The Johnson Company Financial Stability - Essay Example

Introduction Johnson pls is a limited company established in 2002 in accordance with the United Kingdom’s Company’s Act 1985. The company manufactures eighty six individual furniture products that are sold within the United Kingdom. It sources its raw materials (wood, plastics and fasteners) locally from United Kingdom suppliers. Johnson pls has sixty employees in total. The company financial stability has been impressive since inception. However, Johnson pls Return On Capital Employed (ROCE) had been declining significantly since 2006. ROCE declined from 12 percent to 7 percent from 2007 to 2009 respectively. A significant decline in the ROCE is as a result of declining revenues and poor cost controls. However, the company’s management perceived that the company can attained and maintain ROCE above 15 percent, which can be achieved through adoption of a comprehensive information communication system. The company used the root cause analysis tool to identify causes of declining ROCE and develop strategies that need to be implemented to improve the ROCE by December, 31 2012. Problem Identification Johnson pls is experiencing declining ROCE since 2006. There was 5 percent decline of ROCE from 12 percent to 7 percent in 2007 and 2009 respectively. Gathering information The information was obtained by conducting both secondary and primary research on company’s activities as well as market performance. Research reveals facts, assumptions and relevant interest of the company and other stakeholders. Johnson pls declining profitability is directly attributed to increasing production, administrative, marketing and distribution costs as well as declining product prices. Therefore, the company lacks appropriate cost control measures and marketing techniques. Since 2007, cost of production has increased by about 1 percent. The 1 percent increase in total cost is attributed to delays, fickle deliveries and inferior quality from the United Kingdom Suppliers. Furthermore, raw material holding costs has been on the increase. The company suffered losses occasioned by changes in the amount of raw materials sourced and those delivered to the company. Over 75 percent of all the problems covering the cost of production is as a result of lack of adequate communication between the suppliers and the company’s procurement department. The second problem is increasing administrative costs. Increasing administrative cost accounts for an estimated 40 percent of the total increased costs. Administrative costs have grown despite declining sales revenues. This is attributed to increase in the number of employees, annual increase in employee remuneration, and increase in utility costs as well as increases in rent and communication expenses. Communication expenses increased the highest and accounted for about 20 percent of the total increases in costs. Both marketing and distribution costs increased by about 19 percent. Distribution costs alone increased by about 15 percent and marketing cost by about 14 percent of the total cost increases. There was a 0.95 percent decline in the prices of company’s products. This is because of inferior quality products caused by inferior raw materials. Screening and evaluation The company developed a criterion for screening all possible alternatives aimed at improving its ROCE as follows. All the possible actions should increase sales revenues by at least 15 percent. All possible actions should be flexible, less cumbersome and time savings. The actions should lead to at least 8 percent savings in total company costs. The actions should be practical and measurable. The actions should lead to economies of scale, faster customer services and direct savings on production costs, administrative costs and marketing and distribution costs. Furthermore, it should lead to better product pricing. Possible solutions There are various solutions that have been identified to increase the ROCE of Johnson pls from 7 percent in 2009 to above 15 percent in 2012. The company should introduce comprehensive information management systems, increase specialized assembly operations to produce high volume company products, open branches in other countries, increase the price of company’s products or undertake cross cutting. Comparing possible solutions Introduce comprehensive information management systems. Information is critical to effective and efficient operation of the business entities. It allows for cross reference of suppliers and employees do not have to rely on their memory. To monitor changes in original purchase orders reconcile raw materials and finished products. Information helps to manage market trends, economic and technological developments. Increase specialized assembly operations to produce high volume company products is the second viable option but it cannot be sustained because quality of company’s products is falling due to inferior raw materials. Third option is opening branches in other countries to increase the market share and proximity to raw materials. This could be viable but coordination of company’s activity poses a big challenge. Fourth option is to increase the price of company’s products. The company can raise its prices by about five percentages. However, the pricing trends of furniture are declining. Fifth option is undertake cost cutting. Reducing administrative costs by 3 percent, marketing and administration cost by 1.5 percent. It is not advisable to reduce the number of employees because company’s workload is overwhelming existing employees. Implementing best chosen action From the above options, there are many alternatives actions that have the potential to improve the ROCE of the company. However the most appropriate is the implementation of a comprehensive information management system. Helenius (n. d., p.10) stated that introduction of computerised information system require investment in staff, equipments and software. Benefits of the comprehensive information management system According to Piercy (1987, p. 241), computerised information system speed up decision making as it supports information resource assessment enabling the organization define its business direction. Arora (2006 p. 29) stated that computerised information system is comprised of computer hardware and software as well as data, procedures and people. Sheldon (2010, p. 195-198) stated that comprehensive information management system should allow for internet access. This is because internet access enables the company to save communication costs significantly. Voice Over the Internet Protocol (VOIP) is most appropriate for companies that regularly make international, long distance calls or high volume calls. VOIP customers pay fixed monthly fees to the service providers. Therefore, business entities like Johnson pls can make unlimited calls, make facsimile and participate in teleconferencing to any location in the world at extremely low costs. Furthermore, comprehensive information communication system allows integration of networks, which lead to fewer equipment costs due to utilization of fewer network devices. Johnson pls intends to consolidate communication resources into single infrastructure to reduce operation, administration, personnel, security, network management and accounting costs. According to Aksoy and DeNardis (2007, p.10), internet access can increase organisational (entity’s) geographical coverage. Therefore, it is possible to access customers, suppliers and other stakeholders who are very far away (long distance) from the company with minimal cost. It is a low cost way of making transactions with the customers and suppliers. Internet is also fast, convenient and flexible communication tool. Furthermore, internet can be used as an interactive tool that enables two-way dialogues between communication parties. Through the internet, e-coupons can be timely used as part of the e-promotional tools that can reach large number of customers fast and at very low costs. New suppliers and distributors can be accessed through the internet. This may enable the company to maintain its competitive edge. A company can conduct online research on issues touching the company as well as its products and services. The cost of online marketing is extremely low; as a result, companies can pass cost savings to customers by reducing prices on their products for the benefits of the consumers. However, there are disadvantages that are associated with internet accessibility. Older and disadvantaged customers may resist the use of internet for transactions and may be limited to people who receive lower income. As a result, certain population may not be reached. Internet may lead to breach of privacy as people and organization sent spam while worker may engage in chatting at the expense of company’s precious times (Gay, Charlesworth and Esen 2007). Internet marketing and sales may not be effective when selling products that need to be tasted or touched to influence the buyers’ decisions. The cost of broadband services can be prohibitive and most customers or suppliers may not afford it. Technological gap between the users and the providers may exist. This does not allow for maximum utilization of internet services. Designing the comprehensive information management system Johnson pls will consider the outputs, inputs, file design, hardware and software as it designs its information system ((Deeson, 2005, p. 56). ISRD Group (2006 p. 216- 260) revealed that there are ten steps involved in developing the company’s management system. It is important to involve all relevant stakeholders when designing the information systems to ensure that all variable are included (Tyndall et al 1990 p. 36). Relevant stakeholders assist to establish information and database requirements. Reviewing current system According to WHO (2004, p. 11), existing information systems is reviewed to check for accuracy, completeness, adequacy and timeliness. Challenges with the existing system must be considered and other aspects that need to be retained, modified or abolished are identified. There are key strategic issues to be reviewed on Johnson pls information systems that have been addressed. They include purchase of raw materials, production, warehousing and distribution, sales and marketing, and strategic management. The current of Johnson pls is as follows: The purchase function operates a manual information system associated with time wastage and information incompleteness. This has made it extremely difficult to control costs and compare different suppliers. Production function is a computerised system and has helped the company to produce furniture effectively and efficiently. There are no problems identified with the production operation systems. Thirdly, warehousing and distribution uses a manual information management system that has led to poor linkages between production and sales department. In addition, errors have been made with the manual system (stock cards) that has led to stock outs and increased levels of customer dissatisfaction. There has been increased warehousing cost associated with some slow moving furniture. Marketing and sales information system is computerised and sufficient. It has comprehensive information on technical specification (quantity, quality, price and discount) delivery time, credit terms, changes in quantity, price and quality. Reports generated include quotations, delivery notes and invoices. However, there is need to introduce network interface to allow real-time processing among buyers and sales agents who are miles away from the company. Fourth, the management does not have a comprehensive information management system. Johnson pls relies on internally generated data to make company decisions. This is inadequate because key information that affects the company is not considered. Define the data needs First, Johnson pls purchasing function needs raw materials unique codes accompanied by their suppliers details, technical specification (quantity, quality, price and discount) delivery time, credit terms, changes in quantity, price and quality. Computerized information system should be real-time to allow for speedy decision making. Reports include purchase orders and money paid out. Secondly, warehousing and distribution operations need computerized information systems. Finished products need unique codes accompanied by technical specifications (quantity, quality, price and discount) and production cycle. The reports generated include received and delivery notes and stock outs. Thirdly, the company needs integrated network to allow buyers and sellers make transactions irrespective of the distance. Fourth, Johnson pls needs a comprehensive information system that would ensure that adequate information is available for decision making. All functional departments in the company need to be integrated appropriately. Additional information on local and global economic and market trends as well as technological advancement should be developed. The socio-economic trends should monitor purchasing power of individuals and companies, inflation rates, economic growth and employment levels. Market trends include consumer tastes and preferences, purchase cycles, prices and cost of raw materials. Technological advancement in furniture making and information communication technology should be considered. There is need to ensure that all key stakeholders can access company’s website that allow interaction and dialogue among the parties involved. Data flow is determined At this level, it is important to identify key variables and appropriate personnel to handle them. It is also important to determine the form of data and how frequent data is needed to be submitted. The flow chart determines how information will flow. Table 1 Department Forms / reports accomplished at this level Position of person in charge of accomplishing the form /report To whom the completed report is submitted Frequency of submission Production Form 1 Production accountant Production supervisor Weekly Warehousing and distribution Form 2A Form 2B Clerk Chief Clerk Weekly Sales and marketing Quotations, Invoices Sales agents Marketing Manager Weekly Administration Head of departments Chief Executive Officer Two weeks Design data collection and reporting tools Data is collected using departmental designed intake forms that reflect key variables in day-to-day company operations. The intake forms are self analyzing using specific software application. The application software ensures that each process based on unique results. Storck (n. d.) revealed that computerized production information systems ensure that products are assembled based on unique products, maximization of the output, focused production requirement overview as well as unbiased progression of orders. It also facilitates off-line production and assembly plan and ensures that all product information is integrated in a single data base from strategic decision making. Develop and implement a training programme The training programme for the new software application should be implemented by a comprehensive curriculum. Training manual should contain training plans, standard operating procedures, skill demonstrations and job analysis as well as implementation date (Sawers and Eastman, 1996, p. 382). Few individuals in the company should be trained to train others (data providers, computer operators and relevant staff at different level of the organization). Training materials should be reproducible. Pretest the information system It is important to test the new information system by trying various sequences of input values and confirming that the software application work appropriately (Parsons and Oja 2007, p. 584; Fortune and Peters 2005, p. 22). Before implementing a new information system, it is important to ensure that it is cost efficient; personnel and technical support should be available; reports should be easy to generate; data quality should be verifiable; developed software should be simple, straightforward, pre-testable; there should be software manual that could be easily understood and programme must be put in place to train the relevant staff. Monitor and evaluate the system Develop a systematic plan to ensure that input, output and procedures are performing as intended. Any delays, errors should be reported to the system analyst. Develop effective data dissemination and feedback mechanisms Information system should have the capacity to disseminated data and information to relevant people in specific places. Information will be disseminated through publications, telephone, fax, mail, email and meeting at various levels. Acquisition of the information management system Johnson pls will acquire its information system through outsourcing. Outsourcing is important because it cut costs and enables acquisition of state of art technology. It also enables the company to acquire technical expertise that would be difficult to afford with in-house personnel and eliminate staffing problems (Stair et al 2009 p. 502). References Aksoy, P & DeNardis, L 2007, Information technology in theory, Cengage Learning, New York. Arora, A 2006, Foundations of Computer Science, Laxmi Publications, New Delhi. Deeson, E 2005, Essentials of Gcse Ict, Letts and Lonsdale, Lancashire Fortune, J & Peters, G 2005, Information systems: achieving success by avoiding failure, John Wiley and Sons, New York. Gay, R., Charlesworth, A & Esen, R 2007, Online marketing: a customer-led approach, Oxford University Press, Oxford. Helenius, R. n. d. Designing an information system- A support System for A statistical Information Service, viewed 28 December 2010, . ISRD Group 2006, Structured System Anal And Design Isrd, Tata McGraw-Hill, India Parsons, JJ & Oja, D 2007, New perspectives, computer concepts, 10th edn, Cengage Learning, London. Piercy, N 1987, Management information systems: the technology challenge, Taylor & Francis, Australia. Sawers, RJ & Eastman, RM 1996, Process industry procedures and training manual, McGraw-Hill Professional, New York. Sheldon, F 2010, The Fundamentals of Leadership: Essential Tools of the Trade, Wheatmark, Inc., Arizona. Stair, MR, Reynolds, G & Reynolds, WG 2009,Principles of Information Systems, 9th edn, Cengage Learning, London. Stork n. d., PDS-NT: Product Distribution and Information System, viewed 28 December 2010, . Tyndall, RG, Cameron, J, Taggart, CR &Federal Highway Administration 1990, Strategic planning and management guidelines for transportation agencies, Transportation Research Board, Washington. WHO 2004, Developing Health Management Information Systems: A Practical Guide For Developing Countries, Western Pacific, viewed 28 December 2010, . Read More