Stock Control Investment Appraisal

8/8/2019 Stock Control Investment Appraisal

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CEE CENTRE EXECUTIVE EDUCATION

Project Management,

Stock Control &

Investment AppraisalBusiness Decision Making

Rashida Yvonne Campbell6/22/2010


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Contents

ASSIGNMENTTASK 3

ANSWER Q1 5

STRATEGIC INFORMATION 6

SUMMARY OFSTRATEGIC INFORMATION 7

TACTICALINFORMATION 8

SUMMARY OFTACTICALINFORMATION 9

OPERATIONALINFORMATION 10

SUMMARY OFOPERATIONALINFORMATION 12

CONCLUSIONOFSTRATEGIC, TACTICALANDOPERATIONALINFORMATION 13

ANSWER Q2 14

TWOEXAMPLESOFSTRATEGIC INFORMATION 14

TWO EXAMPLES OF TACTICAL INFORMATION 14

ANSWER Q 6 15

ANSWER Q8 16

ANSWER Q 9 17

ANSWER Q 10 18


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Assignment Task

Answer 6 questions from 10 provided.

1. Distinguish between strategic, tactical and operational information.

2. Give two examples of strategic, tactical and operational information

relevant to an organization operating in the manufacturing sector.

6. Placing an order for an item of stock costs $340. The stock costs

$60 a unit, annual storage costs are 10% of purchase price. Annual

demand is 900,000 units. What is the economic order quantity?

8. The following activities comprise a project to agree a price for some

land to be bought for development

Activity Preceded by Duration Days

A: Get survey done ----------------------- 5

B: Draw up plans ----------------------- 9

C: Estimate cost of

building work

B 2

D: Get tenders for the

site preparation

A 11

E: Negotiate Price C,D 5

8a. What are the paths during the network?

8b. What is the critical path and duration?


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9. A company is wondering whether to spend $36,000 on an item of

equipment, in order to obtain cash profits as follows:

Year $

A 12,000

B 16,000

C 10,000

D 2,000

The company requires a return of 10% per annum. Use the Net

Present Value (NPV) method to assess whether the project is viable.

10. The Net Present Value of an investment at 25% is $90,000 and at

30% is $20,000. The internal rate of return of this investment (to

the nearest whole number) is:

A: 17%

B: 20%

C: 22%


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Answer Q1Non-profit organisations and business organisations depend on

information. They require information for many purposes and reasons.

The reasons may vary according to the organisation, below are common

general purposes for gathering and processing information:

y Planningy Controly Decision-making and problem-solvingy Co-ordinatingy Organisingy Commandingy Performance measurementsy Recording transactions, numerical data from various departmentsy Competitor movementsy Government legislation/political movementsy Customers

A vast amount of information can be related to all of the above

categories. Information is a valuable tool and resource for organisations,

it maybe confidential, crucial and or critical to the success of the

organisation. Information maybe gathered from the past, present or

anticipated future i.e. forecasting as economists and governments do. It

maybe gathered formally and/or informally, externally and/or internally, it

may consist of primary or secondary data, it maybe quantitative or

qualitative etc.

Therefore information gathering, processing and dissemination are vitalfunctions of any organisation. Information about customer requirements

gives the organisation purpose and objectives. Information about

objectives enables managers to direct and co-ordinate the activities of

others. However not all of the information that a company holds is

available to all its employees, for example: there is no need for a

manager responsible for production line output having access to the

information that it is required for the CEO of the company. For

organisational purposes information is split into three main types of

information divisions:


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Strategic Information

Strategic decisions, choices and direction of the company are long-term

objectives. These are the responsibility of the top management. It is

strategic information that is essential for planning objectives for the

organisation and to assess if the objectives are being met through the

organisational activities and practices.

The strategic information includes:

y total profitability, the profitability of sub-business units, and varioussegments of the business

y future market forecasts and predictionsy the level of retained earningsy availability of raising capital (new funds) perhaps for new venturesor re-investments purposesy overall cash needs of the organisationy overall resources requirements such as human powery availability and capital equipment requirements

This information is essential for top senior managers to decide the long-

term planning strategies, such strategies like growth of the organisation

and helps them to base decisions of growth from its information gathering

to decide upon mergers, takeovers, alliances etc. They match the

organisational competences and capabilities to the external environment

and make adjustments as necessary. The information maybe informal andmay not be possible to quantify. This level of information it is usually a

summary or total value. At this level the management receive information

mainly from the executive summaries and collect project, sales, revenue,

purchases, and departmental information this way (internal information).

The information at this level is usually formal. Strategic management

information is also reliant on external sources of data either quantitative

or qualitative. They monitor competitors, stakeholders, political, legal,

social, economic, technological and environmental movements and

indicators that assist them toward their decisions, planning, f inancing and

business choices for the overall direction and success of the company.


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Summary of Strategic Information:

It is inform

tion required by top senior m

nagement that are responsiblefor long-term planning, growth and sustainability of the organisation.

The diagram demonstrates that internal information is provided to themanagement at higher levels. However decisions and choices are then

communicated from Top level managers downwards.

trategic Information is:

y Information iscollected from both internal and external sourcesy All the information issummarised at a high levely The information is relevant for the long-term rather than the day to

day functioning

y The information required is regarding the organisation as a wholey Information maybe prepared on an ad hocbasisy The information maybe both quantitative and/or qualitativey Long-term information ismore ris

y as the future may have

unexpected changes that were not cater for.

Strategic Information for Top

Senior Managers Purpose forlong-term planning &

Decision making

MIDDLE MANAGERS

LINE MANAGERSinformation is provided to the

management at higher levels


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Tactical Information

Tactical Informationis used to decide how the resources of the businessshould be employed and monitored and how they are being deployed anddispersed.Examples include:

y Information about business productivity e.g. units produced peremployee; staff turnover

y Profit and cash flow forecasts in the short termy Pricing information from the markety Budget control and/or variance analysis reportsy Employee levels i.e. head counts per team, department, divisions,

projects and units etcy Employee turnover levelsy Short-term purchasing requirementsy Profit results of particular departments

Tactical information is essential for the middle management of theorganisation. The professional middle managers include sales &marketing, manufacturing, Finance & Accounting, Human Resources,procurement & logistics, production, purchasing managers, research &development etc. Each of these middle-managers would require tacticalinformation for various reasons. Below are some of the explanations forthe requirements of middle-managers tactical information needs:

Marketing Manager would require tactical information regarding:y Advertising techniques and analysis of their impact.y Customer preference surveysy Correlation of prices and salesy Sales force deployment and targetsy Exploring alternate marketing channelsy Timing of special sales campaigns

A Financial Manager would require tactical information regarding:y Variations between budget and expensesy L

arge outstanding payments/Receiptsy Credit and payment statusy Cost increases and pricingy Impact of taxation on pricing


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Basically tactical information allowsmiddle managers to monitor andcontrol, to chec

if operations and activities are working according to

plan. ome professional middle-managers are involved in the decision-making process and the tactical information that is useful for them will beprovided as a guide to the decision that they need to conduct, but this ismore on a short or medium term level.

Summary of Tactical Information

It is information required for professional middle-managers that areresponsible for short to medium term planning and decision-making of theorganisation.

Tactical information is:y Usually generated internally, but there maybe some external

sources incorporatedy Decision regarding the information are summarised at a lower levely The information is regarding the short-medium termy It isconcerned with activities and/or departmentsy Information is prepared on a routine and regular basisy The information is quantifiable and produces quantitative measures

Strategic

Infor-

mation Top

Senior

Managers

TacticalInformation to monitor & controlresources

Professional Middle Managersfor short-medium term planning anddecision-making

LINE MANAGERS


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Operational Information

Operational information isused to make sure that specific operational

tasks are carried out as planned/intended (i.e. things are done properly).

For example, a production manager will want information about the

extent and results of quality control checks that are being carried out in

the manufacturing process. This information is gathered by line managers

of the organisation and is essential for monitoring, identifying areas that

need attention. Operational information is needed to plan programactivities such as the use of time, people, and money, and which is used

to assess how well the planning program is functioning.

Examples include:

y Listing of debtors and creditorsy Payroll detailsy Raw materials requirements and usagey Listings of customer complaintsy Machine output statisticsy Delivery Schedules

The actual requirements and usage for operational information is an

endless list, above are just some of the examples. Operational

information is essential for lower level line managers and supervisors as a

form of control and monitoring, recording, storing, reporting etc. This

information assists operational managers to track the organisations day -

to-day activities. The decisions based on this information are small -scale

and can be programmed. It is a formal and quantitative measure. This

information is updated quickly in some cases hourly, daily, weekly etc.


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An example of this would be the workers wages relating to day-rate

labour would include the hours worked each day, week, the rate of pay

per hour, details of over-time, deductions, and the amount of time a

worker spent on each individual job. This all provides assistance to the

line managers when analysing the workers wages.

Middle managers would require the operational information provided by

lower level managers for example:

A Marketing Manager would require the lower level manager to

communicate the following operational information:y Sales analysis by regions, customer class, sales person.y Sales target versus achievement.y Market share and trends.y Seasonal variations.y Effect of model changes.y Performance of sales outletsy Costs of campaigns and benefit

A Financial Manager would require the lower level manager to

communicate the following operational information:

y Periodic financial reporty Budget status to all functional managersy Tax returnsy Share transfersy Profit and loss accounty Payments and receiptsy Payroll, provident fund accounts


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Summary of Operational Information

It is information required by lower level managers and supervisors that

are responsible for the day to day operations and running of theorganisation. The information is for their records but is also

communicated through to higher level managers and in some cases the

senior management levels.

perational information is:y Usually gathered from internal sourcesy It is detailed information and specificstep by step such as the

processing of raw datay It is for the immediate termy The information is divided into task-specific recording and

monitoringy The information is prepared frequentlyy It ismainly numerical and quantitative

TATEGIC

INFORMATION

Topenior

Managers

TACTICAL INFORMATIONProfessional Middle-

Managers

OPER

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L NFORM

T ON L n

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Conclusion of Strategic, Tactical an OperationalInformation

The diagram below shows the relevant information sections according tothe typical organisation.

Organisations require information for recording transactions, measuring

performance, making decisions, planning and controlling. The information

requirements will be influenced by the sector they operate in. Information

is vital and may be strategic, tactical or operational.


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Answer Q2

Give two examples of strategic, tactical and operational informationrelevant to an organization operating in the manufacturing sector.

Large manufacturers are usually plc companies and will therefore have

shareholders. The information that is produced at a strategic level is vital

information from a shareholders perspective. Shareholders would want to

know information such as revenue, capital investments, and sustainability

and growth options of the organisation.

Two ExamplesofStrategicinformation in the manufacturing sector:

1. Communication of corporate objectives to the management of thebusiness expressed in term or profit targets and measures of wealthsuch as earnings per share value.

2. Communicating information on strategic plans for the long termfuture of the organisation such as acquisitions, mergers,

partnerships etc, to reduce risk, increase revenue, improve product

differentiation to meet demands.

Two ExamplesofTacticalinformationin the manufacturing sector:

1. Using variance analysis and stock turnover information a salesbudget provided by middle managers my be required to be analysed

by the product team managers of the same level and/or higher level

managers

2. A manufacturing plan for the next twelve months, as at this levelthe decisions and information is either short-medium term. The

information may include performance measures of machines that

have been decided that a replacement is required.


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Two Examples of Operational informationin the manufacturing sector:

1. A record or analysis of the recorded debts showing all customerswhose deliveries have been put on hold pending settlement of

overdue balances.

2. A list of all purchase orders outstanding with the financia l evaluationof total purchase order commitment.

Answer Q 6Placing an order for an item of stock costs $340. The stock costs $60 aunit, annual storage costs are 10% of purchase price. Annual demand is

900,000 units. What is the economic order quantity? The Economic OrderQuantityEOQ is the order for an item of stock which will minimise costs.The formula is:

EOQ = 2CoDCh

D= DemandCo= CostsCh= holding costQ= re-order quantity

Therefore:

Co= $340D= 900,000Ch= $60 x 10% = $6

EOQ = 2 x $340 x 900,000 = 621000000$6 6

= 102000000 = 10099.5 = 10,010 units

900,000 = 89.91 (90) or!

ers place!

each year, so the stock cycle

10,010

52weeks / 90 or!

ers = 0.577(gi"

ing a stock cycle of e"

ery 6#

ays)The point of the EOQ is to minimise costs as holding stock costs money and lackof insufficient re-ordering can also cost the firm, if re-ordering is delayed.


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Answer Q8The following activities comprise a project to ag ree a price for some land to be

bought for development

Activity Preceded by Duration Days

A: Get survey done ----------------------- 5

B: Draw up plans ----------------------- 9

C: Estimate cost of building

work

B 2

D: Get tenders for the site

preparation

A 11

E: Negotiate Price C,D 5

8a. What are the paths during the network?

8b. What is the critical path and duration?

8a) A, D, E = 5days + 11days + 5days = 21$

aysB, C, E = 9days + 2days + 5days = 16

$

ays

8b) Critical Path is A,D,E. The critical path is identified by which eventstake the longest time, the critical activities are those activities which mustbe started on time otherwise the total project will be increased.

A

B

D

C

E


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Answer Q 9A company is wondering whether to spend $36,000 on an item of equipment, in

order to obtain cash profits as follows:

Year $A 12,000B 16,000C 10,000D 2,000

The company requires a return of 10% per annum. Use the Net Present Value(NPV) method to assess whether the project is viable.

The following discounted rates in the table below to answer question 9has been calculated assuming that the money earns 10% per annum, the

calculations are as follows:

a. PV $1 at year 1 is $1 x 1/1.10 = 0.909b. PV $1 at year 2 is $1 x 1/(1.10) = 0.826c. PV $1 at year 3 is $1 x 1/(1.10) = 0.751d. PV $1 at year 4 is $1 x 1/(1.10) = 0.683

Year Cash flow Discount factor10%

Present Value

0 (36,000) 1.00 ($36,000)A 12,000 0.909 10908B 16,000 0.826 13216

C 10,000 0.751 7510D 2,000 0.683 1366

Total $33,000$36,000$3,000-

%ET

&RESE

%T VALUE $3,000-

The Net Present Value is negative; therefore the following conclusions canbe made:

1. It is cheaper to invest elsewhere at 10% than to invest in theproject.

2. The project would earn a return of less than 10%. Since 10% of$36,000 is $3,600.

3. The project is not viable since the PV of the costs is greater than thePV of the benefits.


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Answer Q 10

The Net Present Value of an investment at 25% is $90,000 and at 30% are

$20,000. The internal rate of return of this investment (to the nearest wholenumber) is:

A: 17%

B: 20%

C: 22%

a = one interest rate at 25%b = other interest rate at 30%A= NPV at rate a = $90,000B= NPV at rate b = $20,000

IRR +{ $90,000 x (30-25) }%$90,000 (-20,000)

25% + 90,000 x 5 = 4.09%110,000

= 25% + 4.09% = 29.09%

None of the above IRR for this investment rates are correct. The project isNOT viable.

The IRR is an alternative method to NPV. It determines the rate of

interest at which NPV is 0. The internal rate of return is therefore the rateof return on an investment. Thus if a company expects a minimum ofreturn of 25% the project is viable if the IRR is more than 25%.

Documents

Stock Control Investment Appraisal