CEE CENTRE EXECUTIVE EDUCATION

Project Management, Stock Control & Investment Appraisal
Business Decision Making
Rashida Yvonne Campbell
6/22/2010

Page 1

Contents
ASSIGNMENT TASK ANSWER Q1 STRATEGIC INFORMATION SUMMARY OF STRATEGIC INFORMATION TACTICAL INFORMATION SUMMARY OF TACTICAL INFORMATION OPERATIONAL INFORMATION SUMMARY OF OPERATIONAL INFORMATION CONCLUSION OF STRATEGIC, TACTICAL AND OPERATIONAL INFORMATION ANSWER Q2 TWO EXAMPLES OF STRATEGIC INFORMATION TWO EXAMPLES OF TACTICAL INFORMATION ANSWER Q 6 ANSWER Q8 ANSWER Q 9 ANSWER Q 10 3 5 6 7 8 9 10 12 13 14 14 14 15 16 17 18

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 purchas e 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 --------------------------------------------B Duration Days 5 9 2

A: Get survey done B: Draw up plans C: Estimate cost of building work D: Get tenders for the site preparation E: Negotiate Price

A

11

C,D

5

8a. 8b.

What are the paths during the network? What is the critical path and duration?

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 B C D

$ 12,000 16,000 10,000 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: B: C: 17% 20% 22%

Answer Q1
Non-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 Planning y Control y Decision-making and problem-solving y Co-ordinating y Organising y Commanding y Performance measurements y Recording transactions, numerical data from various departments y Competitor movements y Government legislation/political movements y 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 vital functions 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:

Strategic Information
Strategic decisions, choices and direction of the c ompany 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 various segments of the business y future market forecasts and predictions y the level of retained earnings y availability of raising capital (new funds) perhaps for new ventures or re-investments purposes y overall cash needs of the organisation y overall resources requirements such as human power y availability and capital equipment requirements This information is essential for top senior managers to decide the longterm 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 and may not be possible to quantify. This level of information it is usually a summary or total value. At this level the management r eceive 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.

Summary of Strategic Information:
It is inform tion required by top senior m nagement that are responsible for long-term planning, growth and sustainability of the organisation.

Strategic Information for Top Senior Managers Purpose for long-term planning & Decision making

MIDDLE MANAGERS

LINE MANAGERS
information is provided to the management at higher levels

The diagram demonstrates that internal information is provided to the management at higher levels. However decisions and choices are then communicated from Top level managers downwards. trategic Information is: y Information is collected from both internal and external sources y All the information is summarised at a high level y 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 whole y Information maybe prepared on an µad hoc¶ basis y The information maybe both quantitative and/or qualitative y Long-term information is more ris y as the future may have unexpected changes that were not cater for.

 

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Tactical Information
Tactical Information is used to decide how the resources of the business should be employed and monitored and how they are being deployed and dispersed. Examples include:

y y y
y y y y y

Information about business productivity e.g. units produced per employee; staff turnover Profit and cash flow forecasts in the short term Pricing information from the market Budget control and/or variance analysis reports Employee levels i.e. head counts per team, department, divisions, projects and units etc Employee turnover levels Short-term purchasing requirements Profit results of particular departments

Tactical information is essential for the middle management of the organisation. 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 tactical information for various reasons. Below are some of the explanations for the 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 surveys y Correlation of prices and sales y Sales force deployment and targets y Exploring alternate marketing channels y Timing of special sales campaigns A Financial Manager would require tactical information regarding: y Variations between budget and expenses y Large outstanding payments/Receipts y Credit and payment status y Cost increases and pricing y Impact of taxation on pricing

Basically tactical information allows middle managers to monitor and control, to chec if operations and activities are working according to plan. ome professional middle-managers are involved in the decisionmaking process and the tactical information that is useful for them will be provided as a guide to the decision that they need to conduct, but this is more on a short or medium term level.

Summary of Tactical Information
It is information required for professional middle-managers that are responsible for short to medium term planning and decision-making of the organisation.

Tactical information is: y Usually generated internally, but there maybe some external sources incorporated y Decision regarding the information are summarised at a lower level y The information is regarding the short-medium term y It is concerned with activities and/or departments y Information is prepared on a routine and regular basis y The information is quantifiable and produces quantitative measures

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¤

Strategic Information Top Senior Managers

Tactical Information to monitor & control resources Professional Middle Managers for short medium term planning and decision -making

LINE MANAGERS

Operational Information
Operational information is used 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 program activities 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 y y y y y

Listing of debtors and creditors Payroll details Raw materials requirements and usage Listings of customer complaints Machine output statistics 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.

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 y y y y y
y

Sales analysis by regions, customer class, sales person. Sales target versus achievem ent. Market share and trends. Seasonal variations. Effect of model changes. Performance of sales outlets Costs of campaigns and benefit

A Financial Manager would require the lower level manager to communicate the following operational information: y y y y y y
y

Periodic financial report Budget status to all functional managers Tax returns Share transfers Profit and loss account Payments and receipts Payroll, provident fund accounts

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 the organisation. The information is for their records but is also communicated through to higher level managers and in some cases the senior management levels.

T ATEGIC INFORMATION

Top enior Managers

TACTICAL INFORMATION Professional MiddleManagers

OPER T ON L NFORM T ON L n n nd u v f h d y d y unn n f h n n

perational information is: y Usually gathered from internal sources y It is detailed information and specific step by step such as the processing of raw data y It is for the immediate term y The information is divided into task-specific recording and monitoring y The information is prepared frequently y It is mainly numerical and quantitative 

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Conclusion of Strategic, Tactical an Information

Operational

The diagram below shows the relevant information sections according to the 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.

Answer Q2
Give two examples of strategic, tactical and operational information relevant 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 shareholder¶s perspective. Shareholders would want to know information such as revenue, capital investments, and sustainability and growth options of the organisation.

Two Examples of Strategic information in the manufacturing sector:
1. Communication of corporate objectives to the management of the business expressed in term or profit targets and measures of wealth such as earnings per share value. 2. Communicating information on strategic plans for the long term future of the organisation such as acquisitions, mergers, partnerships etc, to reduce risk, increase revenue, improve product differentiation to meet demands. Two Examples of Tactical informat ion in the manufacturing sector: 1. Using variance analysis and stock turnover information a sales budget 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 level the 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.

Two Examples of Operational information in the manufacturing sector: 1. A record or analysis of the recorded debts showing all customers whose deliveries have been put on hold pending settlement of overdue balances. 2. A list of all purchase orders outstanding with the financia l evaluation of total purchase order commitment.

Answer Q 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? The Economic Order Quantity µEOQ¶ is the order for an item of stock which will minimise costs. The formula is: EOQ = D= Co= Ch= Q= Demand Costs holding cost re-order quantity

¥2CoD
Ch

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

¥

2 x $340 x 900,000 $6

=

¥621000000
6

=

¥102000000
!

= 10099.5 = 10,010 units

900,000 = 89.91 (90) or ers place 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 lack of insufficient re-ordering can also cost the firm, if re-ordering is delayed.

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!

each year, so the stock cycle

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Answer Q8
The following activities comprise a project to ag ree a price for some land to be bought for development
Activity A: Get survey done B: Draw up plans C: Estimate cost of building work D: Get tenders for the site preparation E: Negotiate Price C,D 5 A 11 Preceded by --------------------------------------------B Duration Days 5 9 2

8a. 8b.

What are the paths during the network? What is the critical path and duration?

A

D E

B
8a)

C
21 16

A, D, E = 5days + 11days + 5days = B, C, E = 9days + 2days + 5days =

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

$ $

ays ays

Answer Q 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 B C D $ 12,000 16,000 10,000 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 9 has been calculated assuming that the money earns 10% per annum, the calculations are as follows: a. b. c. d. PV $1 PV $1 PV $1 PV $1 Year 0 A B C D at at at at year 1 is $1 x year 2 is $1 x year 3 is $1 x year 4 is $1 x Cash flow 1/1.10 = 0.909 1/(1.10)² = 0.826 1/(1.10)³ = 0.751 1/(1.10) = 0.683 Discount factor 10% (36,000) 1.00 12,000 0.909 16,000 0.826 10,000 0.751 2,000 0.683 Total

Present Value

The Net Present Value is negative; therefore the following conclusions can be made: 1. It is cheaper to invest elsewhere at 10% than to invest in the project. 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 the PV of the benefits.

%

&

ET

($36,000) 10908 13216 7510 1366 $33,000 $36,000í $3,000RESE T VALUE $3,000-

%

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 whole number) is: A: 17% B: 20% C: 22%

a = one interest rate at 25% b = other interest rate at 30% A= NPV at rate a = $90,000 B= NPV at rate b = $20,000 IRR +{ $90,000 $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 is NOT 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 rate of return on an investment. Thus if a company expects a minimum of return of 25% the project is viable if the IRR is more than 25%. x (30-25) }%

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