Tuesday, April 17, 2012

Strategic planning

As I've mentioned a few times before, my final course for the MBA degree is called 'Strategic planning'. For a variety of reasons, the flow of this semester has been problematic: frequently there has been a lecture one week but not the next. This has made it hard to get a handle on the course material. I spent some time, however, in the past week, going over the lecture notes and improving my understanding. There were only five or six lectures which dealt with source material, and most of these reiterated material which came from previous courses such as accountancy, economics, finance and marketing.

That said, a more appropriate name for the course might be 'Business Analysis': after finishing the source material lectures, we moved on to practicing examination questions, and these tend to require an analysis of a company on the basis of data provided in the question. I completed one of these exercises when I was ill and we went over it the last time we met (nearly two weeks ago).

The day following the lecture, I found myself in a meeting with one of the business units of my company, discussing their performance. This business unit behaves as if it were existing fifty years ago: there is only a nodding acquaintance with the ERP program, the manufacturing side tends to be ad hoc (every order is different and there are no real standard products) which means that purchasing similarly is haphazard. There are no real marketing forecasts and each project is manually analysed with the help of a spreadsheet. Their inventory management is a disgrace.

During the course of that meeting, our CEO performed an analysis as if he had been sitting in the lecture the previous night (he already has his MBA degree); obviously he didn't calculate financial ratios, but he was very strong on the conclusions and list of actions which have to be taken. As I commented to the CFO (my boss) afterwards, we should send all the business unit's managers to business school as it can only improve their understanding.

Since then, I've done a little work for them by giving tools for forecasts and costing, but it will take some time before they start using them (if at all). I have been trying for the past three years to get them to use the ERP program in order to run their production but this seems to be one huge up-hill climb. Until recently, I felt that there had been no progress whatsoever, but now it seems that the CEO is going to add his influence and be present at some of the future meetings, which means that changes might actually get implemented.

They performed a stock taking at the end of March and I have been working on some analyses the past few days (which is why I am reminded of my current course as I note failings and how to correct them). Today I came across a particularly egregious mistake which I thought that I would note here.

One of the standard (or almost standard) products that this business unit makes is the entire apparatus which holds the basket (see picture). I analysed the bill of materials for one such product before the holiday and discovered to my surprise and dismay that the final product was composed of 50 sub-assemblies! This means that for every such basket apparatus, 50 work orders have to be issued and there have to be 50 completions entered into the system. As at the moment, this business unit has difficulty in entering even one such completion, I can't see how they are going to enter fifty. Presumably changes will have to be made in the bill of materials in order to cut down the number of work orders.

But, even worse, today I discovered a problem with the inventory costing of this product. One of the sub-assemblies is made by a sub-contractor: we supply him with parts, he produces whatever he produces and issues an invoice for his work. So far, so good. But the good people in this business unit order from him the final assembly and not the sub-assembly which he makes - thus every time the sub-contractor issues an invoice (which we faithfully input into our system), we add another unit of the final product to our inventory. 

To use some figures: the sub-contractor charged 850 NIS for his work for one sub-assembly. But inventory recorded one complete assembly at a value of 6,000 NIS! At that moment, the value of our inventory was artificially inflated by 5,150 NIS - which of course improves our bottom line.


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