As the general manager of operations for a regional division of a construction materials manufacturing company, you are seeking ways to make your operation more efficient, while being constantly aware of how your operation is evaluated by head office.
Ratios for the most recent year reported to head office for its evaluation included:
Current ratio..........................................2.2:1
Receivables turnover...........................10 times
Inventory turnover..............................8 times
Gross profit margin.................................25%
Profit margin........................................10%
Return on assets......................................8%
The management team is reviewing a proposal to develop an Internet-based electronic marketplace. With an investment in internal IT infrastructure modification and connective technology, your operation could expect benefits in:
• Materials sourcing and purchasing, resulting in lower product costs and lower levels of in-stock inventory requirements
• Shipping and logistics planning, resulting in faster order-to-delivery cycles for customers, more efficient billing, and faster collection of customer accounts
• Market intelligence data, resulting in the identification and pursuit of new customers and markets.
While all of these benefits are desirable, they must weighed against the significant expenditure over the next three years on IT infrastructure, business process redesign, and staff training. As general manager, you expect to work at this plant for only another two to three years. After that, you hope to be promoted to a senior position at head office.
Instructions
With the class divided into groups, do the following:
(a) Considering the expected benefits described above, state whether you would expect each of the above ratios to improve or deteriorate in the short term, if an Internet-based electronic marketplace is developed. Justify your answer.
(b) The VP of Sales is enthusiastic about developing an electronic marketplace because she is confident that customers will reward the better service with loyalty to the company. If this is true, what could be the long-term effect on the key ratios given above?
(c) Could your two-to three-year time horizon as the general manager affect your decision on this project? Explain.