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MJB/HNC-BM/0909/8609

Student No : MJB/HNC-BM/0909/8609

Course : Unit 6

Module No : Business Decision making

Tutor : Jeevesh Goolab

Assignment No : 1

Submission date: 31/08/2010

SIRM Education

M1

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Information system

An information system is a computer system that provides management and other personnel
within an organization with up-to-date information regarding the organization's performance;
for example, current inventory and sales. It usually is linked to a computer network, which is
created by joining different computers together in order to share data and resources. It is
designed to capture, transmit, store, retrieve, manipulate, and or display information used in
one or more business processes. These systems output information in a form that is useable at
all levels of the organization: strategic, tactical, and operational.
Information systems are the means by which people and organisations, utilising technologies,
gather, process, store, use and disseminate information (Caldelli, A, 2004)

The notions of wholeness, boundary, environment, emergence, communication, co-ordination


and control are fundamental to the understanding of information system. Information System
draws primarily on systems theory, which provides an intellectual foundation and a basis for
studying the enterprise as a complex adaptive system. The practice of IS necessitates the
integration of systems theory and theories from other disciplines relevant to the range of
application domains (Zehir, C,2005).

Information and Communication Technologies (lCT)


Information and Communication Technologies (ICT) enable the processing and transfer of
data and information electronically for the purposes of the information system. ICT provide
the infrastructure for intra- and inter-organisational information systems. Knowledge of the
capabilities and limitations of ICT as components of information systems is essential to
understanding the design, performance, operation and use of information systems (UKAIS,
1999).

Organisational and social effects of ICT based information systems

ICT based information systems affect individuals, groups, organisations and society. The
nature of work, skills, employment, organisation structures and management and professional
practices are constantly changing due to technology innovations and their pervasive

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application. These systems also impact on social interaction and social and cultural
revolution.
Information systems have economic and financial effects on individuals, organisations,
industries, markets, national economies, including the ICT industry. Understanding these
effects requires the application of economic theories and theories of competition, firms,
markets, and social behaviour to interpret and explain the range of effects in the different
dimensions of economic activity (UKAIS, 1999).
Information systems at different levels

Information system at different organisational levels:


 Executive levels
 Management levels
 Operational levels
1. Executive levels
An Executive Information System (EIS) is a type of management information
system intended to facilitate and support the information and decision-making needs of senior
executives by providing easy access to both internal and external information relevant to
meeting the strategic goals of the organization. It is commonly considered as a specialized
form of a Decision Support System (DSS).The information system support the executive
levels to make long term and complex decisions (Agarwal, R., Lucas, H, 2005).
2. Management levels
The middle level is perhaps the most interesting, as it covers all the information shared within
teams, divisions, business units, etc. This information may be critical to the day-to-day
activities of the group, but of little interest to the rest of the organisation. All information
systems support decision making, however indirectly, but decision support systems are
expressly designed for this purpose (Benbasa, 2003).
The two principal varieties of decision support systems are model-driven and data-driven.
During a typical session, an analyst or sales manager will conduct a dialog with this decision
support system by specifying a number of “what-if” scenarios. For example, in order to
establish a selling price for a new product, the sales manager may use a marketing decision
support system. Such a system contains a pre-programmed model relating various factors the
price of the product, the cost of goods, and the promotion expense to the projected sales
volume over the first five years on the market. By supplying different product prices to the
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model, the manager can compare predicted results and select the most profitable selling price
(Agarwal, R., Lucas, H. 2005).
3. Operational levels
At the operational level are transactions processing systems through which products are
designed, marketed, produced, and delivered. These systems accumulate information in
databases that form the foundation for higher-level systems. In today’s leading organizations,
the information systems that support various functional units marketing, finance, production,
and human resources are integrated into what is known as an enterprise resource planning
(ERP) system. ERP systems support the entire sequence of activities, or value chain, through
which a firm may add value to its goods and services. For example, an individual or other
business may submit a custom order over the Web that automatically initiates “just-in-time”
production to the customer’s exact specifications through an approach known as mass
customization. This involves sending orders to the firm’s warehouses and suppliers to deliver
materials just in time for a custom-production run. Finally, financial accounts are updated
accordingly, and billing is initiated (Benbasa, 2003).

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M1:

Critically assess the implications of Stock/Inventory control in the textile manufacturing


industry.

Inventory:
Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household and for
a list for testamentary purposes of the possessions of someone who has died. In accounting,
inventory is considered an assetInventory is one of the most expensive assets of many
companies especially for the manufacturing company. It represents as much as 40% of total
invested capital.

Types of inventory:

1. The first is called materials and components. This usually consists of the essential
items needed to create or make a finished product, such as gears for a bicycle,
microchips for a computer, or screens and tubes for a television set.

2. The second type of inventory is called WIP, or work in progress inventory. This refers
to items that are partially completed, but are not the entire finished product. They are
on their way to becoming whole items but are not quite there yet.

3. The third and most common form of inventory is called finished goods. These are the
final products that are ready to be purchased by customers and consumers.

Implications of Inventory control in the textile manufacturing industry

The textile industry is characterised by a complex production network which spans many
businesses and usually crosses international boundaries. In addition, sales are highly volatile
and seasonal, and order fulfilment windows can be very tight. Good capacity planning,
production scheduling, process control and inventory management are required for a
profitable operation.

Textile network:

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A textile is a flexible material consisting of a network of natural or artificial fibres often


referred to as thread or yarn. Yarn is produced by spinning raw wool fibres, linen, cotton, or
other material on a spinning wheel to produce long strands. Textiles are formed
by weaving, knitting, crocheting, knotting, or pressing fibres together (felt).

The textile industry

Woollen Industry Cotton Industry

Silk Industry Linen Industry

Just in Time (JIT)

Just-in-time (JIT) is an inventory strategy that strives to improve a business's return on


investment by reducing in-process inventory and associated carrying costs. Just in Time
production method is also called the Toyota Production System. To meet JIT objectives, the
process relies on signals between different points in the process, which tell production when
to make the next part. Implemented correctly, JIT can improve a manufacturing
organization's return on investment, quality, and efficiency (Schonberger, Richard J. 1982).

JIT production in Textile industry means

(1) Elimination of Waste in the textile industry, after implementing the JIT in textile
manufacturing industry the waste can be reduced to its minimum levels and productions and
profits of textile industry will be rise.

(2) Synchronized Manufacturing, its mean in the textile industry every department
coordinates with other and performance of overall textile industry overhauled.

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(3) Little Inventory indicates the reducing the order batch size can be a major help in
reducing inventory. Following formula can be used

Average Inventory = (Maximum Inventory + Minimum Inventory) / 2

Holding and ordering costs in industry

Holding Costs: are the costs associated with holding or “carrying” inventory over time. It
includes costs related to Storage; such as insurance, extra staffing, interest, and so on.

Ordering Costs: include, cost of supplies, order processing, clerical cost, etc. The ordering
cost is valid if the products are purchased not produced internally

Set-up cost is the cost to prepare a machine for manufacturing an order. Set-up cost is highly
correlated with set-up time.

In textiles manufacturing industry Inventory control evolves supervision of supply, storage


and accessibility of items in order to insure an adequate supply without excessive oversupply.
It can also be referred as internal control - an accounting procedure or systems designed to
promote efficiency or assure the implementation of a policy or safeguard assets or avoid
fraud.

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D1

Perform an investment appraisal

One of the key areas of long-term decision making that firms must tackle is that of
investment the need to commit funds by purchasing land, buildings, machinery and so on, in
anticipation of being able to earn an income greater than the funds committed. In order to
handle these decisions, firms have to make an assessment of the size of the outflows and
inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of
obtaining funds.

Investment appraisal methods:

One of the most important steps in the capital budgeting cycle is working out if the benefits
of investing large capital sums outweigh the costs of these investments. The range of methods
that business organisations use can be categorised one of two ways: traditional methods and
discounted cash flow techniques.

Traditional methods include

1. The Average Rate of Return (ARR) and

2. The Payback method

Discounted cash flow (DCF) methods use

 Net Present Value (NPV)


 Internal Rate of Return techniques.
1. Payback period:

This is literally the amount of time required for the cash inflows from a capital investment
project to equal the cash outflows. The usual way that firms deal with deciding between two
or more competing projects is to accept the project that has the shortest payback period.
Payback is often used as an initial screening method.

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The following project's cash flows of UK company (with an initial investment in year 0 of £4
00000):

year Cash flow cumulative cash flow


- - 400,000 -400,000
1 75,000 -325,000
2 75,000 -250,000
3 90,000 -160,000
4 100,000 -60,000
5 60,000 0
6 400 400

The payback period is precisely 5 years.

The shorter the payback period, the better the investment proposal is under the payback
method. We can appreciate the problems of this method when we consider appraising
several projects alongside each other. It is probably best to regard payback as one of the
first methods you use to assess competing projects. It could be used as an initial screening
tool, but it is inappropriate as a basis for sophisticated investment decisions.

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2. Accounting rate of return (ARR)

The average rate of return expresses the profits arising from a project as a percentage of the
initial capital cost. However the definition of profits and capital cost are different depending
on which textbook you use. For instance, the profits may be taken to include depreciation, or
they may not. One of the most common approaches is as follows:

ARR = (Average annual revenue / Initial capital costs) * 100

A project to replace an item of machinery is being appraised. The machine will cost £240 000
and is expected to generate total revenues of £45 000 over the project's five year life. What is
the ARR for this project?

ARR = (£45 000 / 5) / 240 000 * 100


= (£9 000) / 240 000 * 100
= 3.75%

Drawbacks of AAR:

Firstly, the ARR doesn't take account of the project duration or the timing of cash flows over
the course of the project. Secondly, the concept of profit can be very subjective, varying with
specific accounting practice and the capitalisation of project costs. As a result, the ARR
calculation for identical projects would be likely to result in different outcomes from business
to business. Thirdly, there is no definitive signal given by the ARR to help managers decide
whether or not to invest. This lack of a guide for decision making means that investment
decisions remain subjective.

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Discounted Cash Flow Methods

3. Net Present Value: (NPV)

The Net Present Value (NPV) is the first Discounted Cash Flow (DCF) technique covered
here. It relies on the concept of opportunity cost to place a value on cash inflows arising from
capital investment. NPV is a technique where cash inflows expected in future years are
discounted back to their present value. This is calculated by using a discount rate equivalent
to the interest that would have been received on the sums, had the inflows been saved, or the
interest that has to be paid by the firm on funds borrowed.

Calculate the present value of a project's cash flows, with initial investment of £750,00 using
a 10 % discount rate.

Discount rate
year Cash flow (10%) Present value

0 - 750,000 1 - 750,000
0
1 100,000 .909 90,900
0
2 250,000 .826 206,500
0
3 350,000 .751 262,850
0
4 350,000 .683 239,050
0
5 30,000 .621 186,300

present value 235,600

Assessing the value of NPV calculations is simple. A positive NPV means that the project is
worthwhile because the cost of tying up the firm's capital is compensated for by the cash
inflows that result. When more than one project is being appraised, the firm should choose
the one that produces the highest NPV.

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4. Internal rate of return (IRR)

The IRR is the annual percentage return achieved by a project, at which the sum of the
discounted cash inflows over the life of the project is equal to the sum of the capital invested.

NPV @12% Discount rate:

Discount rate Present


year Cash flow (12%) value
-
0 -25000 1 25,000
1 7500 0.893 6697.5
2 7500 0.797 5977.5
3 9000 0.712 6408
4 9000 0.636 5724
5 5950 0.567 3373.65

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present value 80.65

The above calculation for NPV used a 12 % discount rate and produced a positive value of £
3180.65. We need to find a discount rate that produces a negative NPV. Let's try 20 %.

NPV@20% Discount rate:

Cash
year flow Discount rate (20%) Present value
0 -25000 1 - 25,000
1 7500 0.833 6247.5
2 7500 0.694 5205
3 9000 0.579 5211
4 9000 0.482 4338
5 5950 0.402 2391.9
23393.4
-
present value 1,607

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IRR = 12 % + Difference between the two discount rates * Positive NPV


Range of +/ve to -/ve NPVs
IRR = 12 % + (8 % * 3180.7)
1606.6
IRR: 21.93%

The value to a business of calculating the IRR is that its decision-makers are able to see the
level of interest that a project can withstand. In the case where a number of projects are
competing for selection, the one that is most resilient can be chosen.

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References:

Agarwal, R., Lucas, H. (2005): The information systems identity crisis: focusing on

high- visibility and high-impact research, MIS Quarterly, 29(3)

Benbasa, (2003) The identity crisis within the IS discipline: defining and

communicating the discipline’s core properties, MIS Quarterly, 27(2),

Caldelli, A., and M.L. Parmigiani, (2004). "Management Information System: A Tool for

Corporate Sustainability."Journal of Business Ethics55, no.2 (December 2004)

Schonberger, Richard J. (1982), Japanese Manufacturing Techniques: Nine Hidden

Lessons in Simplicity

UKAIS, (1999), UK academy for information systems, information in organisational

decision making p1-6.

Zehir, C. and H. Keskin, (2003). "A Field Research on the Effects of MIS on Organizational

Restructuring."Journal of American Academy of Business3 (September 2003)

http://www.britannica.com/EBchecked/topic/287895/information-

system/218054/Operational-support

http://www.slideshare.net/naveedtaji/organizational-information-system

http://www.answers.com/topic/management-information-system

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