EXPANSION STRATEGY AND ESTABLISHING REORDER POINT
Case 1: Bell Computer Company
Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit?
Expected profit for medium- scale project= $1000 X 30.2654
= $302654
Expected profit for large- scale project = $1000 X68.3130
= $683130
With regard to this computations, is should be realized that the more risk averse executives hedge the company’s profitability through making several small-scale investments. Thus, in the process of expanding its economic activities in the emerging market, the company will be forced to forge limited distributional of its new computer products or entering into operational alliances with other companies in the industry (Anderson et al., 2013). Likewise, this indicates that it will be hard to estimate whether such an investment will truly reverse the right to gain or lose in the market.
On the other hand, in venturing into a large-scale project, it is absolutely critical for the management authority of the company to compute the expected profit as well as weight it against the potential risks to be associated with such a project before financing it. By computing the expected net income assists in clarifying the big picture, particularly when such a project whose profitability margin can vary widely under different scenarios (I.S.R, 2013).
Conversely, the demand for the company’s new computer products will be found to be relatively higher during the first few years but in case the initial consumers discover that such a product is unsatisfactory, will definitely decline to lower level thereafter. Equally, high opening demand may show the possibility of sustained high volume in their market. In case the demand for new computer products is relatively higher and the company does not have the potential of expanding within few years of establishment, it is important to introduce a more competitive product into the market (Anderson et al., 2013). In the process of venturing into such a project, it means that the management authority of the company should ensure that they have lived with it regardless of the size of the market. The main reason for this consideration is because in case the company opts to venture into a small scale project, it means that the management authority will not have the opportunity of expanding the project when the general demand is higher during the initial period. Therefore, with a large scale project, the company will have the opportunity of maintaining its operations as to point of making a tidy profit on the low volume even if demand might be low during the introductory period (I.S.R, 2013).
Nevertheless, in case the market might be large, with a large scale project the management will have the capacity of pushing the business into the newer period of profitability. The development department, especially the project manager will be able to push and expand such a large-scale project to the extent of exploiting the initial major product developments realized from the project for years to come (Tavana, 2013).
Compute the variation for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?
Profit variation = expected profit for large- scale project- expected profit for medium- scale project
= $683130 - $302654
= $380476
Considering the variation in profit for either of the two alternatives, it means that the possibilities for cash inflow or out-flow during its initial stage range through a whole spectrum. Equally, this will largely depend on the number of partially or independent variables which are subjected to changes which influence i.e. economic climate, demand, cost, technological advancement, and so on.
In this case, it is; therefore, clear that the range of variability of cash flows to rise or fall can be computed readily from the knowledge of the key indicators and the uncertainties surrounding them. Thus, by making systematic and sound strategic decisions under uncertainty requires that the management authority to formulate an approach which has the potential of avoiding any risks in the market (I.S.R, 2013). What will follow is the framework which assists in evaluating the level of uncertainty or risks which will be surrounding strategic investment decisions before deciding to finance any project. This indicates that there exists no solid market research which has the capacity of forecasting consumer demand for the company’s product (Tavana, 2013).
The incremental investment of the large scale investment is the one which will offer useful information that will enable the firm to be privileged in expanding its economic activities in the near future. In other words, the management authority will be forced to confront several uncertainties concerning demand, technology, and the relations which exist between all the resources to be used in manufacturing new computer products (Anderson et al., 2013).
In such a case, it implies that the management authority of the company will be given the capacity of identifying any opportunity in a low-uncertainty business environment which has can be developed or established within the prevailing market structure. Because of that, this shows that the best level that the management authority will adapt is the one which will assist them in creating value through innovations in their product and enhancing improvement of the business systems without necessarily changing the industry (Tavana, 2013).
Case 2: Kyle Bits and Bytes
What should be the re-order point? How many HP laser printers should he have in stock when he re-orders from the manufacturer?
Re-order point = {average daily utilization rate X the lead time (in days)}
= (200/7) X 7
= 200 units
First, re-order point is regarded as being the inventory unit the business has on hand which assists in triggering the purchase of the determined amount of the replenished inventory (Lall & Sahai, 2008). For that reason, in case the supplier fulfillment and the purchasing process works as planned, it means that the re-order point must lead to the replenishment inventory arriving once the last stock is used up or sold. The end result of this is to ensure that there is no interruption in fulfillment and production activities while decreasing the amount of HP laser printers on hand (Toomey, 2000).
In addition, it should be noted that the re-order point for the HP laser printer can vary depending on the every item of inventory. The main reason for that is because every HP laser printer will have different rate of usage in any business organization. This, therefore, will require different amount of replenishing time of the HP laser printers once the orders have been made (Lall & Sahai, 2008).
This then indicates that in case the inventory balance of the HP laser printer declines, Kyle Bits and Bytes will have to place an order. The newer units, therefore, have to arrive seven days or one week later once the last on hand HP laser printers have been used up. Contrary to that, although this only depends on the average usage, the truth is that the demand may increase or decrease below the average level (Toomey, 2000). This suggests that there might be some stock left when the replenishment order arrives. This has the capacity of reducing the risks that the company will have experienced as a result of stock-out situation.
References
Anderson, M. A., Anderson, E., & Parker, G. (2013). Operations Management For Dummies. Hoboken: Wiley.
Lall, M., & Sahai, S. (2008). Entrepreneurship. New Delhi, India: Excel Books.
Tavana, M. (2013). Management theories and strategic practices for decision making. Hershey, PA: Information Science Reference.
Toomey, J. W. (2000). Inventory management: Principles, concepts and techniques. Boston [u.a.: Kluwer Academic Publishers.
