,000 purchase and installation of new telephone lines 100,000 0 0 0 100,000 purchase of new software $80,000 $20,000 $0 $0 $100,000 Contractor 200000 100000 50000 0 350,000 project administration 150,000 75,000 75,000 75,000 375,000 research and development 50,000 50,000 50,000 50,000 200,000 repair and maintenance 62,500 62,500 62,500 62,500 250,000 meetings with stakeholders 20,000 20,000 20,000 20,000 80,000 office operations 15000 15,000 15000 15,000 60,000 Total Amount needed 862,500 342,500 272,500 222,500 1,450,000 Total Income of the company 11271000 cash and cash equivalents year end 10532000 ABC limited has had sufficient funds to finance the project as reflected by the estimated annual income and cash and cash equivalents at the year end. Year 2013/2014 1st Q 2nd Q 3rd Q 4th Q 5th Q Net Income 11271 14898.8 19433.7 25102.9 32189.09 cash and cash equivalents year end 10532000 The first quarter of the year requires $862500 while the net income was estimated at $11271000. In the second quarter, the amount of finances required in the new investment goes down to $342500 as the net income increases to $14898800 making it easier for the company to afford the new proposed technology. During the third quarter, expenses on the new system decreases further to $ 272500 as the net income increases to $19433700. The fourth quarter also experiences decrease in the money required to finance the supply chain as the income increases to $25102900. The estimated net income and cash and cash equivalents at the end of the year against the quarterly funds required to finance the proposed project clearly reveals availability of funds for the company to implement the new system and hence achieve its business goal of serving its customers more effectively and efficiently. The first step in the preparation of the Proforma financial statements was to forecast sales. Sales usually influence the current assets and current liabilities account balances. For example: as sales increase, the firm will generally need to carry more inventories and will have a larger accounts receivable balance. The income statement hypothesizes that sales will grow from the first to the fifth quarter hence showing that the firm will have adequate funds for the project. The ratio of the current assets to that of current liabilities is satisfactorily sufficient to facilitate the ability of the company to finance this new project. In addition, the Proforma balance sheet, balances from the first quarter to the last quarter. In the event that it does not balance, then external financing would be the most appropriate step. However, the fact that it balanced means that the firm has the financial abilities to finance the project internally. Therefore, the use of Proforma statements and budget was very effective in ensuring that the firm had adequate funds. 2.4 Project Benefits The benefits that come with installation of supply chain management system are immense. The proposed system will to a great extent solve all the problems associated with the legacy order fulfillment technologies. The balanced score card is an effective way of measuring the performance and benefits of the supply chain management because it concentrates on the impacts of the SCM on finances, customers, internal processes and learning and growth of the employees in a firm (Bhagwat & Sharma, 2007). The effects that the new system will have on the four areas have been identified. The new system will help improve order fulfillment processing time through reduction or elimination in redundancy of information input and processing. 2.4.1 Estimated Annual Savings The new technology will enhance inventory management and production levels thus reducing the high costs of inventory handling. It is estimated that the company will experience cost savings of $500,000 annually. Table 1: Estimated Annual Savings Item or Activity Annual savings Reduction in the data entry staff from 10 FTE to 8 FTE $100,000 Reduction in the stock carrying costs $300,000 Retirement of several legacy systems $100,000 With the implementation of supply chain management system, the company will experience improved order fulfillment. This is because the initial time taken between making orders and making delivery will be reduced by approximately 10% to 20%. Essentially, this will go a long way in ensuring customer satisfaction and retention which will be useful in attaining one of the objectives of the firm of attaining customer loyalty. The unreliability of data due to inaccuracy will be reduced by implementation of the recommended system. Additionally, the revenues, production per unit time, assets, customer retention levels and management of expenses of the company are estimated to have improved considerably. Table 2 : Estimated Cash Changes Reduction Rates 10% 20% 30% Cash and Cash equivalent 10532 10532 10532 Adjustments in operations Reduction in stock based compensations $217 433 650 Sales and Marketing $1,094 $2,188 $3,282 Net cash and Cash equivalents 11843 13153 14464 Table 3: Cumulative Balanced Scorecard Q1 Q2 Q3 Q4 Total Cumulative Customer Retention and Loyalty 10% 15% 18% 20% 63% 0.1575 Cutting Expenses 1311 1311 1311 1311 5244 1311 Growth in Income 3627.8 4534.9 5669.2 7086.19 20918.09 5229.5225 Growth in Company Cash 11843 13027.3 14330 15763 54963.36 13740.8408 Reduced Production Time 10% 15% 15% 20% 60% 0.15 Growth in Assets 1.2 1.2 1.2 1.2 4.8 1.2 Savings from SCM 0.85 0.05 1.05 1.25 3.2 0.8 Growth in Revenue 4371.3 5463.7 6830.4 16665.4 4166.35 2.4.2 Just in Time and Lean Operations Usage The current working strategy for inventory management in most of the successful organisations is to maintain minimum levels of inventory. The most suitable supply chain approach is the just in time (JIT) method of inventory management. With this method, inventories are maintained at minimum levels and the supply chain is effectively and optimally utilized to ensure that the firm never runs out of raw materials or finished products. If this method was used together with the new proposed technology, the firm will manage to cut down on the operating expenses and cost of revenues by approximately 25%. This will automatically raise the company’s profits with an equivalent percentage.ABC Limited dedicates its efforts towards delivery of highest quality commodities and supply chain within the industry. The use of Lean principles in the current supply chain throughout the company will enable the company to enhance efficiency, minimise variations, faults and costs, improve waste management and improve products to the customers more effectively. Lean operations have overwhelming benefits that touches on almost every part of the operating cost. Therefore, it is estimated that the use of lean operations will cut down on the expenses by a significant 50%. The profits before tax of the firm are consequently expected to rise by an equivalent 50%. 2.5 Management of Inventory Inventory is also an important element of the current assets of a firm. Management of whichever type of inventory is a tedious activity that requires a balance between the tied up capital and sales (Deloof, 2013). A problem could arise if the inventory levels are too low because the company may lose out on an opportunity to make sales in case the demand goes up unexpectedly. On the other hand there is a risk of tying up so much capital that could be utilized elsewhere if a company decides to maintain high levels of inventory. According to Arbidane and Ignatjeva (2013) proper inventory of management requires striking a balance between customer service and inventory. Additionally, if it’s properly managed, inventory can drive the revenues of a firm as well as efficiency. Aberdeen group (2008) discovered several inventory management practices among the most successful firms such as reduction of in lead times, increasing levels of perfect orders and reducing stock holding costs 2.5.1 Followed Approached in Inventory Management i. Increased levels of perfect orders so as to reduce stock based compensation. This worked in reducing the level of stock holding expenses by 10%. Initially, stock based compensation was $2166000 which was reduced to $1949000. Overtime, these changes would have considerable impacts on the profits of the business. ii. Reduction in stock handling costs was successfully attained by implementing the JIT system thus cutting down inventory costs by $300000 annually. The focus was put on reducing lead time to the customers by employing just in time technology that is capable of ensuring consistent available of computers as demand arises 2.6 Work Cells Vs. Straight line Method Planning decisions for manufacturing require firms to make choices determining the best way to assemble or construct a product. The simplest form of straight-line production uses an assembly belt or mechanized table allowing workers a chance to assemble a product in a prescribed order. Setting up a straight-line production requires adequate sources of power, interior lighting that is suitable for line production. Additionally, there must be sufficient space for allowing access routes that are necessary for local fire codes and safety rules. The company can easily adapt the physical plant to meet the requirements for straight-line production, but the cost to do so can also increase the cost of doing business and the price of the product, making the adaptation impractical and wasteful. Straight line production could not fit with the use of supply chain management because of the high costs involved as well as the increased motion in the company facility that would in turn lengthen the process of production. The main aim of installing the new technology was to reduce production time and increase customer satisfaction. A combination of straight line production and the new technology would definitely cause the reverse. On the other hand, Work cells are a key component to accomplishing lean manufacturing. Since product flows straight from one machine to the next, the movement of materials around the facility is greatly reduced. Work pieces within the work cell are very visible, which eliminates the need for bar coding and simplifies inventory control. This equates to a significant increase in efficiency. Therefore, work cells will go a long way in reducing production time and hence facilitating a cut down on the production costs of the firm. Besides, products will always be available on demand hence enhancing customer satisfaction and retention rates. The use of work cells and the new technology is a perfect combination for meeting the current demand of the customers as well as the company needs of cutting down on the costs. It was estimated that will be in a position to decrease throughput time by about 90% with work cell put in, compared to some other operations such as straight-line method. 2.7 Continuous Improvement Program This report was generated with the main aim of bringing to light the means by which the current production processes can be adjusted to enhance company performance as well as please and increase the client base. To ensure accomplishment of intended goals, the following program will be very useful: i. At the beginning, ensure consistent monitoring of the installation of the supply chain management to ensure that it is done as intended while also checking on the usage of finances ii. From time to time (after every four months) conduct a market research to establish the impact of the new supply chain on the client’s base iii. Constantly check on new improvements and alterations that can be done on the supply chain management iv. Ensure constant and effective communication among the staff to enhance success of the new project In order to encourage a continuous improvement of both specialists and suppliers regular and scheduled meetings between the department and the suppliers and specialists should be availed. Such meetings are also very important in building and maintaining lasting and beneficial relationships between the company and the suppliers/ specialists. The following types of meetings are highly recommended by Queensland Purchasing (2000) namely, progress, technical and longer term review meetings The current project largely concentrates on the implementation of a new supply chain management. Installation of this project requires constant communication with the suppliers as well as the specialists. Therefore, one of the most effective continuous improvement programs will be holding constant review meetings as shown in the table below. Table 5: Review meetings Type of meeting Period Purpose of the meeting Progress review meetings Monthly basis Discussing performance trends, milestones on the impending contracts, proposed responses on existing problems Technical review meetings Immediately a need arises conduct a review of the technical reports as well as technical issues currently affecting contract operations Longer term review meetings Quarterly They are aimed at determining the extent to which requirements are being satisfied as well as means of managing any anticipated changes The main objective of the organisation has always been to achieve total quality management throughout the organisation. Therefore, every new project is sufficiently scrutinized with the aim of establishing the impact it has on the rest of the organisation. To achieve total quality management with the new project, employees will be adequately empowered through training, constant feedback and engagement in the implementation of the supply chain management to ensure maximum contribution from them. CHAPTER 3 3.1 Conclusion Supply chain management is one of the newest technologies that manufacturing firms are using in order to increase efficiency and effectiveness in the production and inventory management. In addition, many firms are have implemented in order to gain competitive advantage. With controlled costs and improved order and delivery time of commodities, ABC Limited will be in a position to offer its commodities at relatively low prices compared to those of the competitors. This will help accomplish the organizational objective of increasing the market share and customer retention. In addition, the firm will be able to increase shareholder value through increased revenues and reduction of expenses. References Aberdeen Group, 2008. ‘Unlocking Working Capital: Best Practices For Reducing Inventory.’ Research brief, pp.1-8 Arbidane, I & Ignatjeva, S, 2013. The relationship between working capital management and profitability: A Latvian case.’ Global Review of Accounting and Finance, Vol. 4, No. 1, pp. 148-158 Bhagwat, R., & Sharma, K.M (2007). Performance measurement of supply chain management: A balanced scorecard approach. Computers and industrial engineering, 53(2007), 43-62 Craig R. C, Dale S. R, (2008) "A framework of sustainable supply chain management: moving toward new theory", International Journal of Physical Distribution & Logistics Management, 38 (5), 360 - 387 Deloof, M (2003). ‘Does Working Capital Management Affect Profitability In Belgian Firms?’ Journal of business finance and accounting, Vol.30 (3/4), pp. 573-587 Queensland Purchasing, 2000. Managing and monitoring suppliers’ performance. Better Purchasing Guide, Queensland Government, September 2000. Read More