Evangelos Tsevdos Prof. Lizza ACBU 2222 April 29, 2010 Think Tank Project Mr.

Manicotti: After conducting an operation audit I have both some upsetting and positive news. The upsetting news is that your business currently has poor inventory management, high levels of product spoilage, inaccurate order fulfillment to customers, and a lack of proper overhead allocations. However, the good news is that I have come up with solutions to how we could solve these problems and ultimately improve profitability. First off, inventory is a large asset on your balance sheet, and as a result, there should be as much of an emphasis on keeping inventories low so that they do not consume too much cash and space. In addition to tying up money, maintaining inventories encourages inefficient and sloppy work, results in too many defects, and dramatically increases the amount of time required to complete a project. The objectives of inventory reduction could become more easily accomplished through what is known as lean production. The lean thinking model, is a fivestep management approach that organizes resources such as people and machines around the flow of business processes and that pulls units through these processes in response to customer orders. The five

steps are as follows: (1) Identify value in specific products (2) Identify the business process that delivers value, (3) Organize work arrangements around the flow of the business process, (4) Create a pull system that responds to customer orders, (5) Continuously pursue perfection in the business process. Just-in-time system is a form of lean production, which was originally pioneered by Toyota and is extremely efficient at improving poor inventory management. As a result your company would have no goods in your inventory at the end of the day, and all goods completed during the day would be shipped immediately to customers. By implementing a JIT system you we can eliminate waste, reduce inventories and develop strong supplier relationships. Product spoilage is the production that fails to either meet quality or are so bad that they are no longer capable of being fixed and are therefore taken out of the process and disposed of. There is usually some degree of spoilage, but the levels at which your company is currently producing spoilage is unbearably high. In a JIT system, inventory is delivered from suppliers in just the correct quantity to fill customer orders. If a defective part is received from a supplier, the part cannot be used. Therefore, every part received from a supplier must be free of any defects. Because you will be using a JIT system in the future, I highly recommend that the first thing you do in order to reduce product spoilage is to is speak with your suppliers and ensure that they are using sophisticated quality control programs. If you are

receiving parts that are no good, then obviously your own finished products will have a high degree of spoilage. Therefore simply by implementing the JIT system from a good supplier you can reduce product spoilage to some degree by limiting defects and waste; however, in order to truly control product spoilage I highly recommend that you start to use the statistical process control system. Statistical process control is a technique that is used to detect whether a process is in or out of control. An out-of-control process results in defective units and may be caused by a mis-calibrated machine or some other factor. In statistical process control, workers use charts to monitor the quality of units that pass through their workstations, and can quickly spot defects. Problems can immediately be corrected and therefore decrease resulting spoilage. Furthermore, inaccurate order fulfillment to customers severely hurts your respectability and reputation and therefore your profitability, as consumers are dissatisfied with your service. In order to ensure that your order fulfimment to customers becomes more accurate I yet again recomened the JIT system. The just in time system ensures that inventory comes in quickly only at the request of customers. Therefore, inventory comes quickly in and quickly out as a finished products are shipped to the customer. At the end of the day, there should be no inventory, which will ensure that all customer

orders are properly fulfilled. A lack of proper overhead allocations severely limits your ability to understand where costs are really coming from. A plant wide overhead cost does not necessarily move in tandem with the cost driver, and therefore product costs can easily be distorted-with the potential of distorting decisions within the company. In order to improve the lack of proper overhead allocation I recommend that you implement an activity based costing system. (ABC). ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions. Manufacturing companies, such as your own, can use the activity-based costing system instead of traditional methods to calculate unit product costs for the purposes of managing overhead and making decisions. In activity-based costing, products are assigned the entire overhead costs-nonmanufacturing as well as manufacturingthat they can reasonably be supposed to have caused. In activity based costing, products are only charged for the costs of the capacity they use-not for the costs of the capacity they dont use. Therefore, by implementing an ABC system you can better understand what products are profitable and what are costly. As a result, perhaps you can start to eliminate inefficient and costly pastas and therefore increase your profitability. In conclusion, I believe you should not proceed with expansion until you implement the recommended solutions to your problems.

After implementation, I recommend an adjustment period of at east 2 quarters to realize the effects of the new changes. Perhaps, the high selling price you currently charge can be lowered using the systems and procedures I recommend. Once you implement a JIT system, statistical process control, and activity Based costing you will be able to analyze whether or not you can expand your customer base to the general public via an e-commerce web site.