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INSS 640                         HW#1

Summer 2010 Summary

The Mr. Kawasaki, CIO,

Pierogi_

Warsaw, Poland

Dear Mr. Kawasaki:

Thank you for giving us a chance to assist you with the financial analysis of Pierogi_.

We found your business quite interesting and have attached our analysis.

In summary, we find company to be financially viable returning an average of 38% ROI.

We, however, noticed several items that need immediate attention:

• Inventory-carrying costs are high during lean months (See Appendix A) and inventory level falls below minimum requirement of 500 during busy period.

• Advertising costs as a percent of total revenue are rising, except October through December (see Appendix B) but not resulting in additional sales during lean months

• Sales are particularly lean during holiday seasons (November, December).

We recommend following course of action:

• Adjust production schedule to match demand

• It would be wise to invest in inventory management system to control production and inventory costs

• Since sales are lagging during holiday period (November and December), we recommend creating holiday theme “baskets”

• Customize “special” baskets during birthdays, special occasions

• Provide samples and open kiosks in malls during holiday season, this could be financed by cutting traditional advertising expenses

• Change advertising strategy, instead of traditional media (TV, RADIO etc..) start advertising online with search engines.

• Join social networking sites like twitter, facebook and start blogs related to your company and specialty pierogi. This will be good advertising for on line communities.

We also analyzed price increase option and found it is not a good idea to increase price at this time since this will result in lower profit or even losses in December. However it may be possible to have a return of 15% in December if we raise prices by about 15% or reduce production by 800 units. It maybe possible to raise prices during holiday months as customer maybe willing to spend more on gift items. We would suggest creating gift packages for individuals and families.

We noticed that is interesting in buying your company. We feel this would be a win-win situation for both companies. We have also attached our analysis regarding this.

As this is the first phase of our analysis, we did find some worrisome trends. As already mentioned there are major problems with production and inventory management, which may require additional analysis. In addition, we found problems with your infrastructure and advertising costs.

If you decide to hire us again, we would be willing to perform further analysis.

Sincerely,

The “A” Team, consultants

Part 2

all spreadsheet attached

Discussion Part 3

Our what-if analysis (20% price increase) and resulting 20 % demand drop revealed some disturbing results. For the first time we saw loss during month of December. ROI reduce every month of the year from the base model. This is happening because increase in price is not offset by decrease in costs. Inventory carrying costs are increasing as inventory builds up due to low demand. Once again our analysis shows problem with production and inventory management.

Our Goal seeking analysis confirms that 15% ROI in Dec is achievable if you increase the price in Dec by approx 15%. This, however, may not be feasible given the current state of economy. On the bright side, customers maybe willing to pay extra if they see “added value” in your product. One possibility is to package them as Christmas gifts for individuals and families. If this is not feasible we would advise not to increase price which may result in permanent los of customer goodwill. Another option is to reduce production by 800 units in December if labor contract allows that.

Part 4

Our analysis showed inventory levels below 500 in September and October. This is because seasonal demand increases in sales July (74%) and September

(52%). However during this period production remains constant (2500) resulting in uneven inventory level. This doe not include any further increase in sales, if that happens,

stock outs may result during busy season. Production rate adjustment is needed to maintain inventory level above minimum requirements of 500.

Our analysis also revealed that profit is under $100,000 during low demand periods, especially in Jan, Feb and Dec. Once again this is due to poor production planning as inventory keeps building due to low demand but production remains constant. To maintain appropriate cash flow, we would suggest company try to boost demand in lean periods by offering holiday “baskets”, discounts and coupons) and adjust production process to lower inventory carrying cost.

We would recommend following actions:

• We find Pierogi_rus a combination of old (organizational infrastructure) and new (completely on-line business) Pierogi needs to change its organizational infrastructure. It appears that Piorgi_ is still following traditional functional system model and has not converted to online model. We recommend completely re-engineering not only the processes but your organizational model Pierogi could follow successful business models of , Dell computers that have very little brick-n-mortar presence and have been able to cut costs and compete successfully.

• Invest in IT –based systems like SCM, and CRM. SCM would improve efficiency of your “in-bound” processes of procurement of raw materials, ordering process. This streaming of operations will reduce costs. CRM is very important due to specialty nature of your business. You are the “tiffany” of specialty foods. The management need to perform “basket” analysis to identify your customer needs and likes, and what “other” items they would be willing to buy WITH specialty pierogi.

• Revision of existing policies.

o Minimum inventory of 500 appears to be quite high compared to sales (see APPENDIX C). In lean months it is as high as 50% based on industry standards of perishable foods it maybe desirable to lower this requirement.

o Minimum profit requirements also appear to be quite high, especially in lean months (see APPENDIX C). We would recommend to adjust this number for seasonality.

• We would recommend “growth” strategy, this would imply studying “alternatives” ways of expanding your business

o Global growth

▪ Since sales are increasing overseas, it maybe a good time to develop “franchises” in Poland and surrounding areas.

▪ Acquire a distribution center in Poland

▪ We feel merger with Food_rus will be a win-win situation. As organizations become global, people tastes are changing and people are becoming “global”. Customers are looking for exotic foods from all over the world. This merger will allow the combined company to offer variety of foods. You will have access to Food_rus network and access to European market with minimal investment and Foodr_us will have access to your well established specialty pierogis.

o Local growth

▪ Though currently, there are no viable substitutes, but Pirogi_rus must always stay ahead of competition.

• Offer variety of specialty pierogi’s

• Award customer loyalty

• Start twitter site to explain benefits of specialty pierogi and why it is different

▪ Acquire a local distributor and guarantee deliveries

▪ Form “alliances” with local food growers that may reduce ingredient costs

Part 5

Food_rus is in a very competitive environment where buyer power is high and supplier power is low. In addition there are many competing products. One way for them to survive is to follow “growth” strategy recommended by Porter. We feel Pierogi_rus would complement Foods_rus well. They could sell their product as “complete” meals with pasta, pierogi and other food items.

Pierogi_rus is selling specialty items and has supplier power. However competition will eventually grow, limiting their growth. The company needs market beyond US and could use Food_rus market outlets to expand overseas. This would provide growth to both companies and be a win-win situation for both.

We do not expect any legal problems since both countries are politically stable. One problem maybe currency valuation since euro is not the common currency of trade in both countries. However valuation could be worked out between the two companies.

Other areas of concern could be organization culture. Pierogi_rus is family driven while Food_rus is institutional (an assumption) driven company.

Before merger IT staff of both companies should look at compatibility problems.

There is also issue with trans-border data flow. Europe has stringent laws about personal data. This should be discussed before any merger takes place

We, however, feel strategically this would be a good move for both companies making them more competitive globally.

Part 6

IMMEDIATE ISSUES:

During economic downturn, Pierogi_rus need to cut costs and follow Porter’s strategy of “low cost strategy” and “Strengthen customer and supply intimacy”. We do realize there are no viable

“substitute “ products at this time but competition may eventually develop something similar. You must stay ahead of the competition.

Since our analysis reveals that problem is in inventory management and production area. We would recommend an “inventory management system” and “production system” that would automate the two processes. This would allow you to streamline and manage both processes more efficiently. In addition, since you are selling a specialty item, it is necessary to keep track of your customer’s wants and needs. It would be advisable to perform market basket analysis to study buying habits of your customers. This could be done using Customer management systems (CRM). This would help you identify “total” needs of your customers and will give you further strategic advantage. we understand you are reluctant to spend money at this time, however if you do not want to invest money next year, we strongly recommend you do that following year.

If minimum inventory is required as a policy, our analysis (see policy worksheet in worksheet B) further showed that if we increase production in September to 2900 from 2500, we will have minimum requirement for all months (see table 1 below). In addition, our analysis shows if we increase the price of unit to as shown in table 1 below we can meet our goal of $100,000 profit in each month. But this is NOT recommended since this will increase the price two fold in some months and may drive customers away, especially in this turbulent economy.

Table 1: Policy Table

| |jan |feb |mar |apr |may |jun |july |aug |sep |oct |nov |dec | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |PRICE | |227.1473 |163.7626 |137.6585 |120 |120 |120 |120 |120 |120 |120 |162.2277 |221.8232 | |

production rate | |2500 |2500 |2500 |2500 |2500 |2500 |2500 |2500 |2900 |3000 |3000 |3000 | |

LONG TERM ISSUES

In the long term your emphasis is on increasing shareholder’s value. You should follow “growth” and “innovation” strategy advocated by Porter. As mentioned, Pierogi_rus needs to look at their organizational infrastructure. It appears outdated for online environment. A restructuring would allow you to cut costs.

Times are changing, people are becoming “global” in taste and it is a matter of time before competition develops a similar product. You have following options to “grow”:

• To be acquired by a global company, Since Food_rus has proposed a merger, we would recommend you accept their offer. This will make your company a true “global” company.

• Acquire a global distribution company to market your product overseas as demand increases overseas.

• Extend markets to other products in the long term to develop a “complete” package. However this extension should be based on customer’s tastes and needs. For example, if customers that buy pierogi also buy certain “sauce”, it maybe desirable to package “sauce” with pierogi.

• Change management and IT infrastructure

• Examine your policies of minimum inventory and ROI.

Part 7:

Pierogi, currently, is in a seller’s market with buyer having few choices for quality substitutes. This does not imply they should not think of future competition or growth.

Porter has suggested many different strategies to stay ahead of competition. For Pierogi, which currently has little competition due to their specialty offering, we recommend following strategies:

Low-cost leadership. Pierogi could reduce their costs by investing in cloud computing. This will help reduce cost by reducing in-house IT infrastructure and may be personnel without sacrificing quality. Though we recommend to re-train loyal workers for other IT related jobs. Before investing in cloud computing, it would be wise to study its drawbacks. For example, Pirogi could suffer major losses if cloud computing hosts are too busy and/or have system breakdown. Pierogi would be wise to have a disaster recovery plan to mitigate losses and to maintain customer loyalty.

Strengthen Supplier and customer intimacy. It would be wise to have close relations with supplier and a supplier chain management (SCM) system would be very useful. This will cut inventory costs and allow scalability. Just in time inventory approach would be beneficial in cutting costs also. In addition, as already mentioned a customer relation management (CRM) system would be beneficial to understand your customer better. CRM can help in market basket analysis to better understand customer buying habits. In addition, a Geographic Information system (GIS) could provide assistance in identifying target markets for growth.

Part 8

Cloud computing is an emerging discipline which is changing the way corporate computing will be done in the future. Economics is the driving force behind cloud computing. The simple notion of “pay what you use” is behind this computing revolution. Cloud computing has been defined by many researchers with National Institute of Standards and Technology (NIST) taking the lead. NIST defines cloud computing as a “ model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.” Cloud computing brings a fundamental change in how managers think about business and will coordinate tasks and people. Researchers have claimed many benefits of cloud computing including, cheaper and faster development of business applications, efficient use of resources and easier application development. Cloud computing, however, faces many challenges related to scalability, virtualization, collaboration and above all security.

Pirogi_rus should consider moving to cloud computing since this will eliminate processing costs. IT investment and maintenance costs will be minimized. Pierogi will pay for only the resources they use. This move, however, should be studied against potential costs. Pierogi has loyal customer following and their data is critical for Pierogi. Will the customer security be compromised? For an e-commerce business, like Pierogi, 24/7 access to web site is important. What happens if the host site is overloaded or fails? If the host company has many small cloud clients, what would be the nature of relationship? Will they customize their services for Pierogi’s needs? Pirogi would be wise to look at both costs and benefits before investing in cloud computing.

references:

Aggarwal, A. & Bento, A, “Cloud Computing: Opportunity and Challenges”, work-in-progress, University of Baltimore



Laudon and Laudon, Management Information Systems, Eleventh edition, Prentice-Hall pub.

Appendix A: Advertising Cost as Percent of Sales

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Appendix B: Inventory Management Systems

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Appendix C: Policies: Revisited

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